The strength of the housing market has made order takers out of the builders and dealers serving it – even to the point that many are turning down work because new jobs would mean a sacrifice of critical resources.
Now, the question is, how sustainable is the strength of this type of market? And, how do builders and dealers with stretched-out resources quantify opportunities that can be part of a smart strategy?
Several experts weighed in on the mechanisms, processes and people needed to absorb available data, then to synthesize it, and then, finally to take action. These are not simple things to do in any kind of market conditions, but will be even more critical during the changes predicted during the next 18 to 24 months.
Those three elements – absorption, synthesis, and action – on data could ultimately determine the survivability rate of many organizations as the housing market adjusts to new pressures.
Increased Reliance on Data
Regardless of size or structure, builders are trying to wrap their arms around the disruptions to the industry and what that means for business today and tomorrow.
Matt Collins, managing partner with real estate consulting firm The Mainspring Group, points out that in today’s market, builders have to operate with more efficiency to counter the increasing disruptions.
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Traditionally, Collins said, builders have been able to rely on gut, experience, and data to future proof business decisions. However, the disruptions of the last two years have made gut decisions nearly impossible to make. Plus, with the market expansion, so much of the labor force is new and inexperienced, which also nullifies the experience aspect of smart decision making.
“Focusing on operational excellence and agility are always the right next steps,” he said. “I have been in the industry for 26 years; I have enough experience that I can almost guess at the right decision. A huge problem though, is that during the last two years, who knows what it is going to be? Now, builders have to rely more on data.”
Most data systems predate the pandemic, which means they probably don’t include agility and can’t deal with the constraints caused by the recent market disruptions.
With that being said, how can builders and suppliers with few resources shift and create a thoughtful stream of data that informs better decision making?
Finding the Right Data Sources
Jeff Handlin serves as the president at Oread Capital and Development, a company focused on residential and mixed-use communities in Colorado metros, and is a self-proclaimed data nerd.
“We use data in a lot of different ways both strategically and tactically,” he said. “Even a few years ago, we started looking at home prices and incomes in our submarkets, and credit scores and delinquencies over time, and tried to match it to what we see on the ground. We look hard at employment production in any market and new permits. We look at and target the most over-employed, under-housed market that is available.”
One example of Handlin’s data-centric approach was his shift from greenfield suburban to focus on higher density, better located communities five years ago, after seeing market insights that directed him to this product that would also lead to better price points and higher margins.
The group also acted on data to develop and offer more three-bedroom apartments. After seeing that there was not a large supply, and that renters were willing to pay a high price per square foot for that specific product type, Handlin formed the company Urban Cottages to steer to more compact infill pocket neighborhoods.
Collins sees the same opportunity for builders to take a fresh look at their main pain points, and to apply agility to address the learnings.
“The best ways to infuse agility are with customer expectation and supply chain,” he said. “If you have a pain point, like you can’t get windows, that means that agility is lacking, and you have to infuse that.”
He used the example of grocery delivery service Instacart as a good way to set customer expectations. As a user logs in, a notification tells them that there may be a substitute if a product is not available.
“They actually prep you to know that you may need to substitute, so that you aren’t frustrated by it,” he said. “Builders should have customers understand what the conditions are and allow for early substitutions. You need to make a way to let the buyer understand that when this occurs, this is how we are going to handle it.”
Setting the customers’ expectations that way will help dealers and builders address the things that used to be rare, but are now the norm, such as garage doors not arriving until after the move-in date.
Because pricing has been on such a wild ride, builders also have adapted by putting escalator clauses in contracts. These clauses didn’t exist until recently, and now Collins says that more than 60% of builders use them.
“It’s an adaptation that didn’t have to happen before because you had a pricing lock with suppliers that went longer than you getting product on site,” Collins said. “Now it’s normal. If the customer is not expecting it, it’s the worst experience possible. Prime them, agility has to be built into the customer expectation.”
Another form of agility that Collins has seen in the market is that some builders are not selling homes until after they are complete.
Within the supply chain, there are other ways to address the challenges. In the past, it would have been fantastic to hear from a builder that they were moving to just one color selection on a product line. But now, dealers don’t have enough supply to respond. So, where one color would have been great for efficiency, it couldn’t be executed, so it takes a collaborative approach with the dealer, analyzing past sales and forecasts.
