Our Favorite Interview Question

If you've been in the workforce for any period of time, you've either asked or been asked some great questions in an interview. Here's one of our favorites, why we like it and what we look for:

"What are the two worst business decisions you've made and what was their impact on the company's profit statement or balance sheet?"

One of our clients posed this question to finalists on a C-level search we handled more than fifteen years ago and we've used it ever since. On searches that don't involve P&L roles, it can be modified to "your area of responsibility?". We look for two things in the answer:

Authenticity & Objectivity. It's amazing how often we hear people skirt this question with "Gee, I can't think of any really bad decisions I've made". Meaning he/she is (A) uncomfortable talking about his/her past mistakes, (B) a low risk taker, (C) lacking in awareness or (D) way overdue for a doozy of a mistake. Pick any of the four options and it's safe to say you probably don't want that person joining your team.

A Proportionate Response. Is the answer proportionate to the candidate's past level of authority and responsibility? A C-level candidate should cite a much more significant example than a mid-level manager and vice versa. If it doesn't match up, then the four reasons above are probably at play again.

A prime example of this surfaced from a candidate we interviewed for the search above. He told us about a large project he bought for his company several years earlier. It was going through a lenghty entitlement process and the front-end investment was growing each day. It was clear the project would be a home run once it cleared entitlements but with a difficult township involved, it was uncertain when that would occur.

This candidate was pressed by his CEO to make a decision on staying the course and hope the project cleared entitlements (or) selling it now with partial entitlements and get out. Either way, it was clear his future with the company was on the line if things went south. His gut told him to stay the course, but logic told him to play it safe and sell the project. He went with the latter and while not a home run, his company still made several hundred thousand dollars profit.

So, where's the grand mistake? Our candidate went on to explain that soon after the sale, the township elected a new mayor that was more pro-development. The project cleared entitlements on the next pass and went on to become the #1 selling project in the state for several years. As the candidate put it, the "lost income opportunity" was in the multi-million dollar range. In the interest of "playing it safe" he cost his company millions of dollars and recognized that.

Point: Many candidates might not have considered this a "bad decision"; after all, the project still made a profit. However, this candidate saw beyond the short term profit to recognizing (and admitting) the missed long term income opportunity. We found his candor insightful and refreshing. So did our client, who hired him as their new President.

OK... your turn. Tell us about your favorite interview questions and we'll share them in a future post.

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The Talon Group
Bob Piper, Rodney Hall, Tony Cleveland & Jean Mason

The Reality of Perception

A recent newspaper article included a statement by Phil Rosenzwieg, the author of "The Halo Effect". Skipping to the point of this blog, Rosenzweig stated a host of psychological studies have shown the extent to which arbitrarily telling a person they have either excelled or failed at a task shapes their memory of the task: people told they succeeded are far more likely to remember their team as tightknit and their team leader as competent and inspiring. Those told they failed remember team squabbling and ineffectual leadership.

"Shapes their memory" jumped off the page. How often do homeowners have one negative customer service experience with their builder and forever rate his overall product quality as below average? Or as managers and leaders, one off-handed comment to an employee (and long since forgotten by you) surfaces again years later as a bone of contention? Sound plausible? How about familiar?

Contemporary employment regulations have taught us to be respectful and even cautious about what we say and do to others, and rightfully so. That's not where I'm going with this. I'm referring to the seemingly innocuous statements or actions which we learn (often too late) were quite damaging. If you want to do your own litmus test, try asking your spouse about it.

As a nation, we are in fragile times, economically and politically, domestically and abroad. As an industry, the environment is primed for miscommunication and missed expectations. Let's keep that in mind as we interact with our customers, employees and vendors. Rememer: the actions and words you use today will determine what people think of you tomorrow.

Linked-In Recommendations

We've noticed the growing popularity of capturing recommendations from former supervisors and peers, especially to display on LinkedIn. Virtually all come across more as a tribute than a professional recommendation, going on and one about what a great person the subject is... how he/she is a superb leader, strategic thinker, self starter, team oriented... blah, blah, blah.

