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Ideas for the upturn

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Ideas for the upturn

November 2, 2012

Richard Dugas, the CEO of PulteGroup, did not want to throw cold water on the party, but he deserves credit for at least pointing out that housing still faces a number of regulatory and financial obstacles as the market recovery begins to get traction. Such was the tidal wave of positive energy and good news at a recent housing investor conference that even a slight note of caution, from Dugas (whose firm just delivered very positive quarterly results), stood in sharp contrast to other commentary that day.

There is no denying that home building is staging a real and sustainable comeback. This year, the combined total of single-family and multi-family homes closed will exceed 750,000 units. This follows the two worst years of production dating all the way back to the Kennedy Administration. It shows that the market for new homes — long broken and in pieces — is slowly coming back together. Banks and buyers are digesting foreclosed houses. Prices are stabilizing. Appraisals are improving, so too is mortgage underwriting. And interest rates? After 2013, we will never see them this low again.

The 180-degree reversal of sentiment toward the housing market — from terminally ill sick-man of the economy to rising star — demonstrates that there is a herd mentality at work. As builders and business people, your job is to avoid the herd and focus exclusively on selling your next home as profitably as possible, because there will be big bumps ahead.

• Policy makers on both sides of the political spectrum are eyeing the mortgage-interest deduction as a means to rein in the nation’s debt.

• Dodd-Frank, the banking reform law passed two years ago, is slowly taking effect, bringing with it new definitions for what is and is not a qualified mortgage.

• Mortgage interest rates will begin to rise at some point, somewhat impacting demand.

• The cost of lumber and other building materials, as well as labor, will certainly rise.

At this magazine, we are privileged to be in touch with many excellent builders. We see, first-hand, what it takes to win. Here are some common traits to serve as ideas for the upturn.

1. Make money on home-building operations. Though it sounds basic, the best builders know how to make money purely on designing and building homes. Land appreciation and financial plays are possible, but not sustainable or very predictable.

2. Go Lean. Over the past several years, our columnist Scott Sedam has been the leading advocate of “Lean” home building — relentlessly challenging builders to omit needless processes and product. A Lean mindset can help drop real money to your bottom line.

3. Energy efficiency is required. Research shows that buyers are drawn to energy-efficient homes. Increasingly, energy efficiency in new homes is expected. It is “table stakes” if you want to be in the game.

4. Pursue design innovation. If you are going to market with  plans you built in 2005, you are in trouble. There are many places to find the design features that buyers want, including our House Review section in this magazine.

Based on great demographics, we know that the demand for new homes is just beginning to be felt. And based on the systemic healing in the housing industry apparatus, home building is coming back. The road ahead looks very promising. Consider it a fresh start. Do your best to rebuild your companies on solid foundations with good margins and real profits. Now is the time to map it out.

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