Here’s how buyer momentum works as a double-edged sword among home builders, and why they must pivot away from all-in focus on costs to become value-generators.
By John McManus
from Builder Magazine
Three economic juggernauts continue to power a surge in belief that has taken on a life of its own. Gravity, biology, physics, nothing to do with mass, matter nor logical mathematics seem to mute nor suppress the mojo. The vagaries of the COVID-19 pandemic notwithstanding, Federal Reserve activisim and legislative accommodation handily cloth-wipe risk from planning white boards everywhere.
And as these triple trend-lines go gangbusters right now, leaders of home building enterprises–those 5,000 or so firms who deliver 10 or more homes a year, and are building 9 out of 10 new homes in America–can’t get rid of a single, nagging, gnawing thought right now.
It’s residential construction and real estate’s four-letter expletive and Holy Grail in one. By day and by sleep-impaired night, the word, its physical visceral meaning in the pit of the stomach, its cost, its fleeting, euphoric rush, and its array of consequences flop and roll, over and over and over in the mind of people whose firms live or die in its force of nature.
Get a candid take on what’s a top priority and “pain point” for home building enterprise executives right now, and I’d bet land–more specifically, ready-to-build home sites–is right up there at the tippy-top of the pyramid. Historically, builders and developers love, hate, need, and rue land. It’s both oxygen and toxic gas, depending on real estate cycle-timing, on fate, and on dumb luck.
Given the DNA of builders–many of them self-professed “deal junkies”–this muscle-memory reflex is a natural response to a stimulus. The stimulus, plain and simple, being real-live, indisputable demand. Rates of conversion, of real buyer interest, of absorption, of earnest money deposits tell most big builders not only that 2020 will be a better year than they’d had reason to expect, but that 2021 and 2022 could be ruinous if their next outlays for land aren’t on the mark.
That’s because every dollar invested in dirt by a builder is freighted with time-released odds of either winning or losing big, subject to inflationary or deflationary forces that kick into gear only after the commitments are done and dusted.
Here’s why most big builders feel nervous that they don’t have enough land in their pipelines, which makes them doubly-nervous that they’re apt to pay too much for what they can acquire at this point, and triply-nervous about what that means if the market suddenly craters. This is one of the critical “pain point” issues for big builder executives as they plan to convene for our Builder 100 conference, scheduled for Nov. 2-4, 2020.
People–those whose means have not yet been, nor likely will be, disrupted by the economic, financial, and occupational toll of the pandemic–seek “safe haven.” The pandemic, among other effects both horrifying and exciting, has served as a “fast-forward” function, accelerating virtual connection, transaction, and value-creation, speeding business model transformation, and adding a proverbial kick-in-the-ass to many people who’d entertained occasional thoughts about moving into a new home in the next five years or so, but now see no reason not to do so as soon as possible.
Pent-up demand for new homes now not only includes people who had been bent on making the switch from rental to new, or from resale to new, but now from an expanded universe of people who’d been perennial tire-kickers and “looky-Lous.” In the past, they may have been window-shoppers. Now–in a sped-up world whose one sure bet affirms that a new, well-designed, well-engineered, flexibly laid-out, physically-protected home is one of life’s only remaining “safe haven” investments–they’re among the ranks of motivated buyers.
This phenomenon–for home builders, much to the envy of business leaders in sectors like travel and hospitality, entertainment, retail, etc.–is a good problem to have. The alternative being the deafening sound of silence from a buyer base pulverized into paralysis.
However, being spared the immediate destruction of COVID-19 could–unless home building, development, and residential real estate investment strategists roadmap fundamental transformation to both what they offer in terms of homes and communities and how they deliver that value offering to the marketplace–be worse than enduring the initial blows of the virus and its economic toll.
How is that again?
The reason is as essential as the notion of home as safe haven. A home–we’ve known for some years now, but have done little to transform around–is more than four walls and a roof. A home–more and more home buyers express–is an array of solutions to their lives, a structure and system that offers sanctuary, well-being, health, comfort, belonging, and other valued states of being and mind.
As home builders and their partners focus increasingly on managing expenses–direct and indirect–that go into producing new homes and communities–they also commit and invest less and less focus on learning to become beacons of value as other consumer marketers learn to do.
This is because most builders’ core assumption is that “everybody needs a home,” which means–to some degree of validity–they can never be truly disrupted.
There’s hazard here. If new-home construction manages to escape COVID-19’s clutches, save for a two-month downward blip, the lion’s share of the business and operational community will revert to outdated, byzantine, self-contradictory, unaligned, inefficient practices that are known to hemorrhage value between their concept and their delivery to the end-user. This would be tantamount to a whipsaw back to business-as-usual, with no new learning about what’s changed, really changed, forever changed.
The pandemic is forcing fundamental transformation in other businesses. It would be a pity were home building to lose such an opportunity to be forced to change, by design, on purpose, to assure their own value-creating futures as consumer-centric producers.
As builder executives ruminate and angst over land right now–and the fact that their mettle as business men and women comes down to how well or poorly they’ll buy land in the next six- to 36-months’ time–they should consider the business they’re truly in–the well-being business, the human solutions business, the “safe haven” business.
The opportunity now is to pivot around purpose as an organization and as a business sector. This would be a pivot away from outsized focus, commitment, and investment as buyers of land, materials, and labor, and toward renewable value-generators among communities, where at the home address level, the local municipality level, the state level, and the societal level, home building organizations begin to be looked at as health- and well-being solutions providers, part of an emerging ecosystem that remaps how fair market value gets quantified and defined.
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