I have been thinking a lot about how the housing market works itself out of its current situation and into whatever the new “normal” will be.   The current “normal” is pretty easy to figure out: still a significant number of foreclosures working through the marketplace, the private builder community decimated, bank lending nearly non-existent, and mortgage lending on life support.   The new home activity seems to be centered on entry level product that has been stripped to the bone to provide “value” and to be able to compete with the seemingly endless wave of foreclosures.

Architecture has been thrown out with the bath water, it seems.   “Rationalization” of product lines (reducing the number of offerings to those which are the most economical to build) and “sku reduction strategies” (code for reducing the variety of components used to make the house) appear to own the day, currently.   Margins are still pretty skinny, if existing at all.

It kind of feels like the Bataan “death march” of World War II, doesn’t it?

I have been wondering if that is really the path out.   Are we doomed to be Zombies building a highly commoditized “product” for the next several years?

Recently, I began reading a small book “Hope, Vision & Value Creation” by John Martin, written last year.   Many in California know John for his work with Mission Viejo, the Irvine Company, and Newhall Ranch.   He has as many honors from the California building community as General Patton did from the Army.   He has “been there-done that” for over 40 years and through some pretty significant downturns. 

 Like modern art, you may not always agree with what he says, but he does deserve consideration.

John’s thesis is this: the cookie-cutter mentality is not a winning long term strategy to undertake.   There are already millions of those houses out there in the resale and foreclosure pool and that inventory is way more than the inherent demand for that product.   Adding more just exacerbates the oversupply issue, putting a crimp on margins.  

He further posits that the strategy of “dumbing down” and building into the commoditized market does not take the lessons learned from prior downturns.   In those downturns, the builders and developers who succeeded were those who understood that customers don’t want a house; they want a home that satisfies their needs in an attractive environment.   What that home looked like, however, changed, based on the particular needs of the population at that particular point in time.  

He argues that there are needs in each area of the country that are being underserved even as we speak.   Multigenerational houses, homes geared to extended ethnic families, homes specifically designed for A2B2 (Active Adult Baby Boomers), etc.   These market segments have housing needs that are not met by much of the product on the resale market or the simplified new product being offered by builders from the “best” of their old portfolio.   His belief is that those builders who go after those niches and listen to those customers to figure out exactly what they want and what they are willing to pay,  will find themselves on a different path that delivers more value, has less competition, and is economically more attractive.

I find this idea intriguing and provocative.

What do you think?   What are the constraints?   Is this a viable path?  

I would love to hear your comments.