Two problems with this: First, what are the odds someone is going to post or advertise anything less than a stellar reference on themself... which makes the recommendation somewhat suspect in the first place. Second, the recommendations tend to be way too generic, lacking substance and speficity. How many times do you need people to say you "are a great person"?

Try this and see if it doesn't lend greater credibility to your recommendations. Let's imagine "John", a former VP Sales for a national builder... wants to add recommendations to his LinkedIn page or resume. Rather than make a blanket request to former peers and supervisors, he asks his Controller friend to write about a specific project they worked on together which demonstrated strong financial analysis acumen. Next, he gets his VP Construction friend to write specifically about John's construction knowledge. Following this pattern, John's former Division President might speak to his understanding of the broader P&L picture. A former Sales Representative writes about John's training and management abilities.

Whenever possible, these "recommenders" should include specific examples or projects, as that is what makes the believable. Otherwise, the entire concept of getting recommendations becomes a revolving mutual admiration society.

Consulting, SWAT Style

Within the last week we received calls from two seasoned home building professionals who are experts at what they do. The first was a former VP of Customer Care for a home builder known for having outstanding customer satisfaction. The other was a former President & CEO from an award winning green builder. These guys share two things in common: they are both leaders in their field and unfortunately, unemployed.

As a means to an end, both gentleman plan on consulting until permanent opportunities appear again, which could be awhile. Rather than just hang a shingle out as a "consultant for hire", they should each package a turnkey program to offer to builders. The entire program might last only 3-5 days and be highly affordable. Quick, fast & effective. Sort of like a Navy SEAL for BuilderOps.

Let's face it... builders are not anxious to spend money these days and most consultants need several weeks or months to implement their programs. However, if these guys could demonstrate their ability to deliver specific services (and value) in just 3-5 days, more builders might be willing to take the plunge.

For those of you in similar situations, where to start? Assess how much time you spent performing the duties of your previous job, then build incremental programs around each. Examples: A former VP Sales might offer a three day program which helps builders determine market strategy, competition analysis, product selection, etc. and a five day program working with the salespeople in the models. A former Purchasing Manager might have a two day program that reviews a builder's budgets and a four day program to help set-up a PO system. In other words, don't position it as a consulting catch-all, but rather specific services which can purchased individually. Then, figure out how much to charge for each.

Do Incentives Work?

No doubt most employees are happy (if not thrilled) to have jobs these days, especially in our industry. Long gone are the halcion days of huge bonuses based on stratospheric profit participations... but no one seems to be complaining too much about the loss of incentive income. Now that profits are flatlining in most markets, should companies adjust their incentive programs or stay the course? And, to what degree do incentives (cash or otherwise) drive employee performance in the first place? Before you try to answer these questions, check out out "Why Incentives Are Effective, Irresistible & Certain to Backfire", from the January issue of Fast Company. Another one worth checking out is "Punished By Rewards" by Alfie Kohn.

Market Update- Sept. 2009

My partners and I continue to field some form of the question “Do you see things picking up?” If only the answer were as simple as “yes” and “no”. Here’s some random observations of what we’re seeing and hearing:

Yes... there has been an uptick in activity and to some degree hiring. Is it an indicator that our industry is heading into recovery? Honestly, it is too soon to tell. Let’s face it: the market went into panic mode a little over a year ago. Since then, there has been little activity of any kind. Call it a market paralysis. Wait long enough and sooner or later someone will have a hiring need or want to invest in something. That is what I think we’re experiencing now... an uptick spurred by pent-up demand and special programs rather than signs of recovery, especially on the hiring side.

Meanwhile, banks are still sitting on real estate debt like chickens waiting for eggs to hatch, hoping something better looking will evolve. Add to that the commercial real estate loans that will soon need to be renegotiated amid an environment of stricter loan-to-values and declining appraisals. Can a recovery really get a fresh start with baggage like that? We’ll see.

