A recent article in Business Insider had the headline “There’s About To Be A Huge Housing Shortage In The U.S.”. The author’s premise is that new home inventory has continuously declined over the past four years and as of September there were only 163,000 new houses for sale in the U.S. I have been making a similar argument for almost two years so it is nice to learn that someone agrees with me. But even when the markets fully recover and this shortage materializes, not every homebuilder and developer will benefit equally from the new opportunities as not everyone is prepared for success.
It would seem reasonable to me that with housing demand over the past few years having been slower than desired for our industry, there would have been ample time available for every homebuilder and developer to have analyzed and fine-tuned every aspect of their operations so that their companies are operating at optimized efficiency and, with strategic plans in hand, are ready for success. But as I travel around the country looking at the local markets that is not what I see and I have to wonder – is anyone listening, not just to me but to any of the industry experts and pundits who have made their knowledge widely available though industry seminars, lectures and educational programs? Or instead, when the markets regain strength, will these builders and developers revert to their stale, trite, inertia-laden and ineffective operations that helped lead them into the troubles of the past several years?
Even when housing demand is again stronger, future homebuyers will not forget the recent economic challenges and what happened to housing over the past several years, even if they were personally unaffected. My parents lived through the depression and, although they survived in some manner of comfort, that epochal period impacted almost every action of their future lives. They were frugal savers, they were cautious purchasers.
While the recent “great recession” was painful to many, it still was a far cry from the “great depression” yet I believe that there will be similar fundamental changes in the psychology of the American consumer for many years to come. Even with the very likely housing shortage there will be no buying frenzy. Instead, buyers will be searching for and demanding real value. They will absolutely require a fair price and, while some will still be “price buyers”, none will settle for less than reasonable quality.
I was speaking with a builder last week and I suggested that a “zero defect” home was the minimum acceptable standard in the homebuilding industry today. He responded that while he strongly believed that his company delivered a quality home and that their control processes were as good as anyone else’s, that it was impossible to satisfy every customer’s expectations. As an example, he related an incident from the prior week when during the “walkthrough” a purchaser had gotten down on her hands and knees to look under the window sill and noticed that the painting was incomplete.
(By the way, the proper term in lieu of “walkthrough” is “initial orientation” which does not prejudice the process by implying that there are defects requiring an inspection.)
Perhaps this builder was expecting sympathy or agreement that this was an unreasonable action by the homeowner but instead I asked why the superintendent responsible for that community had not done the exact same thing two weeks earlier, noticing the defect and having it corrected prior to the purchaser’s inspection.
In another market in which I am active, one homebuilder is working toward securing the price position in his market and recently acquired, at a substantial discount from the previous values, the balance of the homesites in a challenged development where the previous builder had failed. But instead of properly analyzing both the market and the history of that development, he has decided to build basically the same homes as had been provided five years ago by the previous failed builder, albeit with some minor modifications to create some cost savings. His rationale was that he wanted to make the homes appear similar to those already existing within the community.
While I congratulated this builder on his business acumen in arranging an advantageous homesite pricing position and agreed that this was a price-sensitive location and that his concept in providing more affordable homes was correct, I questioned why he would wish to build the same home designs that had contributed to the previous builder’s failure. Moreover, these homes would be competing with the existing houses now coming to the market for resale and would be deemed by the existing residents as lowering the value of their homes.
My strong suggestion was that instead he should start with all new housing designs, based on the viable markets existing today and their current purchasing patterns, designed first for cost-effectiveness and then adding exterior elevations that would utilize the existing materials and colors to be compatible with the existing homes. Even if he were the original builder, five years is simply too long a time to continue to try to sell what are now “old” designs, especially when they did not sell well originally.
When the markets return there will be no universal recipe for success. Each housing market is different, each market has specific local conditions and challenges that must be intelligently analyzed, addressed and solved. Every market requires a creative and realistic solution that provides cost-effective housing and viable and personally meaningful and compelling reasons for each buyer to purchase now.
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