Coming from a Midwestern middle-class background, my family did not deem it appropriate nor could they afford to send me to prep school so I did not have the benefits of a “classical” education, failing to learn Latin or to read Homer in the original Greek. But apparently the Chicago public schools provided a fairly decent education, especially compared to what is provided today in public schools around the country, as I was taught biology, chemistry and physics, algebra, geometry, trigonometry and calculus, world and American history. I learned to parse a sentence and write somewhat intelligibly, I was exposed to both opera and classical music, and I read and read and read, including works by Austen, Bronte, Bunyan, Chaucer, Conrad, Dickens, Dumas, Golding, Hardy, Hawthorne, Hemingway, Huxley, London, Melville, Salinger, Shakespeare and Twain, to name just a few.
I am afraid that I have forgotten most of the science and mathematics but the appreciation for classical music that I first learned in fourth grade has stuck with me to this day. Perhaps most importantly I learned to love reading. The classical authors opened my mind to both the world around me and to the power and beauty of the written word. And although I found both Conrad and Hardy to be somewhat overly excessive in their uses of the written word, I did appreciate their prose and imagery. We spent an entire semester reading Shakespeare. I never was a great fan of the British history series but I must admit to being amused by Richard Dreyfuss’ portrayal of a flamboyant Richard III in The Goodbye Girl (1977). Although I enjoyed Shakespeare’s comedies, my favorites remain his tragedies, especially Hamlet, King Lear and Macbeth. Julius Caesar provokes mixed feelings as I had to translate a large passage into Spanish in high school, a painful experience, but my favorite quote from the Bard is from that play and is the headline of this blog.
I actually researched that phrase when I first heard it as I found it intriguing. The military order “Havoc!” was a command given to English military forces in the Middle Ages to direct the soldiers (in Shakespeare’s words ‘the dogs of war’) to pillage and create chaos. And the quote serendipitously popped up in 1991 in a favorite movie, Star Trek VI: The Undiscovered Country when spoken by the Klingon General Chang. And I find that phrase exceptionally appropriate to the homebuilding industry today.
There is much to be respected and admired among the larger members of the homebuilding industry and smaller sized builders should consider emulating many of these attributes. The larger builders regularly produce quality housing products at affordable pricing, having refined their designs through cost optimization and secured a network of efficient subcontractors and suppliers who provide very competitive pricing. They also are experts in scheduling the construction process and have refined their building cycles to the minimum thereby saving substantial additional dollars.
The national builders are quite adept at general business practices, having secured advantageous access to the capital markets and, while they misjudged by overly aggressive land acquisition during the boom markets, they managed to successfully lobby Congress to amend the tax code and create extended loss carry-back provisions that will yield an estimated $2.5 billion in tax refunds. This has helped many to turn a profit for the first time in years and create a war chest of more than $1 billion in cash now being used to snap up tracts of land at bargain prices to be ready for the coming homebuilding resurgence.
Witness Lennar. According to a March 22ndreport in Bloomberg, they purchased a share of $3.05 billion in delinquent loans last month seized by the Federal Deposit Insurance Corp. from failed lenders. According to Jeffrey Krasnoff, the head of the company’s distressed investing unit, they plan to buy more loans and distressed property from the FDIC and/or directly from banks. And Lennar is certainly not alone in following this course of action as Toll Brothers and Meritage Homes are pursuing similar strategies while D. R. Horton has been purchasing distressed sites in many of their local markets and thereby bringing to the market some exceptional housing values resulting in very strong sales.
But I also continue to be somewhat amazed at the “Nationals”. The majority of the larger homebuilding companies are chasing the same new market, the first time buyers, without fully embracing the practices and methodology that the Millennials require to make a purchase. They engaged in head-to-head competition in most of the major housing markets in the past and they appear to be on the road back to that very same practice. They have yet to meaningfully build a unique brand identity nor other USP and still lack substantive product differentiation. They are slow to change as inertia seems to be prevalent throughout their operations. Several are now advertising financing with no money down. Like General Chang, they are again crying “Havoc!” and letting slip the dogs of war.
Perhaps that is because they overly concentrate their resources on the production side of the business at the expense of sales and marketing. That premise would seem to be supported by the fact that the national builders, who will build an estimated 70% of all new homes in the U.S. over the next several years, employ less than 7% of those sales and marketing professionals who have invested their time to earn the MIRM designation.
And that is where I see potential opportunities for the smaller homebuilders over the next several years. The niche markets are all theirs if they recognize and seize these opportunities. Smaller builders have the flexibility to act quickly and respond to changes in the market as they occur. They can offer customization, within pre-determined cost-effective limits, and design a portfolio of homes that can adapt to the changing needs of the market. They can compete with the “nationals” financially by banding together to jointly develop or take down homesite parcels, making certain that each player has established his or her own specific market position. They can compete with the “nationals” on a cost basis by intelligently working with their trade partners and forming buying cooperatives and they can be cost effective and “green” by pursuing the new systems that are available such as Professional Builder pointed out in their March 1st article on the “American Sustainability Initiative” (http://www.amerisus.com/index.html).
They can be market-driven, responsive to change in the markets and the demand side of the economic equation as opposed to the national builders who address only the supply side. The smaller local and regional builders can truly understand the intricacies and opportunities of their local markets by hiring and utilizing the talents of new home sales and marketing professionals, either as employees or as outside contractors. And the true indication of this professionalism is someone who is recognized as such by the National Association of Home Builders, an individual who has studied the business, learned the processes, earned the designation “MIRM” – Master In Residential Marketing. But that’s just my opinion.
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