While Yamano closely guards how Meritage applies its research, he doesn’t have a problem pointing to the specific indicators that he finds most valuable. “Resale closing information is definitely important to our platform,” he says. “Listing information is important because it’s forward-looking. New-home information is critical because you’re able to see what your competitors are doing in the marketplace. We use property research to determine what product types are selling.”
Scouts Vs. datarn
Wayne Yamano’s use of baseball terminology to describe the success of his data program at Meritage is fitting.
The relationship Big Data and sports grew in national prominence after Michael Lewis’ book Moneyball was published in 2003. The book described how the small-market, cash-strapped Oakland A’s utilized advanced metrics to help them identify undervalued players to would help them compete with well-heeled franchises like the New York Yankees. The analogy goes only so far with Meritage, a top 10 builder that, unlike its smaller peers, can tap into the public market for capital.
But there are some threads that run through both home building and baseball. One is the conflict that can occur between the data team and those people who built their career on acquiring resources. In baseball, it’s the old-school scouts. In home building, it’s the land acquisition guys.
"It’s a cooperative process, but sometimes it does get contentious," Yamano says. "But for the most part, I believe the division and land acquisition folks consider us a valuable resource to help them make smarter decisions on land acquisition side."
But what happens when a division president falls in love with a land position, but Yamano’s data screams "No"? They have to sell their deal.
"We ask anyone that has a certain position on a land deal to provide as much backup data and information as possible," Yamano says. "That’s not always possible. Some of it is anecdotal."
Then, as Yamano describes it, the group with the best case wins. "It’s a process with a lot of give and take with division folks," Yamano says. "Sometimes they’re able to convince us of their positions. Sometimes if we’re in conflict with them, we’re able to convince them of our position with the data backup that we have."
But ultimately, Hilton says his team needs to respect the data operation. "At first, it was a bit of learning curve," Hilton says. "But we’re way beyond that today. Anybody working here has completely bought into that or they’re not working here [anymore]."
But not everything Meritage uses comes from outside. “A lot of the data we collect is in-house,” he says. “We survey our traffic and our buyers to glean as much as we can off of that.” In fact, research will become a bigger part of the Meritage research platform going forward. As Yamano’s group evolved, market research, consumer research, product development, and marketing have been added to the list of duties.
“We’re doing what we can on the product side to get as much insight from our buyers, including what they’re looking for and what they’ll pay,” Yamano says. “Once we’ve designed and deployed a new plan, we go out there again and ask our buyers what they liked about it and what they didn’t so when we build it next time, we can build it better.”
Land Quest
While Meritage’s research has branched into other areas, finding dirt remains a key mission. As the market has recovered, Yamano says “there’s been a real evolution” in the type of land the builder considers. With finished lots growing scare (or altogether nonexistent) in its markets, Meritage—which predominately focuses on first and second move-up—is forced to step out on the risk spectrum to find opportunity.
As Meritage’s core A and B land opportunity becomes constrained, “there is an opportunity to move down in the price band for us,” Yamano says. “Our responsibility is to find opportunities where perhaps not as many people are looking so we can be one of the earlier movers and can gain advantage there.”
But being an early mover means taking risk. Yamano insists Meritage won’t take its eye off the ball. “When you target submarkets that start to get a little further out from your core A and B submarkets, you really want to make sure that they have a lot of momentum going forward,” he says. “The data can really help you determine whether that’s happening.”
John Burns thinks Meritage’s approach, which involves both data and divisional recommendations, minimizes potential damage. “With land prices so high, it is easy to make a mistake,” he says. “Land buying at Meritage requires a dual approval where both the local division and a corporate team, armed with tremendous information, sign off on the deal. The process encourages active debate and has to reduce to the number of mistakes.”
Yamano argues that his group’s research also increases Meritage’s upside on deals, though he agrees with his former boss’ main premise. “You won’t hit a home run with every deal you make,” he says. “But our floor is higher because it [the data] does limit the mistakes that we might make.”
“There’s still judgment involved. And home building is not always about where the puck is today. It’s about where the puck will be tomorrow. Sometimes you make your best judgment about where you think it’s going to be, like we did in Phoenix, and it doesn’t end up there.” — Steve Hilton
But having better algorithms doesn’t immunize builders from mistakes. For instance, three years ago, it looked like Phoenix was in recovery. As such, Meritage, along with a lot of other builders, blitzed the market and community count increased 60% without a corresponding increase in sales, according to Barron. “If you did the analysis three years ago, that [going into Phoenix] was probably the right call to make,” Barron says. “Nobody would have foreseen that everybody else was going to come in. It’s harder to say whether the analysis works or not, if you don’t have a perfect crystal ball as far as what the competition is going to do.”
Hilton doesn’t see Phoenix as an indictment of his company’s advanced metrics. “There’s still judgment involved,” he says. “And home building is not always about where the puck is today. It’s about where the puck will be tomorrow. Sometimes you make your best judgment about where you think it’s going to be, like we did in Phoenix, and it doesn’t end up there. … It’s not foolproof in any way, but the data and the interpretation of the data is really important in how we make decisions.”
In seven years, Meritage’s data program moved beyond just finding pricing sweet spots and land opportunities. Its tentacles reach every part of the builder’s organization—and that promises to continue into the future.
“We use data to buy land at the right location at the right price,” Yamano says. “We use data to tell us who the consumer will be and what kind of house we think they will buy. We use data to show us how much they’re willing to pay for that house. We use data to show us how best to reach that target and to help us understand how we can do it better the next time.”
