Here’s more testimony to the need for innovation in home building this year and next.
Have a look at the post-up on New Home Sales, for December and for full-year 2016, here from National Association of Home Builders chief economist Robert Dietz.
There’s a good-news, not-so-good news note to Dietz’s analysis, but the gist of the commentary is positive. Despite all the headwinds builders faced in 2016, the year-on-year full-year tally for new home sales was up 12.2%, to 563,300. In fact, many of the most severe headwinds were supply-side forces, labor supply constraints, and scarcity of finished, developed buildable lots. There are puts and takes and a growing anxiety as to whether rising interest rates will check up what’s been a mojo-rising story for most of the past 12 months. Still, the kicker line is where we see confirmation of this urgency around innovation–not just talk, action. Dietz writes:
Median new home prices rose in 2016 as well, increasing from $296,400 to $313,200. Pricing will be a key challenge over the course of 2017, given scarcity of lots and labor and growing concerns about building material prices.
That’s a 5.6% increase in median prices on new homes, when what one would expect as builders open more communities and subdivisions aimed at young adult, entry-level buyers is that builders would actually start reeling their prices in a little bit. By now, the median price should be coming down, not going up.
You can see here in the next chart, from Calculated Risk’s Bill McBride that the fact that prices on new homes have tended toward the higher-end discretionary buyer where the margins are greater, the start-to-completion cycles are slower, and the cadencing of new starts can be more deliberate means adds up to one thing. The gap between transaction volume for existing home sales and new home sales has barely shrunk in the past five years. The “distressing gap,” contrasting normalized existing home sales ratios with new home sales remains wide. McBride predicts this gap should narrow:
“I expect existing home sales to move more sideways, and I expect this gap to slowly close, mostly from an increase in new home sales.
“However, this assumes that the builders will offer some smaller, less expensive homes. If not, then the gap will persist.”
Again, just as Dietz notes that “pricing will be a key challenge,” McBride’s commentary supports that, saying it’s either “smaller, less expensive homes” or “the gap will persist.”
But you don’t get lower prices when lot prices, labor, and materials prices are all going north unless you innovate. Smaller, yes. But how small can you go and still be compelling enough to compete not only with resales, but rental apartments, single-family for-rent, and other builders?
Innovation. Investing in it is critical. Real money. But here’s an analysis in the Harvard Business Review, based on evidence, that says that family companies, i.e. like many, many home building companies in home building, are more likely to get more out of their innovation investments than larger companies.
Why? Because they’re poorer. They have fewer resources, and they have to watch their dollars and make every dollar count. So, they have to wrest results from their innovation investment, their research and development, their discoveries.
One such investment that will eventually lead to smarter, probably more efficient home building, design, customer relationship, and management operations is building information modeling. After more companies invest in and change themselves around BIM platforms and their capabilities, we’ll start seeing the kind of innovation that can ultimately impact pricing on a scaled basis.
We’re planning a session that takes a deep-dive on BIM for high-volume production builders at our Build, Measure, Learn: Data and Leadership in Action-themed Housing Leadership Summit, May 8-10, at the Ritz Carlton Laguna Niguel. We’re working with Continuum Group principal Clark Ellis on designing and planning that educational session as we speak. Click here to register.
It’s a long-awaited step toward innovation investment that, we believe, will play a role in eventually closing that “distressing gap.”