On a more positive note, the builders and developers who have survived the write-downs and still have money (or lines to money) are on the hunt for land. In the past week we’ve heard reports of one builder staffing eight land acquisition positions and another looking to staff three or four in the coming months. Once again, we see this as the payoff for a few fiscally conservative players rather than an indicator of long term recovery.

At the market level, former Division Presidents are starting their own companies with subordinated lot deals through developers they know. The big question is whether the banks will play along when real debt is needed once again.

Yes... some positive things are happening. Let’s celebrate the small wins when and where they surface. However, I wouldn’t be too quick to order a cake.

ULI Fall 2009 Meeting Highlights

Just returned from the ULI Fall meeting in San Francisco. The event was well attended by approximately 6000 real estate professionals. Speakers included a wide range of experts such as Ivy Zelman (a leading research consultant on homebuilding), Ron Terwilliger (retiring Chairman of Trammell Crow Residential) and Bill Emmott (Editor in Chief at The Economist). If I had to summarize what I heard in two words it would be “jobs creation” as the key to a sustainable recovery. Here are the quick takeaways:

The Economy

• Non-performing loans continue to rise, trailed by a similar amount of loans “at risk” due to slow/no payment.
• Inflation will rise from 1% to as high as 3-5% in the next five years.
• Of the thousands of ULI professionals surveyed during the Fall meeting, 65% feel the recovery will be a “broken W”... meaning a long trend line of improvement on the back side.
• Some of the positive rebound we’re seeing could be due to recovery from an over-correction of the markets, stemming from last year’s panic. Companies rushed into cutbacks in starts, staffing and budgets to counter the situation and quite possibly– cut too deep.

Unemployment

• We’ve lost 8mm jobs over the last two years. It is critical to the recovery that we have a public policy that fosters jobs creation. Buy-side programs like Cash for Clunkers and the current tax credits for home purchases, while helpful, will not sustain a recovery over the haul; reducing unemployment will.
• A significant portion of the unemployed will not be re-hired into the same roles. Instead, new roles are likely to emerge over the next three years that may not exist today.
• It will be late 2013 to early 2014 before full employment recovery occurs.
• The good news: we still have over 100 million people who are employed and need places to live. While they may be more cautious now with their buying decisions, it doesn’t replace the fact they still have needs. For several years now the American consumer has lived beyond his means and now must pay the bill. The days of consumers buying on a lark or without making comparisons are long gone– which most experts agree is not necessarily a bad thing.
• Recommendation: train your salespeople to diligently counsel buyers, arming them with convincing data on why it is in their interests to buy now vs. later. Salespeople should be experts on every facet of homeownership, tax credits available and mortgage programs.

Residential leads the Recovery

• Housing was the first sector to take the hit and will be the first out to lead a recovery. Extension and expansion of tax credits certainly helps, but once again “jobs” are the key to sustaining a long term housing recovery.
• Equally important is the ability for builders to obtain AD&C financing, especially for the local and regional builders. The public builders left standing have far greater resources and can afford to sell at near break-even margins in order to ride out the downturn. This places significant pressure on the smaller private builders, who absorb higher costs across the board but are unable to recover those costs through higher pricing.
• Expect the public builders to aggressively buy-up the majority of finished lot inventory in major markets– even if they already have ample land on their balance sheet. Strategy will be to sit on any raw land on the books and hold for long term recovery while building out newly purchase finished lot inventory. This too will put additional pressure on local and regional builders who lack similar resources.
• In spite of the bleak economic news, demand for housing will remain. Expect a 13% increase in housing starts in 2010 and higher numbers in 2011 and 2012.
• Recommendation: Smaller builders need to demonstrate a unique selling proposition to the customer in order to counter price differentiation with the big builders. Higher grade amenities alone may not accomplish this due to appraisal difficulties (more on that later).

