Archive for February, 2011

The Post-Recessionary Landscape

Posted February 21, 2011 By Fletcher Groves

“It’s the end of the world as we know it.” — R.E.M.

In mid-2009, I posed the question in this space (“Apocalypse Now: Is a Shattered Industry What It Takes?”, June 2009) of whether life in the homebuilding industry would return to normal, or whether the dysfunctional business model of production homebuilding would be blown up. The post was a post-apocalyptic view of how the attributes of production homebuilding companies ought to change, based on a conviction that the worst Residential Fixed Investment disaster in three generations ought to count for more than a return to business-as-usual.

It did not address what a post-recessionary landscape might look like, because it did not offer a view of how the external factors that drive the homebuilding industry might change. It was more about questioning whether production homebuilders, having survived the equivalent of a near-fatal heart attack, would wise up and change their lifestyles.

In 2005, as we helped one of our forward-thinking clients redesign the production management component of their business model, we aimed at developing a comprehensive, unified approach to production planning and management, aimed at creating a deep, visual, intuitive, instinctive understanding of homebuilding production, and aimed at providing a unique, proprietary expression of homebuilding production “branded” to their system.

One of the requirements was to understand the context – to set the framework within which this homebuilding client’s production system had to operate, a context composed of the factors and conditions that set the parameters for the system’s design and performance.

As a picture of the landscape, it was a view of the conditions that were understood to apply to the nature of the business of homebuilding. If those conditions changed, the production system would have to be capable of adapting and adjusting to the new requirements. Among those factors were the condition of the economy, fiscal policy, the condition of the housing market, and the state of capital flows and housing finance.

The scene playing out before us now was not given much consideration in 2005. There are a lot of players and parts in this scene – the value stream, the supply chain, the question of where the capacity will come from to meet future demand, the deal-driven mentality that collides with a more process-centric view of production, the lack of productivity, the lack of adequate capital to support both land and building operations, etc. The list goes on. But, for now, let’s just consider the future of the current housing finance system.

Before the 2010 elections, I told a number of friends, associates, and clients that, in my view, this country was in full-scale revolt, particularly, over matters of economic policy (both fiscal and monetary), the size, cost, scope, and impact of government, and the course of government regulation. I think the elections bore that contention out.

The resolution that NAHB passed in 2010 on the future of the GSE’s and the housing finance system now stands in sharp contrast to the increasing perception, held by – among others – the United States Treasury, that the current housing finance system misallocates capital and credit in ways that hurts the overall economy. I doubt that NAHB or the rest of the homebuilding lobby will go Mad-Town, fighting change and defending the secondary market in the streets. But, whether they do or not, is the housing lobby sufficiently powerful to beat back every threat to housing finance business-as-usual?

Can they stop the privatization of the secondary mortgage finance market under either of the first two alternatives outlined by the Obama administration under the American Enterprise Institute whitepaper? Can they prevent the scaling-back or outright elimination of MID as part of deficit reduction and tax reform? Prevent the demise of 30-year, fixed rate mortgages? Alter the permanence of 20% loan-to-value ratios for conventional mortgage loans?

And, buried somewhere in all of this, should be the question: Is the current housing finance system worth saving? Is there a better way?

We will have to wait to see the degree, but, this time, I think the world may have changed. And – if the context in which homebuilding companies must operate has changed – then we need to start looking at business models, operating systems, production management systems, business processes, and everything else in that new light.