Strategic Residential Marketing

I believe that we are all products of our environment. I was born and raised on the “south side” of Chicago, memorialized in Jim Croce’s 1973 song Bad, Bad, Leroy Brown, and much of that heritage remains with me today.

Perhaps the greatest influence on the development of the south side was the steel mills. First was the U.S. Steel South Works followed by Youngstown Steel, Republic Steel, Bethlehem Steel, and LaSalle Steel. At its zenith, South Chicago helped make the Chicago metropolitan area the leading producer of steel products in the nation. The employment opportunities within the Chicago steel industry stimulated massive immigration in the early 20th century and the south side became a mélange of cultural influences due to its rich ethnic diversity. During my formative years I enjoyed the opportunity to learn about and appreciate cultures beyond my own and I was exposed to cuisines from around the world which shaped my palate and food tastes forever.

Much of the population on Chicago’s south side was Catholic, including large components of Irish, Polish and Mexican residents and the church permeated every resident’s life, regardless of whether or not you were a member of the flock. I will always remember that I lived in “OLP” (Our Lady of Peace) Parish and, although I was not Catholic, my friends drafted me into their church choir for one year as they apparently needed voices regardless of the owners’ religious beliefs. Festivals celebrating various saint’s days were universally attended and Fridays were meatless, including grilled cheese in the public school cafeteria (although my preference has always been pepper and egg sandwiches).

I was constantly being cautioned by my friends against sin and warned about the prospects of hell if I did not change my ways. The Catholic Church typically divides sin into two categories: venial sins, in which guilt is relatively minor, and the more severe “mortal” or “deadly” sins which include wrath, greed, sloth, pride, lust, envy, and gluttony. Although I must admit that I was not immune from all of these, I managed to survive my youth and have so far avoided the prospect of a very warm end although I do live in Florida and it is hot here now. But who knows the future.

I would suggest that the original deadly sins have equivalents within the homebuilding industry and, while probably not recognized by theologians, are usually equally fatal. As the housing markets return, we must be certain that we have put these sins behind us so that we are ready to take advantage of the prosperity that is available in the future. Read the rest of this entry »

The final Harry Potter film opened at 12:01 AM Friday to record crowds and rave critical reviews.  Being a fan of both the series and movies, I of course took the afternoon off and saw the film.  For those readers who have not yet seen the conclusion, I will not spoil the experience but would suggest that perhaps you will wish to save the $4.00 extra that they charge for 3-D before you take your seat and enjoy.

There are many lessons to be learned from the Harry Potter phenomenon but perhaps the best of which is that a good concept and proper execution leads to success as best exemplified by the extent of that success for Joanne Rowling.

In the world of residential development and homebuilding I believe that it is the national builders who are equivalent to those in the “magical community” of Harry Potter as they have the “elder wand” and with it comes better access to the capital markets so that they are limited only by the conditions of the marketplace and their own actions.  But smaller homebuilders and developers are able to succeed and prosper, even in these challenging times, if they use their own abilities that are often better than magic – hard work including strong doses of common sense, sound research, intelligent strategy and professional implementation.

Three years ago I analyzed a distressed residential community on behalf of a client who had an interest in acquiring the property and redeveloping it. Located in one of the more challenged housing markets in the country, it was obvious to me that the property would need to be held for a few years before the market would allow the development to proceed and, even then, a repositioning was required that would substantially lower previous pricing.  With the extensive costs of carry further depressing the present values, my client’s offer to the bank was substantially below their book value and was not accepted, even though we had submitted all of our research to support the value of the offer.

Six months later, the property was sold to one of the national homebuilders at more than twice the price we had offered.  Shortly thereafter my client and I had a friendly but lengthy conversation regarding the validity of my analysis and we both kept an eye on that community over the following two years as the “winning bidder” proceeded to bring its new community to the marketplace.  Last week a story appeared in that market’s local newspaper reporting that this national homebuilder, after selling only three homes in 18 months, had “taken a chain saw to its pricing” and reduced prices by nearly $200,000. The new pricing is now within 10% of what our analysis had originally suggested was appropriate for the market but that pricing had assumed a much lower land cost so it seems that the “magic” failed to work here.

One of the communities in which I have been actively consulting since its inception was reported earlier this week in national news as being in the top 20 of all planned residential developments across the country in sales for 2010.  The developer is a local company and there are no national or even large regional homebuilders active in the community so there is no “magic” at work here 

Even though this marketplace is extremely “challenged”, with permits and new home sales down well over 60% from historical averages, this property has continued to sell extremely well, reaching or exceeding its projected sales every year since opening. Common sense, sound research, intelligent strategy and professional implementation have proven once again to be more powerful than magic.  But that’s just my opinion.

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This morning a phrase popped into my head – “morning ablutions”. I do not believe that I have heard that phrase used in the past thirty or forty years; certainly it is not a common expression these days. But I was pleased that my mind was still functioning, even if in somewhat unpredictable ways.

It occurs to me that everyone would benefit from morning ablutions. If you are not familiar with that phrase which admittedly is somewhat antiquated, you now have an opportunity to expand your vocabulary through a simple Google search. And that brings us to the topic of this blog – necessary daily actions that prepare us to profitably do business in the homebuilding industry. In my opinion, one of the most important of those essential daily actions is reviewing and updating market studies.

In preparing my presentations for several SMCs, HBAs and Builder 20 Clubs later this year I have begun to examine the housing markets in which I will be speaking. In the process of assembling background data I pulled up a format that I have included in my market reports for the past several years and took a look at the base graph from a market in which I have been active and thought I would share this with you.

This housing market does not usually make the national publications. It is not one of the “chosen 20” that comprise the Case Shiller index, nor is it one in which many national builders have chosen to build. But it is, perhaps, indicative of many of the secondary tier housing markets around the country and representative of the challenges that homebuilders are facing today.

One of the several data trends that I regularly examine in housing markets is the ratios of population growth to permits and employment growth to permits. The optimal data source to determine housing demand is household growth but, except in census years, this data is not always readily available or reliable. Population growth provides a picture of “potential” household formations subject to underlying economic conditions and consumer psychology and confidence while employment growth (or loss) provides a forecast of those economic conditions as they impact consumer willingness to purchase. Read the rest of this entry »