The Lender Side

• Government sponsored financing at both the consumer and banking level, has “bought” us some of the recovery.
• Moving forward, two options appear to exist: Option 1. The more government aid is utilized to bolster banks, the longer the recovery process will be– albeit with less pain. Option 2. The sooner foreclosures are dumped on the market the faster recovery will occur– accompanied by more immediate pain and bank closures.
• 5.6 million mortgages are in imminent foreclosure or "at risk", meaning 60 days past due. If all of them reach foreclosure, home ownership will drop to 63%. This is no longer a sub-prime issue, as 41% of these mortgages are prime, non-jumbo loans.
• In spite of the government sponsored modification program, only 9% of delinquent loans reach that process.
• Bank failures will increase as the Fed becomes more confident in the economy and therefore, less willing to extend support.
• As more banks fail, the FDIC will struggle to absorb the losses and will require additional governmental support.
• Problems with commercial real estate loans are just now beginning. (The graph one economist used to show the potential debt “at risk” was downright shocking; imagine a trend line that shoots straight up in one year– in this case, 2010.) This becomes a potential cancer on the balance sheets of banks; whether or not the cancer is curable will vary with each patient.
• Pension Funds and Insurance Companies are in better shape and should recover slowly over the coming year.
• Whatever the timeline is for recovery, some banks will opt-out of real estate lending altogether or, limit their loan portfolio to projects with shorter time lines for completion. Speculative projects or those early in the entitlement and planning process will have a much more difficult time getting funded– banks will foresee too much potential for problems before build-out.
• Recommendation: builders with should approach their lenders with multiple solutions in hand. Don’t wait on them to help you figure it out.
• Recommendation: offer to help lenders workout their other problem projects, either on a fee basis or as help-in-kind. This might also give you the inside track on short sell opportunities.
• Recommendation: of the deals considered for acquisition, avoid the ones requiring preliminary approvals or which required significant debt commitments. Look for the “A” projects further along in their life cycle so you can hit the ground running.

Appraisal Challenges

• New appraisal processes are stripping new home values of value-added features such as lot premiums. Instead, appraisals are being made on a strict price per square foot basis without much consideration for upgrades or lot premiums.
• Recommendation: Builders must rethink their pricing structure if their product or community relies on upgrades or lot premiums as a profit tool. Simply put, the new appraisal environment focuses heavily on straight price per square foot formulas.

American Fallen Soldiers

This is the first time I’ve used this blog platform for topics unrelated to the housing industry or human resources, so please bear with me. Last night I attended a presentation at the American Fallen Soldiers project. Started in 2007 by artist Phil Taylor, the project aims to provide every family of a fallen soldier with a framed original portrait of their fallen loved one that fully captures their appearance and personality. There is simply no way I can do justice to explaining it in this space so I encourage you to visit the project's website. The testimonials from the families receiving portraits will give you a sense of the impact it's had on their lives. Phil receives no payment for his work, contributing up to 80 hours of his time on each portrait. However, the project incurs other expenses such as professionally printed copies on canvas for family member who do not receive the original. Phil personally funded the project the first year but its has grown beyond the means of one person. Therefore, a 501c3 non-profit organization was created to continue funding the project. I encourage you to visit the site, if for no other reason then to remember and honor those who paid the ultimate price for the rest of us. If you feel called to make a donation, I know they would appreciate it. Learn more at American Fallen Soldier Project.

Purpose Driven Networking

The opening sentence in Rick Warren's bestseller "Purpose Driven Life" sums up a common mistake most people make in their approach to networking: "It's not about you." A good example of this is reflected in the email below, received this week from a job seeker. (The text has been edited for confidentiality.)

Dear Recruiting Professional,

I contacted you several weeks ago regarding a Senior Real Estate Position. I am following up to see if any new positions have opened up. I have attached my CV and a PowerPoint Presentation as a support document. I have over 26 years of experience in Real Estate Development, Construction, Design, and Property Management. Please let me know if I can provide you with any additional information. I look forward to hearing from you. Respectfully, John Doe

Does this mean I can expect to receive a similar follow-up from John in another 2-3 weeks, and every 2-3 weeks thereafter? Clearly, John is anxious to find employment and simply trying to stay top of mind, but at some point reincarnations of this message become redundant and as much as I hate to say it, unwelcome.

