New Home Building’s Ten Most Critical Factors–And What to Do
Winter’s insufferably long days have started to relent to the point where it’s no longer necessarily pitch dark both when you arrive and go home from work. Still, whatever the geography, cold, difficult days and nights lay ahead, even if optimism attaches itself to cautiousness in an increasing number of pronouncements of publically traded home building company leaders in their quarterly and fiscal year financial reports to analysts.
This, the first formal week of what’s long been known as spring selling season, here’s how we’d oversimply characterize the 10 most critical dynamics in the higher volume new-home market:
- 2010 Economy — too close to call
- Access to credit/capital — inertial, thanks to lender greed combined with policy-and-regulastipation, discouraging private sector investors
- Consumer household debt — a negative, deleveraging must continue
- Jobs and income — stay tuned, as election-motivated policy plays out (construction employment stuck)
- Qualified consumers’ access to mortgage finance — harsh at best
- Fencesitters — wavering as to whether they’d be fools to buy now
- New-home supply — one good sales rush from scarcity
- New-home prices — Treading delicate balance of absorptions vs. value and profitability destruction
- Foreclosures — the biggest riddle (no down cycle in any veteran’s experience has included this magnitude of defaults and foreclosures)
- Mobility — at a historic low (back to 1949-’50 levels, when the U.S. population was half what it is today), which means that demographer Cheryl Russell’s theory that mobility is pent up is credible.
As you can see, almost every negative factor has a neutralizer, an offsetting positive one. This is why it’s true that nobody but nobody knows for sure whether 2010’s economic and housing trajectory will go down as part of a W, a lazy U, an L, or even a V-shaped recovery. There are simply too many unpredictables.
This is why, in addition to executing flawlessly on your Spring Selling Season tactical plan of driving people into your sales centers and models, starting specs aimed at the margin of demand you can pull out of apartments and other rentals, and putting absolutely miserly discipline on all expenses beyond the first half of the year, there are other strategic building blocks to work on now …
The good news is that one of them is not simply working to lower your golf handicap this year, with faint hope that the U.S. Census population clock suddenly tolls the end of the housing depression.
- Overheads: Says one senior-level home building finance executive, “every company should manage itself now as if it’s in work-out, turnaround mode… I don’t know why more companies don’t look at it this way. It’ would help every one of them improve their gross margins and their outlook beyond 2010.”
- Construction cycle time: Says the head of a medium-sized multi-regional private home builder, “it’s amazing what you can do when you’ve got contractors circling your sites every day like unfed coyotes. Our speeds are up to the fastest we’ve ever built, and we’re not done yet.”
- Management: corporate, regional, divisional, and community-based operating and communications templates need constant review and reinvention to get cost out and effectiveness in.
- Management II: one structural tipping point yet to occur in home building is diversity–both gender and ethnicity–which has slowed the ability of enterprises to design and develop products, marketing, and sales that keep pace with changing decision-maker home buyers.
- Marketing: Stimulus (aka home buyer tax credits) doesn’t make more buyers; it changes the timetable of buyers from later to sooner. More buyers is the only thing that makes more buyers. Excitement, a unique value, an exclusive deal, an offer that can’t be refused are the ways to get there. They’re what changes psychology from happily sitting on the sidelines to entering the arena.
Even as Capitol Hill remains all too involved in the day to day of business and finance lives and livelihoods, and even as a stubborn economy suggests that incumbent electoral officials will be pulling out the stops on economy-boosting programs, we believe we’ve seen the last of home buyer tax credits. We don’t think that even the housing lobbyists give another extension much of a chance, especially in light of what it took to get the last home buyer tax credit through.
In other words, whether or not the 10 aforementioned critical dynamics play one another to a draw, it’s going to be up to operators themselves to manage through the next stretch. The minute you succeed–as some of you will–in getting home not-buyers to become home buyers, private sector liquidity and even banks will come back into the space looking for your business again.
This is probably a 24-month process. Still, it begins now, with the 2010 Spring Selling Season. What comes next after that? Well, you can focus on that question and come away with an action plan as we gather the Housing Leadership Summit, a conference designed for both strategic leaders and operational management, in Chicago, May 10-12. It’s a must-attend event for the home building industry’s CEOs, presidents, and top operating management.
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2 Responses to “New Home Building’s Ten Most Critical Factors–And What to Do”
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Home builders have been holding on tight throughout this crisis are a successfully pulling through and there’s stats to show it- which is really exciting.
There’s a home builder in STL that lowered the price of their luxury homes to under $200,000
http://www.fischerandfrichtel.com/blog/index.php/2010/01/luxury-neighborhoods-become-more-affordable/
There is one critical element missing from the 10 listed above. Outsourcing.
According to Chuck Shinn of Shinn Consulting: The one thing Shinn doesn’t recommend is re-hiring a lot of staff. There’s no guarantee that the flurry of activity from the tax credit will continue after it expires — and most builders have streamlined their operations to make do with less overhead anyway. It’s a lesson that Pat Neal has learned, and he has no plans to bring back staff.
To accommodate the increased activity, Shinn recommends outsourcing such functions as purchasing, architectural plans, estimating and selections. “Builders ought to look at those instead of hiring people, which is sticky overhead that’s hard to get rid of,” he says. “It allows a small builder to play the game like the publics’. If they take advantage of some of this, they can look like a huge builder with really talented people and still be a small operation.”
Read the full article in the January issue of Professional Builder.