Thursday, April 23, 2009

We've Found The Bottom

Each day new reports continue to surface sighting data that suggests the real estate market is beginning to rebound. I, like many others in the industry, try to read the signals to gain a better understanding of where the market is headed. Once the winds of change reveal themselves, the industry can chart a course for recovery.

One of the most critical things to watch is the state of existing home sales. In our area, we continue to see progress. It may be slow, but at least it is occurring. The inventory is decreasing and the average time homes are spending “on the market” has also gone down. These macroeconomic signs are beginning to breathe life into what was a market on life support.
Whether it is the low interest rates, affordability index, or outright great deals on real estate, people are beginning to feel comfortable with the current value. As the market begins to climb the mountain of recovery, there will now be new challenges and pitfalls to face.

More and more contractors and builders are on the brink of insolvency. The increase in work may actually be a curse instead of a blessing. When new home construction picks up, so does the need for working capital to fulfill the labor and material liabilities. In the process this uses up the cash on hand. Due to the rapid change in risk evaluation from lenders, it is almost impossible to get financing once the cash is used. In many cases this is putting the final nail in the coffin.
It will be prudent for anyone purchasing a product or service currently to seriously consider the long term health of the organizations they will be purchasing from. If the builder or contractor cannot finish the project or is not around to service the warranty, it will not do much good for the consumer. Many of these construction companies are privately held and currently show no signs of financial distress making it very hard for the consumer to be aware of any potential problems. My suggestion is to ask other people in the industry and also trade organizations they belong to in order to acquire good background knowledge on the company’s health.

The signs point to the beginning of a long and slow recovery, but this may just bring an end to many of the companies that have struggled thus far to stay alive. It is an era of great opportunity but also of increased risk for those who do not do some homework. I know our organization is optimistic about the future and will begin to navigate forward with a road map clearly marked to avoid these obstacles.

Wednesday, January 28, 2009

Lessons Learned from the Decline in New Home Construction

Consumer’s motivation to buy is not always done with long term value in mind. The buying patterns of the consumer have been developed over time to not consider long term repercussions of a bad purchase. We have learned through purchasing more and more consumables (i.e. food, paper products, clothes, cell phones, etc…) that if a product does not perform to our expectations, we just choose a different brand next time. Our lifestyles have become more hectic and products of convenience are more available thus developing a consumer that is very seldom punished for poor decisions. A hard lesson is now being learned by many owners of newly constructed homes that large purchases need to be done with a different strategy.
If you buy paper products that do not perform, there is not much risk because the product was not that expensive to purchase. We make low-risk purchases on a daily basis, so our skills are not honed in on choosing more sophisticated products. When it comes time to make a much more sophisticated purchase like a car or home, some consumers apply the same principles as they would for simple buying decisions. They may not base their decisions on craftsmanship, history, reputation, quality, or experience and instead focus on getting a great deal. Oftentimes these great deals are too good to be true.
During the rapid growth of the new home market which occurred in the first half of this decade, I observed two disturbing trends. Buyers seemed to put aside rational buying practices and chose newly established construction companies or very large national builders to build their home. Choosing a new builder over an established one just doesn’t make sense to me in most situations.
I witnessed many new builders spring up during this period that were great marketers, but had little experience building homes or running a construction business. Not all of these builders failed; some chose good subcontractors to help them along the way and others were saved by patient homeowners. In the end, most of the builders that repeatedly sacrificed quality have all but vanished. This has left behind many disappointed homeowners with no support.
I hate to make a blanket statement that choosing a national builder was a bad idea, but it’s more that I would not have made that choice. These companies were in fact run by very seasoned business people. It’s not so much a matter that they didn’t know what they were doing, it was more of a matter of priorities. Along with high demand came a large potential for profit, so the bottom line often took precedence over fulfilling customer’s needs.
What’s worse, the marketing used by many national builders, as well as some of the local builders in our area, seemed to prey on the illogical consumer. The ad programs created a “buy now” mentality that clouded the judgment of many people. Perceptions that if one housing development sold out, the next would be much more expensive caused knee-jerk reactions. Waiting lists and lotteries were even held in some of the overheated markets. At face value, it may have been an accurate assessment to believe prices would rise if they waited. However, when the cloud of overzealous buying ended, the consumer has found that the value they received was much different.
What most consumers did not do was their homework. Like any big organization, national builders have set procedures across the country to keep control. In most cases, each division is not allowed to act independently. Therefore, they were not adjusting their specifications or using subjective reasoning when determining the products or craftsmanship that would be best in each different region. Mandates were given, such as getting three bids on each discipline, with the lowest bid usually being the basis for their decisions. If the contractor missed something or bid it incorrectly, it was the homeowner and trade partner that suffered and not the builder.
National builders tend to rely on their specifications and give no credence to whether the contractor or vendor can or will deliver on the specification. What made this even worse was that in a booming market, production moved quickly with missed specifications often going unrecognized. Due to a lack of knowledge and often access to the site, many customers moved into their homes without even realizing they didn’t really get what they had paid for. Project specifications do not normally affect the structural integrity of the home, but can still greatly influence the joy, livability, and value over time.
Now that the building industry has slowed down, I really hope some lessons have been learned. For the builder, I hope they all take this time as one to focus on rebuilding their companies to be ones that create high-quality homes that fulfill the needs of their customers. Even homes being built on a budget need to be built with solid building principles in mind. As for the consumer, I think we must also learn from this lesson. We must understand the consequences of making high-risk purchases on a whim. Our due diligence is importance not only to protect ourselves, but because that is what holds builders accountable.
As the new home market begins to work through and regain steam, I hope a league of builders will surface that not only have the required knowledge and experience, but also honesty and integrity.