A marketing expert once described most advertising as an uninvited, unwelcome intrusion into our lives, whether the media is TV, radio or web based. (Hence the creation of DVR’s, satellite radio and spam filters.) However, once in awhile an ad campaign comes along that entertains the recipient or provides some other value added component. Have you ever stopped a conversation to point out a funny or heartwarming TV ad or forwarded an online ad posted on YouTube?

Networking should follow a similar path. Rather than repeatedly calling your network or sending emails to see if anything new has come up, give the recipient something of value. Here's a value-added approach John could use to stay on my radar screen in a more welcoming manner:

Bill, I thought you might be able to use this information for new search opportunities. I ran across them while conducting my own job search in Dallas. None of them are a fit for me, but might be of interest to you or someone else:

- ABC Development is looking for a VP Sales.
- XYZ Communities is looking for an Entitlement expert.
- Acme Homes is looking for a Purchasing Manager.

I'm continuing to look for my next opportunity as CFO or Controller for a Dallas based company, so please keep me in mind if you hear of anything.

Respectfully, John Doe

In a similar fashion, John could group his address book by functionality: Sales & Marketing professionals, Accounting & Finance professionals, Production & Purchasing professionals and General Managers. If John runs across an insightful article or web posting that might be of interest to one of those groups, he sends it to them. Hint: utilizing RSS feeds from a handful of websites will provide a constant stream of forward-worthy articles. Or, John might share a "lesson learned" from his own career experiences.

Another option: target senior managers at companies you would like to work with and send them helpful suggestions or tips. Example: a retail site acquisition specialist mentioned he was trying to get connected with a major specialty retailer in the area. He made the off-handed comment that he could greatly improve their market position by improving their locations over where they are now. I suggested he demonstrate that by sending the CEO an analysis of their current locations and what he would do if placed in charge of their real estate department. Yes... he might be giving away his expertise but you can bet he'll get the CEO's attention. He'll have provided something of real value while also demonstrating his knowledge and capabilities. (Tip: to identify who' who in a company check out Jigsaw.com, an online directory of business professionals.)

Remember: the more your networking campaign is viewed as a gift rather than an intrusion, the more inviting (and effective) it becomes. Make it about the recipient first, you last.

Lesser Known Job Search Tools

Every day we hear about online tools to help job seekers. Here’s a few worth checking out that aren’t as widely known:

• Indeed.com. Indeed is probably the simplest search engine for staying abreast of new employment opportunities in your area. Enter the keyword criteria which applies to you and Indeed will scour thousands of company career sites and job boards for posting that match, then send you an email alert whenever a new post is made which matches your criteria. Cost: Free.

• MyXpertise.com. Launched earlier this month, MyXpertise was designed to help individuals promote their business, skills or experience and be easily found by anyone wishing to connect with them. Search results are ranked by date of registration. The sooner someone joins the directory, the higher his/her information appears. Cost: Free, both to search and join. Best of all, no network of peers required to link through either.
  

• Jigsaw.com. Jigsaw provides C-level, VP, Director and Manager Level business contact information for thousands of companies across the nation. Cost: $25 per month. However, the subscription charge is worth its price many times over if you’re trying to determine “who’s who” in a company and their contact information, including email address. While the accuracy of the data continues to decline (due to layoffs), it’s still better than researching from scratch.

Web 2.0 Primer for Builders

The exponential growth of Facebook, Twitter and online blogs offers undeniable evidence that the world has adopted new means of communication. This phenomena is no flash in the pan; the sooner you adapt to these tools the more likely you are to prosper in your career or business. Unfortunately, many of us don't know where to begin. Here are two books that are good primers for the understanding how these tools work and how to utilize them to promote yourself, your company or your product.

