Housing Megatrends 2010: Pulte-Centex May Lead Way to Less Confirmation Bias
In the previous post, we stated our goal for the next week or so: To offer a preview of 10 megatrends residential real estate and construction companies can bank on in 2010 that happen to trace from 10 leading achievements in 2009.
Yesterday we looked at a number of home building companies’ introduction of foreclosure-fighter entry-level home offerings in 2009. On the surface, lower price-tag new homes may look like a tactical adjustment to a huge and chronic price-point challenge posed by the transfer of millions of homes’ deeds to new homeowners via distressed or foreclosure deals.
That’s not incorrect, but it’s also only part of the picture. Shrinking materials costs and stripping out square footage and labor-intensive details and finishes would only get a home builder part of the way to where a home buyer spots a value advantage over existing homes sold under a white flag of capitulation.
It took a mentality make-over not only to extract materials costs and find construction-time short-cuts to reduce a home’s pricetag, but to create a new operational template that speeds up construction, gets it right the first time, and iterates the process consistently across communities, divisions, and regions so that indirect fixed costs can get focus and come out of the equation as well.
So “good enough” is the badge for a home builder strategy that began to emerge in 2009, as companies traded off what people opted for back when money was funny for what they really want when money is deadly serious and much harder to get. Good enough is what a home builder minimally needs to do to get a home buyer excited about buying new. It’s not necessarily lower quality, because new still needs to quicken the pulse compared with what a buyer might get in a buyers’ resale market, but good enough dispenses with whatever doesn’t strike the buyer as bottom line valuable to the whole.
A separate but related strategic issue with origins in a terrific achievement in 2009–Pulte’s “combination” with Centex–has ramifications as one of our 2010 Megatrends: “The End of Confirmation Bias.” We see in the previous example that for a design innovation–the foreclosure-fighter or price-winner new home–to work, a structural, operational change needed to support the new product rollout to gain financial viability.
The line in the sand we see with Pulte’s acquisition of Centex has to do with a disruptive approach to centralizing process and production that entrepreneurial-souled home building enterprises have resisted up to now. As the newly merged company Pultifies Centex, a whole new relationship will tie divisions and regions to the Bloomfield Hills, Mich., mother ship.
This new tie will test one of home building’s most sacrosanct assumptions that all of home building, like all of real estate, is local. This assumption, fed over the past 100 years or more by heaps of confirmation bias, accounts for errors and excess masquerading as local entrepreneurial cultures in multi-divisional home building companies. This is not to say that location is a less powerful factor in real estate value than it has ever been.
Home builders, however, must do better in 2010 at balancing location with process to their advantage in a marketplace that everyone knows will be riddled with foreclosure sales for the next 24 months or more.
- Is real estate and land knowledge essentially local (i.e. value and relationship to sellers are inextricably tied together)? Yes.
- Do municipalities and counties profoundly impact viability and profitability of new home communities? Yes.
- Do local trades and distribution networks structurally impact costs in materials, time, and labor? Yes, but not necessarily to the extent they need to…
- Do local design trends rule to such an extent that each market needs its own floor plans and elevations? Absolutely not.
In the Pulte-Centex strategy we see the most dramatic example yet of a top-out reorganization aimed at making what goes on under the hood of a national home building company easier to understand and manage. In our Big Builder Virtual event program, financial consultant Rob Held points to variability as one of home building’s fiercest foes. If you have a look at his seminar, he’s not saying that home building is not local; he is saying that if home builders can reduce production variability, they’ll be more profitable, and better at supplying the market what it demands.
Many national companies’ divisional structures grew out of acquisition and roll-up binges of yesteryear. The cathartic months from 2007 through now should have done nothing so much as create an opportunity to re-draw every organizational chart from a blank sheet of paper. An initiative and its champion(s) are only worth pursuing insofar as they account for and serve the interests of the whole.
When the world is stripped away of all of the excess that could be had when money cost nothing, what’s left is what makes a new home more desirable than a resale, and the process that can deliver that.
So, the 2009 achievement that is the Pulte-Centex coup has major ramifications for further consolidation in the home building landscape. Yes, we may see that the $1 billion plus in cost out could be gotten from several other big “combinations” of home builders that share market footprints and could re-rationalize land positions around respective product lines and price tiers.
But what we’ll really see more of in 2010 is headquarters power and accountability up, down, and outward of the home office. Division presidents will get to “do what they’re good at,” which is to leverage local knowledge and relationships for smart land buying. At that point, corporate comes in with the operational process and the marketing support to drive sales at a manageable, measurable level.
Hopefully, we’ll see the emergence of talented skeptics. It’s they who’ll give teeth to the ”lessons learned” bullet point in so many powerpoint presentations we’ll see in the upcoming months. Confirmation bias, clearly, kills value and decimates companies that fall prey to it.
The widely held belief that the industry had beaten the housing cycle at its own game was confirmation bias at its most harmful.
Accountability, less variability, and greater measurability can offset the instinct to get caught up in one’s own hype. That’s what’s at work in the Pulte-Centex combination, and what we’ll see lots of variants of in 2010.
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