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In today’s depressed housing market, where uncertainty is the norm, the need for high-quality, timely market research is more critical than ever. Yet, in the eyes of some home builders, research remains more of a necessary evil than an insurance policy.
Where is the new norm in terms of pricing? How do I compete with the glut of foreclosures and short sales? When will my market return? These are just some of the questions that are top of mind for builders that can be addressed through good market research.
We asked four experts (see credits at the end of this article) to discuss the latest trends in market research. What follows is a highly abbreviated transcript of our market research roundtable discussion.
How has market research changed since the downturn of the housing industry?
John Schleimer
Right now, there’s virtually no new-project market research; it’s almost non-existent. There’s limited or no budget for market research for most of the home builders that are trying to survive this downturn.
Brad Clason
I’ve started to see a pickup in work, especially situations where banks and their builders are looking to sell some of their land. The investment value of homeownership has always been a key motivation in buying. That has been virtually decimated, so I’m finding that builders are wondering, “Where is the market? When is it going to come back?”
Tracy Cross
The research process has become much more difficult from two aspects: One is the impact of foreclosures. It’s a challenge trying to measure that. The other key factor is how the market will reset itself in terms of price. What we’re seeing in the Midwest and in parts of the South Atlantic are prices resetting anywhere from 25-30 percent lower. I don’t think anybody knows where that new position will be in the market. So market research is now more vital than ever in being able to ascertain where that reset will be and how we will perform going forward.
Cheri Meyn
Here in Colorado, we’re working on a lot of new-product development right now because some of the builders (mostly publics and some of the more solvent private companies) are seeing the end of the tunnel. We’re doing a significant amount of acquisition work right now, so our business is returning a little bit back to normal.
What are the breakthrough tools and techniques in market research?
Cheri Meyn
For us, it’s GIS [geographic information systems] mapping of all of our data and information to provide bite-size pieces to our customers. Instead of providing reams upon reams of market information, we can give them mapping tools that instantaneously help them understand an area or a market. In addition, we’re having a great deal of success with our online chat surveys, especially with the realtor community.
Tracy Cross
Nothing off the shelf. From our standpoint, the data crunching is even more detailed. Defining and disaggregating data is more important than aggregating it. We do a tremendous amount of work in regression analysis, using a variety of techniques that have evolved over the last 40 years. Every time we do something different from a statistical standpoint, the numbers begin to talk to us, and they tell a story. It’s almost like a doctor looking at an X-ray: we see things that other people can’t possibly see.
John Schleimer
We’re developing a program right now with a builder: For prospects that are deemed qualified and haven’t bought, we’ll give them a $50 gift certificate to a local, well-known restaurant for participating in an ongoing Internet survey about what they’re looking for, what type of floor plan they want, what type of room arrangements they want, etc. Buyers that have purchased a home in the development also get a gift certificate for participating in a series of Internet surveys. When all those responses come back, we’ll compile all of the data points into a report to our builder. feedback.
Brad Clason
There is no boilerplate. Every situation I encounter is trying to understand the dynamics of that particular market. I’m doing an awful lot of rearview-mirror research, looking at tax assessment records and creating databases of absolutely everything that has gone on in the last nine to 15 months at every development in the area.
What are the three or four most crucial elements of research home builders should be looking at?
Cheri Meyn
I’m finding my best work is in real-time data. History doesn’t matter. Previous absorption potential is a non-issue. What matters is today’s demand and, more important, how we forecast future demand realistically for our customers. If we’re not in the field every day monitoring demand, price and propensity to buy, we’re out of the game.
Tracy Cross
The three things that are incredibly important are being able to accurately forecast absorption, understand their competitive environment and forecast where Generation Y is going.
John Schleimer
I think builders have to spend more time on demographic trends, psychographic trends and consumer behavior. If you don’t know who your buyers are and what motivates them, I don’t think you’re going to be able to produce the right product for them. That involves getting away from family-oriented, single-family products that have dominated the marketplace for the past 10 years in most suburban areas and some edge cities.
Brad Clason
I’m doing a lot of analysis trying to figure out exactly what the impact of the recession has been on particular market sectors. I’m also working closely with land planners to develop the best possible plans by looking at the resale market, historic sales and potentially competitive resale developments.