Viral Loop: From Facebook to Twitter, How Today's Smartest Businesses Grow Themselves by Adam L. Penenberg. A thorough analysis of how networks form and grow, starting with examples from the early Tupperware organization up to Twitter and Facebook.

Crush It! Why NOW Is The Time To Cash In On Your Passions! by Gary Vaynerchuk. The writing is a little rough around the edges, but as the author himself puts it– so is he. Regardless, he does an excellent job explaining how to utilize Web 2.0 tools to promote yourself or your business. Recommend reading this one after Viral Loop.

Final Note: as I'm writing this I noticed an article on the HousingZone website about Collins Builders in Jacksonville, FL using texting as a market tool. How timely. If you missed it, click here.


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The Talon Group: Bob Piper, Rodney Hall, Tony Cleveland & Jean Mason

Your Last 25 Years in Home Building

Several weeks ago we shared our observations of how the home building industry has changed over the last 25 years. Several of you replied back with you own thoughts. Here's what you had to say:

What I've noticed is more volume builders coming into smaller markets displacing what had traditionally been local builders. I can see a scenario where large portions of a number of markets (even small ones) will belong to volume builders because they don’t face the financing hurdle independent builders do. As I sat at the Presidents round table at a recent State HBA Meeting the remarks from the group had more to do with the inability of their members to get financing (even for presales) than anything to do with their local associations.My sense is that the volume builders will (fill) this void and for the next few years, back away from performing their own development as they capitalize the hoards of developed lots that the developers (or the banks) could never sell to independent builders and will likely partner with developers in the future with some sort of profit sharing agreement – more like merchant banks. — Eric Coffey

I hope that effective construction management will not come solely from the colleges and universities in the future; it just cannot take the place of progressively developed sensibilities in the builder/developer environment. This is a profession requiring the broadest skill set of any I know. — Bill Mayben

I’ve been disappointed at how conventional most builder/developer firms became. Many companies just followed other builders, or a formula– resulting in a series of paint-by-number projects and homes that the consumers ultimately put in one category, and compared solely based on price. In an effort to appeal to the broadest customer base it appears that real innovation and evolution took a back seat. Now, with nobody to copy, they are really stuck. Many actually believe the market will return to what it was, and that they can continue as they were. It appears that the company that is able to innovate may capture the market again. This speaks well for creative architecture, evolutionary home and community design and specification, and offerings that can make a long-term positive difference in the lives of residents. — Bill Mayben

The most important changes I have seen involve the “standardization” of housing plans, specifications, processes, budgeting, workflow, measurement, organizational structure, training, customer relations, and an attempt to commoditize land. As Standardization starts to merge with Centralization of processes and decision making, the opportunity for smaller homebuilding firms to tailor their product offerings and business processes for targeted consumer groups will allow them to compete effectively against larger public competitors. — Peter Tremulis

You were spot on with some of the critical path and relational selling methods that evolved over the years. As you know, some of the "tried and true" formulas are no longer in play. What happens next? Who is seeing around that curve into the future? One small example, how does social networking play into the sales process? — Nelson McDonald

The profile of a Sales Consultant has changed. The top sales professionals today are people who ask the right questions and listen to the answers. Trust is the essential component to build the relationship between customer and Sales Consultant. If a salesperson does not have great listening and problem solving skills, today’s customer will not bond with them. This isn’t much different than what salespeople seek from their own managers. I have interviewed hundreds of Sales Consultants over the years and NEVER has one of them said they want to leave for more money. They want to leave because of how they are treated. It saddens me when I hear about managers who don't value their people or take time to coach their team. It is a talent that is needed to keep a happy, productive and energized team in today’s market. — Millie Regal

In my early years, I kept knowledge of my college degree between my production manager and myself (he also had one). Very few others were college graduates. That changed in the 1990s to being a “must have” requirement for being hired. The same happened on the sales side, too. In prior years, a real estate license would suffice. Design Centers came on the scene as revenue and margin generators. Lastly, the life of a good floor plan grew shorter each year, as new designs & features were demanded. Who would have imagined granite as standard in a Fox & Jacobs home? — Jerry Whelan