In one example, a builder worked with a dealer to order a large inventory of windows that the dealer would warehouse and that would allow the builder to continue to produce instead of waiting for the long lead times. What was an alarming 20-week lead time became a nonissue.
“The whole point is collaborating – working with the suppliers to be more agile in what they offer,” Collins said.
The Housing Innovation Alliance is a membership-based organization focused on joining the right parties together to think through these tough industry issues.
“We explore what a new focus on data will mean for leadership and operations, along with how teams are organized,” said Dennis Steigerwalt who serves as president at the Alliance. “We can’t get stuck in legacy operating models. We need to be quick on our feet and data driven – thinking in three month intervals not three years.”
The Alliance encourages organizations to dissect what they’re organized to do, using open collaboration with partners across the supply chain for more resilient businesses.
“The benefit here is business resiliency, and you get that through developing an operating framework to be more agile in the face of quickly changing market conditions,” he said.
Building On The Importance of Data
Cal Zant runs Texas homebuilding company Betenbough Homes and has a background in computer science and data analytics.
“We rely on data heavily to make decisions,” he said. “Not a lot is done by gut. There should be some element of that, but data can help you get perspective and uncover your own biases.”
His strategy has been successful. The company grew 25% from 1,600 closings in 2021 to a projected 2,000 this year. He depends on qualitative and quantitative customer research to identify trends, Monte Carlo simulations that play out a scenario a thousand times based on different certainties, and advanced data modeling.
It’s not just about these practices, it’s also about culture. Zant explains that they use terms like ‘professional skepticism’ and ‘curious learner’ on a regular basis to get associates to ask questions in the right way and to remove biases.
“We think data helps confirm decisions or discover that you are off base,” he said. “We have ways to do ad hoc analysis with in-house software. Our leaders can create their own reports to answer their own questions. We think it’s valuable to explore the data and get the answer yourself instead of relying on some canned report that an analytics team makes. The leader can then use their own curiosity to look deeper at a dimension of the analysis based on their gut, tracking down all the various ways they are curious.”
Zant admits that these leaders may not find anything useful 9 out of 10 times, but one out of 10 is super valuable and might change the company’s entire direction.
His wisdom extends to operations where he wants to shift IT’s focus on just technology to a much more valuable aspect: the information. It can’t stop at just capturing a lot of data, the data needs to translate into information, particularly in a way that a businessperson can interact with it.
Understand And Leverage Collaboration
Eric Holt is an assistant professor at the Franklin L. Burns School of Real Estate & Construction Management at the University of Denver where an immersive digital lab is launching to provide valuable insights from a data-driven, experiential learning environment that marries industry with academia. Coined the Collaboratory, the new classroom brings field expertise to students virtually via two elements – a vision port large panel screen and Bluescape a creative digital collaboration tool.
Physically, the Collaboratory is a classroom that hosts a large screen tied to Google Earth to offer a very immersive experience for an entire class that would be similar to what one individual would get by using virtual reality glasses. That presentation medium marries with the Bluescape feature of the class that is a giant digital messy desk that all collaborators can be connected to at any time, bringing the ideas and assets of both students and industry together in one interactive place.
Industry and academia are very often siloed, but Holt is passionate about the benefits of the two parties working together. First, industry can react much faster than academia can. Second, the folks in the industry have first-hand experience, as they live day-to-day in the projects and can bring forward that knowledge. Third, the industry benefits from the new thinking that the students bring when discussing large challenges.
“This is important because companies want to analyze data but they understand that they have a lot of head trash, so they want to have students involved,” Holt said. “Students don’t have the head trash of this is how we’ve always done it and they bring a lot of wacky stuff to the table, but that’s good. It gets everyone to a better outcome.”
For instance, much of the talk in housing today is about finding efficiencies to reduce time and cost. Large builders have proprietary research and development departments that can analyze the possibilities; however, smaller builders don’t have those resources but are the most nimble to adopt innovative techniques and advance the industry. The learnings that come out of the Collaboratory will be published publicly so that any company type can leverage them and help them figure out how to better manage operations in today’s market.
