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.

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