Volcker hit the nail on the head. Business school majors are now either all Finance/Accounting or Marketing - very few in Purchasing, Supply Chain, Operations or Management. Everyone wants to “make it” by “manipulating minds or money.” No one wants to produce anything any longer. That is a huge problem. — Scott Sedam

I remember hearing from "old timers" after the crash of the early 80's that business would never be like it was in the mid to late 70's. They were right – it was better. Then came the calls in the early 90's that business would never reach the prosperous levels of the mid to late 80's. Right again they were ­– it was significantly better. Remember just a few years ago when there weren't enough qualified people around to build the record number of new homes people were bidding up to buy? Now here we are again. Let's just hope that by the time history repeats itself (again), that we've regained a degree of balance at the decision making table. Because without expert input from real home building experts, it could get awfully costly to learn that houses don't just build themselves. — Joe Keppler

There seems to be a significant push in our industry recently to have better systems and processes to compensate for a perceived lack of understanding of what really drives our business: people! There are those who think that if we have the right “Manual” we should be able to execute and achieve success. Instead, the focus should be on culture, training, and enabling people to make decisions, learn from their mistakes and take care of the customers. — Name withheld by request.

The Internet has changed everything. Buyers are more educated than ever and probably know as much about the product and community as the sales agent greeting them. Sales agents need to be perceived as more of a resource in the process (and heaven forbid they actually BE a resource!) Going Green is another big change. Builders must be thinking and building this way (and communicating it better to the marketplace) to be competitive ... especially in the higher end product. Home designs are also getting more and more "open" with space emphasis in the master suites, kitchens, and family rooms. Curb appeal is more important now than ever, certainly more so than in the 1980's. Lastly, master-planned communities have become the best opportunity for a builder to sell real quality of life as a value. This also forces builders to get back to the core of our business– building homes for families, instead worrying about dividends and stock price. — Shane Johnson

What is truly amazing to me is how little we have changed in 25 years. My first computer weighed about 50 pounds and cost $3,200. Today, that computing power can be purchased in any simple electronic device weighing a pound or two at a cost of $200-$300. During that same time, we have not made comparable advances in the homebuilding industry. We still build houses primarily with 2 x 4's, and we waste interior space like crazy. Our energy efficiency is laughable. No other industry would have survived this long without changing their product more than this, and (shelter) is the most important commodity there is, besides food and water. — Ken Mitchell

Our industry has transformed into a “Starbucks” environment (one on every corner), with more of a focus on absorptions rather than profitability. — Eddie Servignon


The Talon Group
Bob Piper, Rodney Hall, Tony Cleveland & Jean Mason
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Truths & Tall Tales from the Builders Show

When Tom Kranz told us he was heading to Las Vegas for IBS we asked if he would compile a report on what he heard and observed. Formerly a Managing Director with GMAC/ResCap, Tom now heads up his own consultancy, Housing Capital Partners. Here’s Tom's report:

Economic Outlooks and other Abstract Speculations

Economists presented and declared the recession over, inflation would not occur, mortgage rates will not be over 6% by year end even if the Treasury stops buying the securitization bonds of Freddie and Fannie, and that by 2011 closings will reach 1 million (or more) by 2012 or 2013. There were some non-believers in the audience.

Despite the declarations from the economists, three panelists (a developer, homebuilder and a capital provider), are planning for future higher inflation.

The argument for higher inflation is the extreme amount of monetary and fiscal stimulus. The argument against higher inflation is due to over capacity of every resource. Time will tell.

The experts are still saying that the US needs something like 1.5MM new homes built every year to keep up with household formation. Meanwhile, 40% of builders surveyed said that they expect to expand in 2010 and 46% expect to be able to increase prices.

