Maynard G. Krebs

Driving home from dinner last evening the name “Maynard G. Krebs” popped into my mind.  I have no idea why that occurred but I am assuming (and hoping) that it was simply a neuron misfire due to my age. I have a theory that all of the useless information that I have acquired over the years must feel neglected and every so often a little bit manages to force its way out.  As this happens relatively infrequently, I will assume that my initial diagnosis is correct and not worry about other possible causes.

For those who have not had the opportunity to accumulate as much useless information as have I, Maynard G. Krebs (the G. stood for Walter and was silent) was the “beatnik” sidekick of the title character in the U.S. television sitcom The Many Loves of Dobie Gillis which aired from 1959 to 1963.  The character, portrayed by actor Bob Denver, began as a stereotypical beatnik, with a goatee, “hip” (slang) verbiage, and a generally unkempt appearance, but as the show progressed he evolved into a bohemian free thinker, a prototype of the late-1960s hippie.

While I am fortunate in that my neuron misfires are infrequent short-term occurrences and so far have not caused any noticeable harm, I was recently looking at a mid-Atlantic housing market where it seems to me that every builder, developer and lender simultaneously suffered major long-lasting neuron misfires;  there simply is no other logical explanation for what took place and continues even today.  And while the recent national economic and housing misfortunes certainly visited this market, they did not do even one-fifth of the harm that the homebuilders, developers and lenders did to themselves when their brains apparently malfunctioned.

I have visited hundreds of housing markets across the country but this one is truly unique and, in my opinion, arguably a strong contender for the least professional housing market in the country. 

Certainly the local homebuilders have been faced with issues beyond their control.  Although recent population growth has been dynamic, civilian employment growth has been limited, adding only 5,600 jobs in the last decade, a rate of 1 job per every 2.32 persons.  According to the most recent RMIC Metro Area Market Analysis, housing prices have declined by 1.3% in the past 12 months and 7.1% of area mortgages are rated “seriously delinquent” (i.e. 60 days or more delinquent or in foreclosure) although this delinquency rates is, in fact, better than the national average.  And the market is limited in size – over the past five years, permits have averaged just under 1,500 units annually with single family homes comprising only 60% of production. 

Those external limitations, however, pale when compared to what the builders and developers have done to themselves and the following are just a few examples:

–       The largest homebuilder in the market has 11 neighborhoods currently operating.  Assuming even a very healthy 20% absolute market share, that would yield only 15 sales per year per community based on average production levels for the past 30 years, obviously an insufficient sales velocity and an insufficient income stream per community to support overhead costs or professional sales and marketing.

–       Researching this market I chanced upon one community’s web site that promotes their having the “lowest price per square foot in the market”.  While that might be a valid USP in a price sensitive market, their claim appears to me to be blatantly untrue as I found two of the major homebuilders in this market offering homes at 5% to 15% per square foot less. 

–       This is a strong broker market and a number of the homebuilders have selected local Realtors® to handle their sales.  While ordinarily that would be great as that practice is both common and successful throughout the Southeast, the brokers in this market apparently have failed to make any commitment to professional new home sales and offer extremely limited operating hours, with one community’s sales office only open on Sunday from 2:00 to 4:00 PM (2 total hours per week).

–       Prevalent throughout the market is a total failure to provide proper breadth or depth of product offerings.  One community offers 10 different model homes but every single one is a 4 bedroom 2½ bath two story design so that effectively only one home type is offered whether or not it Is appropriate for the market.   The typical pricing spread is also limited as the new homes in this market’s communities average only a 9.26% total pricing spread compared to the recommended 25% (+/- 12.5% from average), thereby failing to serve a potential 63% of the potential given market segment. (For more on this subject please visit a previous blog – http://www.residentialmarketingblog.com/2009/11/a-little-help-for-my-friends-in-the-homebuilding-industry/).

–       One community has 100+ fully developed and vacant sites sitting on the ground, a 14 year supply based on their current absorption rates, and they are not alone as there is an abundance of vacant improved homesites throughout the market.  Even at the current low interest rates and assuming that the lenders do not call these loans, the cost of carry in these developments at best obviates any potential profit. 

–       There appears to be an almost universal absence of professional community design and planning in this market as the existing residential developments are basic 1960s era subdivisions.

By itself, any one of these conditions would present a serious challenge to success in residential development.  Combined, they present extremely formidable obstacles.

I had dinner with two of the homebuilders in this market while I was in town and they were both complaining loudly about the weak new home market.  After listening to their diatribes for several minutes I stopped them and asked “how do you know that the market is weak?”  Their response was that it was obvious from the lack of sales in their developments. 

I took a deep breath, gave my response some thought and asked if they were readers of poetry.  In response to their very puzzled looks I suggested that they should read Dylan Thomas’ poem “Do not go gentle into that good night”.  I further explained that if they were going to blame the “weak market”, which in fact was not that weak, then they had effectively given up the fight and the outcome was predetermined as they would, in fact, go gentle into that good night.  However, if they were to take the time to truly analyze their market they could utilize that research to craft a strategy that would turn their back on the market, differentiate them from the competition, and allow them to determine their own future. 

In fact, they could then “rage, rage against the dying of the light” by taking the necessary meaningful action to create a better community, design better homes that more appropriately satisfied the existing viable market segments with proper breadth and depth of product offerings, and provide professional sales and marketing.  The reality is that success in homebuilding in any market at any time is always dependent upon an intelligently crafted strategy based on proper research.  But as I explained to these homebuilders, that was just my opinion.

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