A WAKE-UP CALL FOR HOMEBUILDERS – The American consumer does not see us as wearing white hats.

white hat #2I have always been proud to be a homebuilder and to work in this industry. I believed that we do “good” by providing safe, secure, comfortable and well-built housing for Americans; places to raise our families, places filled with happy memories, places that our buyers are proud to call home, places that, at least in years past, provided substantial economic benefit and created wealth for their owners.

But I have come to realize in the past couple of years that my view of our industry may well be prejudiced and is certainly not shared by the majority of my fellow countrymen, and perhaps rightly so. In fact, It would appear that the average American these days does not think highly of any of the governmental and financial institutions and businesses that have figured prominently in this current economic downturn, and I admit that I have come to share some of that negativity.

Although President Obama still achieves high approval ratings from the electorate, recent surveys show that substantially less than half of the people approve of the performance of Congress, with that dissatisfaction spread uniformly across both houses and both political parties.

Except for the inhabitants of “middle America”, domestic automakers are widely considered to produce inferior vehicles compared to those available from Japan or Germany. I would agree having just spent over $3,000 to repair my aunt’s four year old Cadillac when I have not spent a single penny to repair any of my wife’s or my Japanese-made autos in the last ten years. So it was no surprise to me that both Chrysler and General Motors filed for bankruptcy and I can appreciate the typical consumer questioning “why are we spending billions of taxpayer dollars to bail out companies that make inferior products?”

Investment banks and commercial banks are now often regarded as opportunistic piranhas, gorging at the expense of the public and scrambling for TARP dollars to line their own pockets. Again, it is difficult to disagree not only from the multitude of stories that inundate the daily press but also from personal experience. The stockholders of Bank of America finally revolted, voting to appoint an independent chairman and stripping CEO Kenneth Lewis of that title. And his strongest supporter, O. Temple Sloan, who had served as lead director and been on the Board for 13 years, also resigned, having been one of the strong supporters of the Merrill Lynch acquisition which had also been the cause of much of the dissatisfaction with Mr. Lewis.

I bank at one of the major money center institutions, not necessarily by choice but more due to inertia. This bank “ate” a bank that “ate” another bank that “ate” my bank so here I am. While I would not consider myself to be one of their top tier customers, I do have several accounts which combine to represent a “decent piece of change”. Planning a vacation this past month I stopped in to order some foreign currency, a small amount to cover airport transfers, initial tips, etc. The conversion rate that I was charged included a premium of 11.27% over the market rate plus a delivery fee and, when I asked why this premium, it was explained that my transaction was priced at the “retail rate” and no consideration was given to my other relationships or status with the bank – so much for “service”.

By the way, they did not bother to disclose that they charged a premium; I had to research rates on the web to learn this for myself. So they not only ripped me off but they were sneaky about it. This is the same bank that has refused to honor a valid power of attorney to allow me to invest a relative’s funds at something over the passbook rate, claiming that their internal policies supersede state law.

And I do not believe that my bank is necessarily any worse than the others; was it not PNC that used TARP funds to acquire the larger and healthier National City?

And now we come to the housing industry. We are not the doctors; we do not heal the sick or save lives. We are not teachers; we do not educate our youth and prepare them to become responsible and productive citizens. We are not the military; we do not risk our lives to protect our citizens from foreign enemies. We are not police or firemen; we again do not risk our lives to protect our citizens. We are not the clergy; we do not comfort those in need. We are simply businessmen and women, seeking to earn a living by providing a product that, until recently, helped our customers achieve the American dream.

Although I do not place the entire blame for the current economic meltdown on the homebuilding industry, we certainly did our part, admittedly with the aid of the commercial and investment banks and the greedy investment community, by creating and promoting sub-prime mortgages and encouraging purchases that simply were not viable Is it any wonder that Congress did not rush to our aid to embrace the “Fix Housing First” agenda?

Perhaps America’s current dissatisfaction with just about everyone can be summed up by a bus bench I saw today featuring an advertisement for a legal referral service – “www.whocanIsue.com”.

That brings us to the current housing market, now just starting to recover in most metro areas. We will still have to compete with short sales and foreclosures for several more months but basically those are, in my opinion, the same houses that comprised the “extra” sales we made a few years ago through creative financing and overly aggressive selling. And the market will absorb them in due course.

Looking toward the future, let’s accept that customers see us only as business people and will buy from us only when we create a value proposition that meets their needs.

Here are a few simple suggestions based on my 40 years in this business to turn us into the good guys and create our future success:

1. Stop trying to sell the same houses that you had three years ago, the plans that are all over the marketplace, both new and used, and are virtually identical to the competition, Design new, exciting and unique homes specifically for those markets that are most likely to buy for the next several years and that includes first time buyers.

2. Concentrate on cost effectiveness but include some special features that set you apart from the competition and do not pack the homes with the expensive “extras” that the market does not need and cannot afford. “Less” will be “more” for the next several years but that does not mean going back to the plain vanilla “basic box” of the 1960s.

3. Budget with “reasonable” margins so that true value is delivered. Production builders made a lot of money from the 1960s to the early years of this decade working on an 8% to 9% margin. We got greedy in the good times and pushed prices way beyond affordability.

4. Make your suppliers and subcontractors active team members working toward long-term relationships that will create the quality and value that the market needs.

5. Do not buy land unless it is in a “great” location and seek partnerships with land sellers and developers.

6. Do not overpay for the ground as the market will not and cannot bail you out.

7. Create unique community environments that excite the markets and give them reasons to move. Subdivisions will not sell. Include the lifestyle community features that the target markets really want and, equally importantly, can afford.

8. Re-create truly professional sales teams. Many of you had them in the early years of this decade but you allowed them to wilt on the vine, failing to financially support the good salespeople in the lean years and cutting back or eliminating professional sales management. The market will be extremely competitive for the next several years and you need to hire, train, supervise, motivate and continuously coach your sales team to excellence.

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