Data or Die
Mischa Fisher is the chief economist at Angi, an online platform for homeowners to connect to professional services and stresses the importance of having a strong relationship with data.
“If prices go up, you have to protect your margins, and you can’t do that without data,” he said. “You can’t let a strong market lull you into a false sense of security. It’s so volatile that it can put you in a bad position. It’s not a choice. It’s very irresponsible not to monitor data in this type of market.”
He suggests looking at these three data points: pipeline, costs, and resource allocation.
“I think that demand could normalize and as that happens, as the landscape gets more competitive, as the fed raises interest rates, it will make borrowing more expensive, which means you have to be more competitive,” he said.
Navigating The Current Market
Handlin is peeling back the data to create a solid strategy to go forward in today’s wild housing industry. Since the beginning of this year, he has been tracking interest rates, CAP rates, and weekly sales and traffic reports on the specific market subdivisions in geographies that he is interested in.
“You can look at public and private data, but I would say that I don’t necessarily agree that things cannot get that bad because there is no inventory,” he said. “If you look at the actual data, there is a lot of inventory in pending home supply. It’s actually at the highest level since 1973. I think we need to be paying attention to the number of listings that are coming to the market, which are at all-time highs. They match what was hitting the market in 2006.”
He is watching this data closely as absolute listings reach peak levels and new home supply under construction grew to nearly two times what it was 24 months ago. These numbers are inflating because construction time has doubled or more than doubled in the last two years. Layered on to the amount of new construction is the fact that most of it is moving forward with very weak deposits.
“Much of what is under construction is being built as spec because of material prices and interest rates,” Handlin said.
Now, there are historically high levels of work in progress with very low levels of security. Handlin is involved in a new home construction project currently that only needed less than 1% as a deposit and sees that as a big concern.
“We are paying a lot of attention empirically to the amount of pending home supply, that work in progress and how is it going to affect the rest of our industry,” he said. “We are also paying attention to buying power erosion.”
On a more local level, Handlin’s group identifies the most exposed markets from a price sensitivity perspective, which he says aligns with the best performers in the Case-Schiller during the last four years.
“Where you see home appreciation of 30% is where you see a lot of exposure,” Handlin said. “We drill into the same levels of data at the submarket data. Our concern is where you have seen the inflation grow the fastest and where supply has come online the fastest. We only do business in Colorado, but nationally, the same exercise would show which markets are the most stretched and have the most potential for price degradation.”
The Collaboratory has plans for a study of the carbon footprint of housing with Colorado-based Thrive Home Builders. Using one of the builder’s single family home plans, specs, and bill of materials, the Collaboratory will compare a variety of carbon calculators to ultimately determine a tool that is the most accurate and valuable for the industry.
“We are also discussing with the industry to help draw the boundaries around what should be included in the carbon footprint calculations,” Holt said. “The rabbit hole goes deep on this issue.”
The study will also evaluate how to reduce embodied carbon with alternative materials or offsets.
Another project the lab will undertake in partnership with Pro Builder magazine is to understand the technologies that homebuilders use for day-to-day workflow.
For instance, modular has been 7% of US home construction and now is only 3% of the market share, so it’s a challenge to understand why builders are not changing. There also are many discussions about the efficiencies of modular construction, so the Collaboratory is watching hours of video from inside modular home factories to dissect the workflow process, and to therefore inform the industry on what the precise value-added activities are.
His classes already looked at new home construction framing techniques, from stick built versus panelized and stick built versus precut framing, a paper that is still in review but that will help small builders understand where and how they can leverage automation.
“The numbers from the research pencil out, but it is a culture shift in the way that builders buy framing and the way they interact with framers,” Holt said. “Even though we were able to show the data, that it is a win-win-win, it is a hard thing for them to swallow.”
But, Holt was disappointed to share that if we go into a recession, all the work the lab does on modular and other topics usually is forgotten.
“Everyone forgets about it when we go into hard times and we start over in the industry,” he said.
Some of these new techniques might be the difference in the survival rate of some industry players as they struggle with supply chain issues, with finding and keeping talented labor, and with lower demand.