A new Chinese restaurant opened in our neighborhood this week but my wife and I will probably not be trying their food.  Their name is Bo Bo Chinese and while I am well aware that “Bo Bo” is a variation on “Pu Pu”, the Cantonese name for an appetizer assortment, “Bo Bo” is also the term by which the younger generations commonly refer to something that is a lower class, inferior and artificial copy of the original.  I believe that this second definition is appropriate to the new restaurant as their menu features both “Krab” (artificial crabmeat) and artificial scallops.

I do not blame the proprietors for this avoidable error in naming their new dining establishment as there is a history among even the largest corporations in America of choosing a name for a product that is simply inappropriate.  Who can forget the failed efforts of General Motors several years ago in promoting their new midsize car to the Spanish speaking markets?  Did no one in the company or the advertising agency take the time to fully research the name and discover that “Nova” translates to “No Go” (No Va) in Spanish?  It is obvious to me that no one would wish to purchase a car when the expectation is that it would not run. 

One of the realities of life is that it is often difficult to know what will work in the future as very often we really do not know what works now.  When something is working we tend to accept that success without investing our time and energy in analyzing “why”.

When I was very young my father explained to me that the true indication of intelligence is realizing that continuing to do the same thing under the same circumstances tends to produce the same result; to produce a different result requires a different course of action and/or a different environment.  This was repeated to me in various ways throughout school such as with Newton’s first Law of Motion (“A body in motion will continue….”).   As this principle was first taught to and accepted by me as truth at an early age I have spent much of the adult portion of my life trying to avoid making the same mistake twice.  If I cannot determine why something is working at least I will know when it is not working and try something else. 

In fact, I consider that ability to be one of the major assets that I bring to my clients as a consultant.  With my experience in homebuilding and general real estate in markets across the country, I have seen lots of things that do not work and try to steer my clients’ actions to avoid those same errors.  It is far easier and far, far less expensive to learn from the mistakes of others.  And if we take the time to analyze those things that do not work we can do an even better job of avoiding past mistakes. 

In the past several years the homebuilding industry has seen a multitude of errors – have we learned from those past mistakes so that we can avoid these same errors in the future?  In the early years of the 21st century, homebuilding was booming across the country but it was obvious to anyone who took the time to look that in almost every market we were overbuilding housing in respect to real demand. “Real” primary housing demand is created by population growth, enhanced by employment growth which then stimulates household formation.  This is oversimplified but for the most part, one net new household requires one net new housing unit.  Of course, that net new housing unit has to be appropriate for the market relative to design, location, price and value and then professionally marketed and sold which factors also appear to have been overlooked in the past few years.

When the “real” demand was used up, many homebuildiers, including most of the large merchant builders, tried to create artificial demand through creative financing programs which the mortgage brokers and Wall Street were all to happy to provide.   Was anyone in our industry truly surprised when the “sub-prime” mortgage market collapsed?   But the loss of that artificial market was not the only problem as the homebuilding industry had also been building the wrong homes in the wrong locations and trying to sell them at the wrong prices and with insufficient value.  So from 2006 (or 2007 depending on the local market specifics), the new home market continued to decay until last year;  2010 was the worst year for new home sales since record-keeping began in 1963.  (In fact, those pitiful numbers probably would have been even worse if not for the lift from a tax credit in California that expired at year end).

To know what does not work and to learn from errors, ours and others, we need to first know the facts and then be able to determine causal factors

Beginning with knowledge of the past and present we can begin to create a plan for the future.  We do this by using facts – in the homebuilding industry those facts include population data, employment data and sales and other market data and we create trend lines based on probable future variables.  As economic and political conditions are beyond our control and tend to be in a state of flux, these variables are dynamic, constantly changing, and require us to constantly revise our forecast and our plan. This process is known as strategic planning (planning ahead) and it is essential to success.

We tried the “build it and they will come” approach and that did not work.  We tried the “let’s give it away to anyone who is breathing” approach and that did not work either.  As the housing markets now appear to be coming back and homebuilding is starting to again show signs of life in most markets, would now not be an appropriate time to try the “let’s plan ahead” approach? 

One of my friends, Karen Walkin, sent me an email last week reminding me that the Fargo, ND marathon is only 16 weeks away.  Even though the temperature in North Dakota is now sub-zero and snow is abundant, she noticed that there were several people out running already preparing for the marathon and she commented that it is always stimulating to watch these runners train in such miserable weather.  If these athletes can commit to invest months of their time and effort and overcome the obstacles inherent in living in Fargo solely to plan ahead for a chance at success on one single day, can we as homebuilders hope to succeed by doing anything less?

It takes time and effort and a substantial financial commitment to properly plan ahead in housing.  Developers and homebuilders must create appropriate strategies based on thorough research and analysis and regularly update that research and those strategies based on the dynamics of the marketplace.  Salespeople must continually train and retrain and obtain the education necessary to be ready to make the sales when the customers walk in the front door.  And all of us in the housing industry need to plan ahead to be prepared for any eventuality.  But that’s just my opinion.

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