Lessons from the housing bust

For better or for worse, the depth and length of this housing bust is sure to change the way in which many builders do business. Although this blog has been regularly tracking these changes, Builder magazine's John Caulfield has written an article that summarizes just what types of changes we may see in the future.

Even still, given the highly politicized environments at most large building companies, just because someone has a good idea doesn't mean it will make it past the egos potentially in the way. In fact, I know of one senior executive from a top public builder who was shown the door when he was trying to throw up red flags that the market was starting to slow and they should get rid of their land positions -- and this was back in 2004! From the article:

For more detailed information on the six recommendations visit here.

Many builders would argue that recessions come and go, and this one, too, will pass, so why make dramatic changes? But many of these same builders have called this recession the absolute nastiest they’ve experienced, and no one wants to go through this again. So, to help readers who want to avoid such scenarios in the future, BUILDER has assembled six “lessons learned” from the housing bust, based on our reporting since last fall, when the economy took a severe turn for the worse.

Some of these strategies would require simple changes. Others are more complicated to achieve. All of them, though, do ask builders to muster the guts and the vision to look beyond the status quo, and be flexible and open to new ideas for operating a home building business for the long term, through the booms and the busts...

1. Build Smarter

2. Limit Your Land Holdings

3. Find New Cash Streams

4. Respond Quicker to Market Conditions

5. Value Your Workers and Trades

6. Diversify Beyond New-Home Construction

Reassessing the fundamentals of the building industry

Although I had touched on this same subject in a much briefer format for my most recent column for Builder & Developer magazine (including the mistaken belief that mathematical models alone can forecast future demand), Builder magazine writer John Caulfield has written a very detailed article on how the future building industry may look and what home builders, lenders and investors need to do to adjust to the new reality:

From the 1940s until very recently, U.S. housing policy consisted of two words: more homeowners. Everything from highway construction to taxation revolved around that goal. And the results were spectacular, as ownership rates went from 62.1 percent in 1960 to a peak of 69 percent in 2004. Equally spectacular—but with dire consequences—was how the “American Dream” mutated into “America’s Piggybank” and then “America’s Nightmare” within the last decade.

During this period of excess, buyers agreed to—or were duped into—home purchases their incomes couldn’t afford, and owners used those homes like ATMs to perpetuate more lavish lifestyles. Builders and developers interpreted demographic data—particularly about Hispanic buyers—in ludicrously optimistic ways to justify their expansion ambitions. Mortgage companies sank their underwriting standards to new depths. And, inevitably, investors pounced on opportunities to exploit a thriving market, even as they ignored the quicksand upon which that market had been constructed...

Click here for full story.