Why should builders conduct market research?
Tracy Cross
First and foremost, market research will identify and quantify levels of opportunity. We get involved with strategic planning. It’s not just about working on a specific project, but guiding them to take the best advantage of their limited resources in terms of where to buy land, what to develop and who to develop it for. Also, we have more exposure to different markets and products. The builder may know to go see a development down the street, but there may be one in, let’s say, Charlotte that applies to their market.
Cheri Meyn
We do a lot more retainer work than market study work these days. Rather than doing project-based research, we’re really much more a part of the company itself and its strategic planning. My job is to make sure that our clients are aware of the opportunities in their markets, whether [it's] a consumer opportunity, product opportunity or geographical opportunity. It’s our role to sit side by side with them and help them make those strategic decisions to move forward in a more successful way.
John Schleimer
Well, I’ll give you an example. We have a builder client in Wilmington, N.C., that was mired in the upper move-up market. When we went into that marketplace, we looked at supply and demand, household income levels and demographic growth in certain household types. We told him to get rid of that product segment as his primary focus and go to more entry-level or affordable move-up products. Sure enough, his sales went from 50 two years ago to 126 in 2009.
When we see a gap or niche in the marketplace where certain consumer segments are not being served and there’s an oversupply of every other product, we try to position the builder in that niche.
Brad Clason
I think builders need to start thinking of market research as part of the due diligence process. It’s not a development expense, it’s a pre-acquisition expense. Do it early and it will pay for itself over and over again.
How much should builders budget for market research?
John Schleimer
The current downturn has made market research more affordable. We’re not getting the fees that we got back in 2005. But I don’t think there’s a percentage guideline on how much market research should cost for any given project. The problem many builders get trapped in is they tend to select the lowest bidder, and don’t look at the experience and track record of the research firm.
Tracy Cross
Billing rates and fee structures from our firm are probably down 20 to 25 percent from what they used to be. But we’re doing more retainer work, where strategic planning is folded in. We’re also bundling services, where we’ll work on the asset management of three or four properties for a client. Before, we could charge separately for each of those.
Brad Clason
My fees depend on whether the project is in my backyard or out of the area. If I’m not familiar with the area it’s going to take me a lot longer to get up to speed, and the builder will have to absorb that expense.
At what point should builders initiate research?
John Schleimer
When someone wants to buy a site or a project, research should be commissioned at the start of the due diligence period. If due diligence is 60 days, the client should have the research report within three or four weeks so they can analyze the recommendations and findings. If the site has already been acquired, then the product positioning needs to be done before they start developing floor plans and the specification package. Too often we get involved when the builder’s product is set, and it’s too late.
Tracy Cross
It begins with strategic planning of where to buy the dirt and then, before they acquire the land, to make sure they get the checks and balances from the market-research side of the equation. We assist them before they ever go before the municipality.
Brad Clason
If it’s a complicated development, the research should be done before they start site planning. The researcher should be involved in the team, because that’s going to help the site planner and architect develop the correct site plan and allow for the correct development phasing.
How can builders prepare for the unexpected?
Cheri Meyn
We are absolutely, day to day, living in the unexpected. Every project I’m working on had a pro forma that said it would absorb two or three times what it’s doing. Every one of my clients is living in a recession that is much deeper than they expected, much longer than they expected and much more far-reaching than they expected. I feel like I’ve been living in the unexpected for years now. My best advice is, don’t give up. Let’s try something different this week. Don’t change products willy-nilly, but never give up on the opportunity to sell a house — whether it be a marketing campaign, a new floor plan or a different salesperson. You’ve got to look at absolutely everything.
John Schleimer
Good research hopefully eliminates a lot of these dramatic, unexpected turns. I think one of the problems that developers and builders are going to be faced with when something unexpected occurs is the fact that they don’t have enough staff to execute an alternate plan, should it be required. They’re trapped with the inability to act on any unexpected change.
Tracy Cross
Sometimes the unexpected is the big favor; sometimes it can lead to disaster. You’re asking to forecast the unexpected. I don’t know how to do that. But good market research can tell you what the unexpected is so you can formulate a plan to deal with it.
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