2020 Vision on Production Housing’s 2010 Megatrends
The story of 2010 in production home building trends comes down to the question of whether a company can excel at three basic activities: buying, selling, and manufacturing. Oddly, companies needed to excel at none of those three activities in 2004, ‘05, and ‘06. Many were horrible at them, but made money anyway. Why? Phantom demand based on a phantom liquidity surplus based on overengineered and under-regulated trees of exotic, unchecked risk.
What is unclear today is exactly how much over-capacity there is in home building, just as it’s unclear what real demand is–since the home building sector is currently adrift in a limbo state of over-correction. This limbo state will prevail as a backdrop to a slew of start ups, shut downs, buy outs and sell outs.
Despite continued price-point affordabiliy, monthly payment affordability is shaky, with interest rates likely to rise and home buyer tax credits due to expire April 30. Foreclosures will continue to act as a chronic pathology–lowering home values and glutting supply.
So, buying–land, labor, materials, talent–will focus intensely on trying to lower the end-user’s cost by cutting out as much variability as possible and playing hardball on costs for land and production. Selling–homes and in some cases, land lots–will zero in on the mercuial balance between price and velocity, which means home builders need to strike by offering distinctive, visible benefits to buyers.
Making–the construction process–needs to be fast, waste-free, right the first time, and minimally acceptable in quality.
We know that not all companies are created equal when it comes to these skill sets. Which means we’ll be looking at a lot of demises as well as rises. Here are the 10 megatrends we see informaing most of our high volume home builder stories in 2010.
1. Consolidation – National builders seize greater control of divisional decision and execution chain in order to capture costs, improve communication, streamline variability, and increase accountability across the network.
- Corporate asserts greater control over regional/divisional decision-making as regards floor plans, marketing, construction operations, purchasing
- Companies buy, sell, swap land to cut back on overcapacity on a market by market basis.
2. Cash Preservation 2.0 – all savings and efficiency measures adopted in 2009 remain in effect, plus builders look for new expense savings on an operational level from lower land cost base, faster construction cycles, and leanest possible staffing in operations at the neighborhood, divisional, and regional levels.
3. Construction innovation – the question of developing product that consumers find to be affordable and compelling in an post-Easy Money era comes down to innovation and a “good-enough” mind set. The “good enough” mind set looks at a number of potentially costly touches in homes and regards them as expendable, i.e. frills. Price point – i.e. at the monthly payment level – can act as one of the more exciting factors in owning new, but design must play its part in winning a buyer over.
4. Re-load Finished Lot Strategy: since home builders—both public and private–need to generate cash, many of them need to buy land less expensively to put more affordable homes on these lots. Finished lot supplies have tightened up, which means that opportunistically, home builders need to compete with one another for what’s available so that they can put new homes at more affordable price ranges on the market through 2010.
- Private companies increasingly will exit large-permit markets in favor of secondary and tertiary markets that can support smaller operations and ones that have fewer competitors in land bidding.
5. Public vs. Private polarization grows: Publics enjoy capital structure that allows them freedom not only to reset pro formas around new realities of land valuation, but also to access funds to “go vertical” with construction resources. Meanwhile, private builders must work through the hard dollar obligations of their land purchases, and they also have a harder time getting access to credit lines and construction loans to continue to build through the downturn. This widens the market share gap between publics and private home builders.
6. Branding begins to matter: In spite of low to no regard for branding in home building up to the present, brand discipline and brand power begins to gain traction as home buyers seek differentiable characteristics and experiences to sway their decision in an environment of commoditization and parity on pricing. Trusted home builders who ensure quality around trusted brand names – both on the deed and in the products, materials, and services related to homeownership – are going to have a greater viability in the next year to five years.
7. Internal talent is critical: Since operations and corporate support are so lean, each staffer must represent value generation, and each person must understand his/her interconnection with a collaborative team that produces greater value over time. Issues such as compensation, performance, productivity, accountability, and retention become front and center again for the first time in several years.
- A corollary of this trend is that outsourced help can and will emerge as a force factor that allows home builders to be good at either one or two of the three skill sets–buying, selling, or making–and still survive and thrive in the limbo environment.
8. NewCos., bankruptcies, recapitalizations continue to reshape the Builder 100 landscape so that it becomes hardly recognizable in names from 2008 to 2011. Talent migrates, disappears, reemerges, etc. while veterans of several cycles decide that enough is enough and try to find dignified exit strategies.
9. Washington, D.C. policy continues to exert disproportionate influence on the home building and home buying environment. As the financial crisis begins to stabilize by the end of 2010, and an outlook for an improved job formation environment emerges, the issues of healthcare (for employees) and energy success finance as high-priority relevant challenges for home builders and their partners.
10. Home buyer targets get clearer: What EchoBoom emerging adults, and what Baby Boom emerging retirees really want in their next wave of new home communities begins to come into view in the next 24 to 36 months. GenY homes and Active Adult homes as they’ve been conceived of so far have fallen short of the mark. A new wave of designs, community plans, and locations must surface for there to be a compelling new sense of direction on how home builders will meet this market.
The “So what” of these 10 megatrends takes the following form:
1. Hard credit terms and glutted distressed resale competition in many big builder markets means that production builders will continue to be under tremendous pressure to ratchet purchase prices down further in the coming 12 months. Partners need to work on transparency and program profitability with refreshed assumptions on value to the home buyer as well as unit price and profits.
2. Consolidation, corporate oversight, product streamlining, less variability, and new cost models mean that fewer SKUs will wind up serving the high-volume market. Bigger, more scaled purchasing deals will synch up with a reduction in floor plans, templated building systems, and fewer one-offs on a divisional or neighborhood level.
3. Demand recognition will be a home builder’s best friend. Any partner–be it a product manufacturer, a land seller or developer, a trade partner, etc.–who helps home builders understand a) the female buyer, b) the young adult buyer, c) the baby boomer buyer and how to reach those buyers with a message of new homes’ value will be regarded as a partner they can’t live without.
4. Service and cost (vs. unit price) will supplant design and features as the key priorities among home builders as buyers of materials and products. Their need to be opp0rtunistic, to build on smaller tracts of land with lean, agile production and marketing operations, to strike fast and remain asset-right means that vendors need to be flexible and adaptable in their distribution and installation programs.
Variations on these themes will probably make up 90% of the stories you’ll see about production home building in 2010.
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The industry is hard to predict at this time, but I’m sure that the market will recover in no time. Can’t help from being optimistic.
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