Show Me The Money

The NAHB recognized that obtaining financing is the number one problem facing their members right now and hastily, but in a well done fashion, put together a program for money to meet builders, called the Partnership Pavilion (similar to Meet the Money at PCBC.) Lots of conversation. Not sure how much money flowed. Capital remains an issue.

The Partnership Pavilion includes a web-based clearinghouse of capital providers and those seeking project finance. While there are bugs to work out, most expressed interest in seeing the concept perpetuated.

As a lender participant in the Partnership Pavillion, my advice to builders was to look locally. There were several stories where even banks (a credit union in one case), especially those with unburdened balance sheets from past year’s problems (e.g. newly formed / didn’t participate in boom) and with a specific interest in bettering the community, were willing to put up dollars. Finding the unburdened balance sheet lenders is the key.

Among the regulated lenders I talked with, all said that they are lending….but ONLY “strategically,” whatever that means, which IMHO means you’re not likely to get any.

Don’t know the accuracy of this statement but came from a credible source: There are 760 banks on the FDIC/OCC watch list that are expected to fail, yet the Feds only have the capacity to deal with less than 250 failures. Things are probably not going to get easier anytime soon.

Industry Trends & Strategies: Something Old, Something New

Sales agents have to generate their own traffic by going back to the “old ways” of targeting neighborhoods/apartment buildings, putting flyers on cars, donuts to Realtors, etc. Guerilla Marketing is in vogue.

Social media (e.g. Facebook, Linkedin, Twitter) is much more important today than the old methodologies that included radio, print and TV, perhaps accounting for as much as 33% of sales.

The average new home size has decreased from 2309 in ’07 to 2094 in ’09. On a similar note, Meritage announced smaller, more efficient home designs during the show, joining others like KB, Shea, etc. with similar offerings.

Meritage’s CEO stated that despite the historic higher value usually placed on new homes vs. existing, he absolutely will only buy a piece of dirt today underwritten against resales.

For privates, don’t go head to head against the publics’ balance sheet because when they need to drop the price to create velocity, they will, and you’ll get creamed. Go where they’re not.

This environment is the “New Normal.” Get used to it.

Report courtesy of:
Tom Kranz
Housing Capital Partners

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The Talon Group
Bob Piper, Rodney Hall, Tony Cleveland & Jean Mason

Building on Bright Spots

As our nation and industry continue to work through some big challenges, it's normal to get mired in what got us here. That's great for avoiding the same mistakes going forward but does little to spawn positive, immediate improvement. In their new book "Switch", Chip Heath and Dan Heath offer a road map to overcoming insurmountable ostacles, sooner rather than later. Take their story about Jerry Sternin:

Jerry's employer, Save the Children foundation, sent him to Vietnam in 1990 to develop a program to fight malnutrition. Once there, he found were the common issues attributed to malnutrition: widespread poverty, poor sanitation, unclean water and lack of education about sound health practices. Separately, each could take years to overcome; combined, it could take decades. In Jerry's case, the government gave him six months to make a difference and offered very little support.

Rather than tackle the Herculean tasks, Jerry took a different approach by asking this question: Were there any kids who were healthy and thriving despite such poor conditions? To find out, he visited fourteen villages and found a handful of healthy kids whose defied the conditions. He began to document what these families did differently from the others. His findings– minor changes in diet patterns and sanitation habits– were not only simple but also readily available to to all families in the village. They shared their findings throughout the village and within six months, 65% of the children were better nourished. Soon, other villages adopted the program and now over 2.2 million people in 265 Vietnamese villages have been postively impacted.

The lesson: we face some enormous challenges going forward, most of which are beyond our individual control. However, if we each make an effort to find things (however simple or small) that are working and replicate them, collectively we can move the mountain. Think of it as finding the bright spots and going towards the light!

"Switch" goes on sale February 16th. For a sneak preview, check out this month's issue of Fast Company.


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The Talon Group
Bob Piper, Rodney Hall, Tony Cleveland & Jean Mason