MY PREDICTION FOR THE FUTURE OF THE HOMEBUILDING INDUSTRY

Johhny Carson -CarnacThe question that I am most often asked by clients is “what does the market hold for the next few years and how can I best assure my success in 2010 and beyond?” That is the bottom line question, isn’t it?

I do not claim to have the powers of Carnac the Magnificent, nor do I have his robe and hat, but I will give prediction a try, again. I say “again” because while cleaning out my old files I came across a program I had presented to the Greater Atlanta HBA on September 8th, 2004 titled “How To Survive Sweet Success”. This was well before the “subprime” fiasco, and before the overall economic collapse.

What I said to the audience was that the record breaking performance of Atlanta’s housing industry (they had averaged permits for 64,800 housing units annually for 2000, 2001, 2002 and 2003 and were working toward 75,000 units for 2004) could not go on forever because the employment to permit and population to permit ratios were totally out of whack. These ratios, which provide a basic indication of underlying demand in primary housing markets, strongly suggested that an “adjustment” was coming. Atlanta has historically been a market where builders had grown their businesses too fast during strong economic times, eventually resulting in oversupply. This is known as a “supply side” bubble and, while not yet ready to burst at that time (in fact, they permitted 74,428 units in 2004, 72,733 units in 2005 and 68,123 units in 2006), I suggested that the Atlanta bubble was ready to lose a lot of its air.

I wish that more of the audience had listened as I had managed to hit the nail on the head. Atlanta became one of the most overbuilt markets in the country and when the economic challenges hit along with the “subprime” and foreclosure problems, production dropped to 44,680 units in 2007 and to 19,270 units in 2008, the lowest level in 30 years, with 2009 apparently now heading to only 6,000 total units being permitted, the lowest level on record.

And I had made similar predictions for most other housing markets around the country but, again, the audiences must not have heard.

crystal-ballNow to the future! Most economists agree that the housing market in 2010 and beyond will continue to improve but that improvement will be gradual and I share that opinion. There is no doubt that the heady days of the first half of the decade are only distant memories and for most markets in the foreseeable future we will most likely be faced with strong competitive conditions and cautious buyers.

My recommendation to my clients throughout the country is to return to the basics and create a complete research analysis and strategy for every community prior to commencing the development and to update that research and strategy at least every six months to adjust, as necessary, to changing market conditions. Existing developments must also go through the same process on a “zero based budget” basis, starting from scratch.

For every community an examination of the competition, the local economy, the property and the “players” is essential to provide the analysis that defines the “playing field”. And from that analysis you must create a realistic strategy for success.

And for every community, there is an optimal development and marketing strategy that will maximize sales and profitability under current and foreseeable market conditions. While it may take time and effort to properly create such a strategy, the value is immeasurable.

We must research the market and determine the underlying local economic conditions, the competitive marketplace and the opportunities. What is the quantifiable actual demand with specific attention to location, community design and features, product design features and price? What portion of the demand is already being satisfied? What is happening with the resale market – remember it is an integral component of the demand quotient. Where is the hole in the market? Contrary to what we may wish, we must remember that demand is outside of our control and does not expand merely because we enter the market.

We must take an honest look at ourselves with attention to our property, our products, our company and our identifiable specific identity. What are the comparative strengths and weakness of our location? How does the marketplace perceive our company and our product and what impact do those perceptions have on our ability to do business?

Have we produced a superior commodity that the consumers will purchase? Have we created an identifiable Unique Selling Proposition (“USP”) that is meaningful to the consumer so that we may present our opportunity to the market and achieve the desired response? If not, we are merely another seller of the same product, probably at the same price, and thereby slicing up the market into unsatisfying small bites.

I believe that for most areas, the housing market will get better every year for the next several years and that there will be very real opportunities to sell new homes and make money. But unless we do our homework we will be left on the sidelines watching the parade pass us by.
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