SAME CIRCUS, DIFFERENT CLOWNS IN HOMEBUILDING

I first encountered that phrase several weeks ago on a tee shirt and found it so relevant to life today that I bought the shirts for both of my sons.  It seemed to meet their approval as they wore them immediately.  Apparently, and unbeknownst to me, it is quite a popular expression as I found it again last week on a “onesie” (a one piece stretchy garment for a newborn) at Saks and immediately purchased it for my soon-to-be-born grandson.  While he will not be able to read nor understand the concept for several years, I know that he would appreciate the humor and I believe that it is important for him to begin expressing himself as soon as possible.  More importantly, he will enjoy the smiles from his family and friends when they see him wearing it. 

Many of my readers will believe as I do that the expression has universal impact today and, perhaps, is especially relevant for our political system.  But having recently completed inspections of housing markets in several diverse geographic locations, there is little doubt in my mind that it is most appropriate to the housing industry. 

One market that I examined is in the Southeast.  It is a major metropolitan area with many of the large national and regional builders present. 

This area had enjoyed housing production averaging over 12,000 units annually for the past 25 years and, in the prime of the market, hit twice that level but this year’s production will show a decline of well over 50% from average and over 75% from the maximum. The commonly held belief is that the market was overbuilt and that with the current economic challenges there is little that can be done except to wait for the market to recover. 

I agree that the market was overbuilt.  In fact, the extent of the overbuilding based on the ratios of “permits to population growth” and “permits to employment growth” is almost beyond comprehension. In 2004 at one of the programs on which I spoke at the NAHB convention, I specifically referred to this market as an example of the overbuilding that was already evident in many markets around the country and the need to make adjustments in our operating strategies.  But it was also readily apparent to me on this latest visit that overbuilding was just part of the problem and that there was and is much that could be done. 

In looking at the competitive offerings I found an almost universal lack of creative exterior product designs.  Not only were the majority of the house’s exteriors stale (perhaps 10 years old in design), but they were unattractive, lacking any curb appeal whatsoever and virtually identical to those provided by every other builder in the marketplace.  There was an absence of uniqueness and individuality creating a commoditization of the product which reduced the market’s purchase decision to one based solely on price.  

Similarly, the homes themselves almost universally lacked creative, innovative and intelligent design of the plans themselves, thereby failing to reflect the fundamental changes that have occurred in the market.  I did not see one example of a new home design which would stimulate excitement and a desire to purchase.  Not a single builder visited offered an “expandable” home which I believe would naturally appeal to and satisfy the needs of the first time buyer segment which will constitute a major component of the purchasing market for the next several years. 

Almost consistently the competition consisted of “subdivisions”, not communities. These developments failed to provide small villages of similar products, buffered from adjoining villages and thereby creating privacy, intimacy and urgency (as each village is completed). These competitive developments featured long streets without breaks, enhancing the perception of density, further aggravated by the builders scattering houses throughout instead of concentrating on one section at a time and thereby never creating a visual impression of completeness stimulating urgency. 

And here is the killer – the majority of the sales offices were not open for business during their posted hours or what is accepted within the industry as “normal” operating hours.  The sale of new homes is a retail business – unless the “store” is open for business sales cannot be made and the perception of a slow market becomes a self-fulfilling prophecy. Yet those few builders who were open for business were making sales and they reported that in recent weeks their traffic and sales had increased substantially. 

In the current market conditions and with the economic burdens, low consumer confidence, stricter lending standards and the difficulties of potential buyers’ selling their current homes, as evident throughout the country, the majority of the homebuilders have made substantial cutbacks on personnel and expenses for sales management, training and supervision.  They lost a substantial number of their good salespeople as they were unwilling to provide draws or salaries to carry these valuable team members through these challenging times, forcing many of their qualified and trained people to find employment elsewhere. The salespeople, whoever,  who I found on-site in this market reported that they were all receiving some type of guaranteed compensation and were thereby able to weather the current market and these were the ones making the sales.  

Now it is well known that the Southeast has been one of the areas of the country that has been hardest hit in this housing downturn and, while I was disappointed at what I saw, I was not surprised.  Teaching a MIRM class in this area several years ago I had made the same observations about lack of originality in housing product and community design but the response, from the sales and marketing directors in attendance, most of who were employed by the larger national and regional builders, was that market was strong and there was no need to make a change.  No one heeded the call for action.  And in those good times, the sales staffs were generally professional, they were open for business and the personnel were well trained. 

Another market I recently visited is in New England, an area that is relatively “mature” in terms of development, having experienced rapid growth in the 1980s but averaging production of only 4,000 new homes annually over the past 20 years. There was really no serious overbuilding in 2004, 2005 and 2006 and therefore the market has slowed far less drastically.  

And for the most part this market exhibits a much higher level of product and community design then did the Southeastern major metro area.  Most of what I saw here was attractive and appropriate and many of the communities were visibly different from the competition, providing the market with a clear choice.  The vast majority of the sales offices were open for business and although sales were at a slower pace than they would prefer, they were selling homes.  What I found most interesting was that only two national and one regional builder were active here and they were typically the ones with communities facing the biggest challenges – the three developments that were not open for business during advertised hours were by these larger builders. 

Over the past several decades I have had the opportunity to consult with most of the major builders in the country. In almost every instance, I found the experience to be frustrating, at best. 

One such assignment over 20 years ago was to analyze a market for the builder’s possible entry, creating a long-term operating and positioning strategy if the analysis indicated potential.  My report found a very respectable opportunity but cautioned that the market was entering a down cycle and that sales would be slow for the first two to three years, then pick-up substantially.  I recommended the builder’s cautious entry there and a strategy that could well have positioned the builder to become the market leader within five years.  Instead of a cautious entry, the builder entered this market and immediately opened six communities the first year.  Then, experiencing the correctly forecast declining market, they closed all of the developments and pulled out two years later, less than six months before the also forecast major recovery which continued almost steadily for the next 20 years. 

And almost every other assignment I have had for these industry leaders has had similar results.  If they agreed with the report’s conclusions they typically responded that they “knew that already”.  If they disagreed with the recommendations they were ignored and they followed their original program without change.   These larger builders typified the principles of inertia – continuation of the same operating philosophy and program without change while ignoring any movements of the market.  “Build it and they will come”. 

circus clowns #1While I cannot put 100% of the blame for the housing market’s current challenges on the national and regional builders, as many of the small local builders eagerly followed the “big boys” down the road to trouble, it seems to me that our industry leaders certainly are playing by the same rules they always have had, they just have different people now sitting in the division presidents’ seats and thus, at least to my way of thinking, we have the same circus, different clowns.

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