The Housing Chronicles Blog: New Year's Resolution #1: A Respect for the Truth

Monday, January 5, 2009

New Year's Resolution #1: A Respect for the Truth

Recently, I was talking with a reporter and well-known blogger in Orange County, California who told me a story of an in-house market research analyst for a major home builder whom he met at a local soccer game during the tail end of the housing bubble. “I really envy what you do for a living,” he told the reporter. “You get to tell the truth.”

Having worked not just for various real estate consulting companies but also for a public home builder and a large land developer in my building industry career, I knew exactly what this guy meant. With internal pressures to hit certain targets for prices and absorption, failing to help make a division president’s pet projects see the light of day could otherwise mean the end of an interesting and well-paying job.

When I first started writing market studies in the late 1980s, figuring out the demand for new homes in specific price ranges was a requirement for a full-fledged analysis. But by the late 1990s, as the market began to rebound and public home builders snapped up local companies, the only data many clients wanted to see were the prices and sales velocity of their top competitors. Suddenly, it seemed, the most important factor in determining the potential success of a multi-million dollar development – future demand based on employment and household growth, population influx and incomes -- was rendered irrelevant.

Yet even as an outside consultant with an established company, the constant pressures to bring in revenue often meant a Faustian bargain for colleagues and competitors alike, in which peppering reports with qualifiers such as “if past is prologue” seemed the only practical way to make clients happy while also hitting sales quotas.

Indeed, some companies offering consulting services to developers owe their entire growth strategies to their reputations for providing supposedly objective reports – at least from the unknowing point of view of compliant construction lenders – that would magically hit pre-set targets for prices and sales velocity.

Much like the Wizard of Oz, at first glance these reports – which I’ve been recently updating for clients and having to explain the defective original analysis – would hide objectivity behind expertly formatted exhibits, sunny narratives and professionally bound copies on expensive paper. As a finishing touch, articulate company leaders leading seminars at industry functions could provide a patina of objectivity so few would ever question their methods and ethics. Today, however, one only needs to follow the trail of bankrupt land development deals and mothballed projects to see the true consequence of such financial sleight of hand, in which an entire industry must pay the price.

One company which soared during the boom did so due to its reliance on ‘econometric modeling’ (a fancy word for statistics) and some admittedly impressive but off-the-shelf software that allows clients to alter recommended prices based on changes in interest rates, existing home prices and other factors. By charging several times the typical rate for market studies and declaring all staff members to be in the “Top 5% IQ in the country” (with no apparent proof to back up the claim), the firm would provide clients with Bible-sized reams of data comparing proposed projects against not just direct competitors, but also home sales by zip codes, submarkets and county regions. Recommended prices were ultimately determined not by an experienced consultant who knew why Builder A could command a premium over Builder B, but by simply averaging averages: if this is the average price from this zip code and among these competitors and from this county, then here’s your price. Next!

I know for a fact that I lost a lot of potential business during the end of the boom years because I wasn’t willing to sacrifice my long-term reputation for financial expediency. So when I heard Dr. Christopher Thornberg (then with the UCLA Anderson Forecast) speak in 2005, I introduced myself and thanked him for being courageous and strong enough to point out what he thought was obvious. When he left UCLA and co-founded Beacon Economics, I knew this was a company which shared my values regarding complete and total honesty when conducting economic analysis.

Today, besides being a trusted partner to MetroIntelligence, Beacon has emerged as a primary source to national and local press, trade groups, home builders, developers, Wall Street institutions and municipalities for the unbridled truth on the economy and the fate of the housing market. Rather than warning about the bust to come, they’re now talking about how and when to prepare for the rebound. And finally being able to tell the unvarnished truth to clients willing to listen has never been so important.

Here's hoping 2009 marks a return to a long-term respect for the truth so another housing bust like this doesn't reappear. Happy New Year and good riddance to 2008!

1 comment:

Christopher Hain said...

Great post.

We all want to make sales and make more money.

You may be able to get away with it for a while, but ignoring the truth for the financially expedient desire to sell eventually comes around to bite you in the behind later on.

This is at the heart of what caused the bubble. The desire for sales and profits is fine. It's what drives our economy.

But when the desire for sales -- be it for the sale of homes, mortgages, credit default swaps or consulting reports -- leads people to inflate the truth, or outright lie, that's a dangerous tight rope walk. And yes, some will get away with it for a while. And some will make money off it for a while. But when it becomes the norm, everyone is set up for a fall.