| Consumers Do Not Wear Hard Hats |
| Written by Jonathan Smoke | |
| 01.15.2009 | |
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Discuss this article on the forums. (0 posts) I recently read with interest an informative column entitled “This Cycle's Recovery Will Be Distinctive” from Giants magazine by industry luminary John Burns. In the article Burns concluded that the housing recovery will vary geographically. He recommended that to find the markets that will recover first builders “need to put your consumer hat on.” While I whole-heartedly agree with his analysis, the specific advice about how to understand consumers and determine where they will re-emerge as buyers left me sorely disappointed. The housing industry is horrible about understanding consumers, and this lack of understanding was one more reason why the housing crisis snuck up on the industry. If you pay for information and advice from industry consultants, think about how they define demand. If that demand is based on what sold, you’re getting a bad, supply-centric view of consumers. While I am used to seeing inferior market reviews and feasibilities that define demand as what sold last year, I am even more irritated to see consumer preferences and trends defined as what sold inside homes last year or even worse by a survey of builder purchasing managers. No offense to the several purchasing managers that happen to be good friends of mine, but their own spouses wouldn’t let them pick materials for their own homes let alone understand “what’s in.”  So if you buy consumer advice that is really repackaged supply data you are making yourself believe you are putting on your consumer hat when really you are wearing a standard issue hard hat that represents the collective actions of your fellow builders. Having this supply-centric view of consumers can cause you to make many mistakes including following the crowd (and thus adding to oversupply problems). It also can leave you blind to real opportunities to profitably convert buyers. There are many types of households out there. Some are traditional families but the vast majority represents varied lifestyles and household compositions that produce distinct needs and preferences with regards to housing. Some households are primarilyy renters while the rest range from almost completely owners to those who desire ownership but struggle with affordability. It’s not hard to put your consumer hat on to understand what kind of households live in your targeted submarkets. Take a look at www.MyBestSegments.com, from consumer research company Claritas. Plug in your own zip code and browse through the top profiles that live in your market. I know these segments very well as they are the basis of our Housing Consumer Groups, which build upon Claritas’ PRIZM NE segmentation model with our own research, additional survey input and experience. We built our Consumer Groups to provide easy-to-understand yet powerful profiles of the distinct groups that buy new homes. My other problem with the typical industry research approach is that demand is quantified by what has sold in the last 12 months. While absorptions are clearly important data to study, they are a factor of what was available as well as demand. This can lead to bad decisions, but worse they are decisions you thought were correct because they were backed by “solid numbers.” Do you really want to invest in a piece of land because you quantify a deep market for homes in the low $300s when it’s possible that last year’s absorptions were a reflection of a large volume of discounted homes that should have been in the $400s? How about if two new similarly priced communities will open in the adjacent and more desirable submarket? In either case, your supposedly quantified demand will not materialize into your community. A better approach is to analyze estimated demand built upon robust segmentation models that review existing households and forecast segment specific household growth and compare that to last year’s absorptions as well as current inventory and the future community pipeline. The same consumer segment data can also help you make the best conclusions about emerging submarkets, which was another of Burns’ recommendations. Consumer data reveal the nature of household incomes, occupations, and other factors that better inform prioritization of submarkets. I encourage any housing professional who is seriously trying to analyze submarkets to prepare for or make the best strategic choices regarding land investments to invest in understanding and having access to a good segmentation framework such as PRIZM NE from Claritas, Tapestry from ESRI or PersonicX from Acxiom. For those with limited budgets or time, we can help. We are a licensed partner of Claritas and offer our Housing Demand services that can provide an insight into the consumer groups by market, submarket, zip code or even custom territory for any location in the country. We also estimate new home demand by consumer group or by price point or by both. I do encourage you to put your consumer hat on, but don’t kid yourself that you know what consumers want by wearing a hard hat. 
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