The Downturn Lesson Home Builders Don’t Want to Learn
You hear it repeatedly now. It’s phrased in different ways by different people. Essentially the gist is that it would be a waste of a housing crisis of exquisite proportions to come out of it behaving like you did going into the mess.
Larry Webb, who’s working with steady progress on getting his The New Home Company ramped up in Southern and Northern California, spoke about this issue during a session yesterday at the Pacific Coast Builders Conference in San Francisco.
”I don’t think home builders have done a very good job of learning what the downturn had to teach us about what home buyers want.”
People who know Larry Webb know that he means that a particular, relatively finite group of home builders is guiltier than the rest of the failure to recognize the error of their prior ways so that they can avoid repeating them. His sharpest slings and arrows are reserved for those who’ve grown to regard them with relatively minor discomfort if not as a source of amusement.
Still, in the literal sense, he’s being fair, inclusive, even self-inclusive in his admonishing words about industry practice, process, and product that have done little to adapt to a post-financial meltdown reality.
He’s saying, roughly, expect the cycle to restore things to how they were at your own peril. The worst thing you can do right now is to not pay more studied attention to who a home buyer in today’s market is and what makes her or him tick.
It’s an agonizingly obvious notion.
Cutting prices by taking dollars out of the cost-per-square foot matrix is a critical but not total answer to what a home buyer today wants. And that’s the good news for the symbiotic slog that goes on between large public and more-focused private home building companies. If the recovery story were all about price, there’d be no chapters in it about private companies.
A mistake home builders make collectively is that they assume too quickly that they know how to learn who their customers are and how to compel them.
Few if any of them do though. Paul Saffo, a Silicon Valley-based forecaster, had a number of intriguing nuggets in his remarks at the PCBC show, and one of them is the simple observation that it’s often not our failures that get us into the biggest trouble but our successes.
So, going back to Larry Webb’s barb, how can home builders learn something when they’re pretty well convinced they already know? The volume of business and wild successes of the first half of the decade just finished are fresh enough in remaining home builders’ minds to convince them they do know what their customers want, and the only difference between then and now is that 50% or 60% of the money around then has been hi-jacked.
Now, any public or private home building company still in business, does many things well. Most of them have strode out of the dark ages in their operational and construction processes, their manufacturing efficiencies, and are taking baby steps forward in sourcing the materials supply chain. They’re also skilled at dealing with localities and have become more sophisticated on the financial management front.
Where they have the greatest opportunity (or, put another way, where they’ve made the least progress to date) is on the customer intelligence front. Why? In some ways, it’s as Saffo says above: prior successes lay squarely in the way of recognizing the error in one’s thinking. It’s hard not to believe that if home financing were fixed whatever you could build would sell.
Still, Saffo had some other valuable thoughts about this issue of trying to understand your customer’s post-financial meltdown behavior. To grasp it requires looking back, not just to recent history, but farther. (He generally recommends that if you want to forecast a period ahead, you’ve got to look at least double the period behind).
So, briefly, the post-industrial revolution period, Saffo says, could be described as a “producer” economy. It was about the sea change from scarcity to abundance, capacity, and efficiency. The profound change that occurred post-World War II, when manufacturing reverted from arms to peace time goods, happened because there was a sudden recognition that there was more manufacturing capacity than there was need for goods.
Consumerism, which essentially meant desire for goods could be invented, propelled an expansion of business opportunity and capacity. So that post-war period Saffo calls a shift from a producer economy to a consumer economy.
Next, which Saffo plots occuring in November 2008, comes another structural shift. He describes the post-financial crisis era as one where people play the roles of both producer and consumer. He calls it the Creator economy, which means that the act of consumption and production occur simultaneously.
Consider Google. When you use it for a search, you’re also producing data that immediately enriches the engine itself. People consume and produce in many ways these days, and in more and more ways, households behave more like little company entities rather than traditional family units.
This is where there’s probably something valuable for home builders to learn what they’ll need to learn about their customers. When you X-out all of the funny business around home financing circa 2004-2007, two stark realities come clear.
One is that real money, real skin in the game, means that a buyer will necessarily be more fully invested in the home, not just as shelter but as a sound financial program for that given period of her or his life.
The other is that home builders don’t have an off-the-shelf solution for that producer-consumer type of buyer to roll out today, which means both their designs and their real estate strategies are full of risk.
Saffo has some interesting notions about what the post-financial meltdown residential built environment might look like and work like if builders don’t revert exclusively to their comfort zone.
He suggests that multifamily homes whose mortgage and ownership structure blend some middle ground between condo and timeshare for baby boomers who want to downsize out of single family houses might be one direction to explore.
Nothing like that will ever happen though if home builders ignore one of the downturn’s most glaring lessons–which is that there’s a gap separating what they build and what home buying customers really want.
You can ignore the gap if you want. Temporarily anyway.
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