THE “OSTRICH SYNDROME” – a new disease of epidemic proportions is hitting the homebuilding industry.

There is one builder I know who is finding it hard to make sales in the current market – no surprise there.  But his reaction to the current challenges has been limited to only two courses of action.  First, he has changed his sales team several times.  And two, he has reduced his prices through sales and special incentives, but each time only for a limited time period.

This builder, who we will call “Average Builder”, has the benefit of a sophisticated marketing team, arguably the best in the area.  After a comprehensive analysis of the market, the competition and the builder’s position, they presented a twelve page memo of detailed recommendations.  I participated in the research and preparation of that memo and believe that it was a correct, concise, logical and businesslike analysis and that the suggestions were all valid and the goals therein were achievable.  In fact, there was nothing new in that memo;  many of the same recommendations had been made in one form or another fairly continuously for the past two and one-half years.  But the builder’s response, as it has been every time in the past, was to rage against the dying of the marketplace (forgive the misquote of Dylan Thomas), loudly proclaiming the superior “quality” of his company’s homes, and then demand a change in the sales force.

Personally, I am exhausted and beyond frustration trying to help “Average Builder” see the realities of the marketplace, the homebuilding business today and his relative positions.  And I know that his sales team must be totally spent and emotionally drained. 

Perhaps his sales people are not the best possible but what does he truly expect?  His product is difficult to sell, at best, and any good (or even halfway alert) sales person would quickly recognize that and leave for greener pastures. He does not pay salaries or guaranteed draws; he does not pay higher commissions; so there is no financial benefit for any great salesperson work for him and any loyalty from past years’ successes has long ago been dissipated.  

79754589I believe that this builder suffers from a new disease – “Ostrich Syndrome”.  He ignores all facts and sticks his head in the sand hoping that whatever ails him and his company will just go away and that things will return to what they were.  But the reality is that things will not and cannot return to what they were.  And “Average Builder” is not unique in this market nor in many of the other markets I have seen this year.  It appears that the disease is spreading, perhaps reaching epidemic proportions and may well have a more severe impact than Swine Flu, especially on the housing industry. 

“Average Builder” had accomplished substantial success in years past, becoming one of the largest builders in the marketplace while achieving significant financial gains.  His homes are well built and continue to be desired as resales.  The communities in which he has built, many of which he also developed, are maintaining relatively high values. 

“Average Builder” builds a very good home but plenty of other builders build a good house, even the same house, at a substantially lower cost and a lower price and “good” is all the market today really needs.  The consumers simply do not have the extra money or the confidence to spend more than they must to meet their minimum requirements unless they are offered something truly special.  This builder includes more features (however, it is questionable if those are the correct features today) but he charges for them and the market is first and foremost buying “price” and “value” unless they can get a truly different, unique product.  

Unfortunately this builder does not offer a home that is unique in any way.  In fact, the home designs that he is building are stale and tired (he has built some of the same plans for well over ten years) and they are somewhat unattractive, lacking great exterior elevations and any true “pizzazz”.  His home designs have become “commoditized” – the same houses are available from every other builder in the marketplace, usually at a lower price.  His homes are not special, they are not unique, they are not the best value so price alone governs the buying decision and as he does not offer the lower price he must continue to lose sales to the competition. 

Now in this same market there is another builder, who we will refer to as “Smart Builder”.  He has introduced new and distinct lines of housing product in several communities around the area and they are all selling very well.  In fact, this builder is gaining not only market share but also growing his total number of sales even though the market is down by over 50%. When we suggested several times that “Average Builder” examine the operations of “Smart Builder” the response has always been the same – that other builder is not building a “quality” home and he must be giving away his homes, not making any money.  Now I have some personal experience with “Smart Builder’s” operation and know for a fact the he is not only making money but has been able to increase his margins recently and managed to eliminate almost all discounting due to the uniqueness of his product and the fact that he has responded to the market by allowing customization. But we were not suggesting that “Average Builder” copy the new home designs of the “Smart Builder”, rather that he should examine the operation to see what he is offering that is selling and why. 

We recommended several specific concepts for new home designs to “Average Builder”, all of which would be new and unique to the market, all of which would target the market segments that were still buying and likely to continue buying for the next several years.  Our recommendations also included tactics for improving cost efficiency and strategy for refining the included and optional features to conform to the current indicated market preferences.  But as on previous occasions, the response was the same – “change the salespeople and make them work harder to sell what we have built”.  Fundamental changes in product design, cost effectiveness and target marketing were not even considered. 

We also looked at his communities – their location, natural amenities, physical amenities and targeted markets.  In two of his developments, pricing was well into the 5thQuintile of both the resale and new home markets in that area.  It was obvious why  he had targeted this price segment – higher priced homes potentially yield higher profits so greed governed the decision. 

The 5thQuintile is open ended at the top, including semi-custom and true custom homes (“Average Builder” will not allow design changes so he cannot compete with semi-custom and custom builders) and estate homesites (“Average Builder” offers only smaller homesites, garden home and conventional sized, nothing even approaching one acre and therefore cannot compete in that regard either).  Only one of these communities offered outstanding amenities such as golf which would appeal to the buyers at these price points, and that course is public and reported to be encountering financial difficulties.  And in the current market, potential new home buyers at this price point almost always have a home to sell and most cannot achieve nearly the value which they think their existing homes are worth, creating a very challenging sale process, at best.  For these reasons, the 5thQuintile is a segment of the market where a production builder such as “Average Builder” typically does not wish to be and one which almost every national builder has studiously avoided.  

In one geographic area in which “Average Builder” had recently opened two new developments (contrary to the advice of his marketing team), the local share of the total new home market fell by 20% in the past three years while the number of builders more than tripled (and that is in addition to the impact of the overall market having declined by over 50%).  This was an absolutely predictable occurrence by anyone truly examining the market and determining who the buyers were and from where they were coming as that historic market had very nearly been satisfied. But again, this builder knew better.  After all, he had been very successful in the past and his “build it and they will come” philosophy had always worked before. 

There were also numerous other conclusions and suggestions, specific to each development, that, if implemented, would have made the existing housing products more saleable, either by refining the designs and features to better suit the targeted markets or adjusting the features to target new and more viable market segments.  But as these had all been suggested previously and ignored, it is doubtful that “Average Builder” will now have an epiphany and see the light.  So my crystal ball suggests that unless he dramatically alters his operations, which appears extremely unlikely, he will soon end up as many ostriches do – as nothing but an expensive handbag. ostrich-purse  
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