Housing Industry Research Essay

People would often refer to real estate and housing industry as the best way to build up riches, or possibly the best, easiest and fastest way for anybody to get rich. Most of the time, the terms real estate industry and housing industry are being used interchangeably by people, not knowing the very basic distinctions between the two terminologies. Real estate industry more formally refers to the industry that focuses on simply buying and selling real estate properties. Whereas, the housing industry is more concerned on developing and incorporating improvements to a real estate property. Basically, those that are in the real estate industry are doing much more of retail business, while those in the housing industry are doing much more of service and nonetheless, research, design, and manual work. The housing industry is the industry which is primarily concerned in building and developing houses and housing designs for private individuals, for government housing projects and for a local community. Moreover this is also the industry which provides the basic materials such as the building materials, and hard escape materials for a housing project. When you drive or ride through a community, the variety of architecture often reflects some of the history of the community or the locality. Architectural styles of the past are illustrated in the older neighborhoods but also influence the styles of homes built today. In a community, the housing industry is the one which is mainly concerned in all these. For most communities, there is only one housing industry which can be regarded as the main housing industry of the community. This can be a company, or a group of companies that would generally dominate all the housing projects within the locality, be it a private housing project or a housing project from the government. Mostly, these housing industries would dominate the landscaping industry, hard escape industry, and the hardware, building equipments and materials industry as well. Since most people believe in the logical trend that as one industry goes up the black, a counter industry would fall down the red; this would lead many to believe that the immediate spike in the information technology and communications industry would leave other industries such as the real estate industry and housing industry, to experience its most protracted slump for several years. This is actually the opposite of what’s really happening in the economy, for many years, the housing industry has remained as one of the most stable industries all over the globe. Indeed the housing industry has had its share of downs and suffered greatly from economic destabilizations, inflations and other economic fluctuations, but in spite of all these, it has retained itself as still one of the most promising, and stable industry. With nearly 17 million new conventional homes added over the past decade, the home building industry continues to set new records and standards. In 2005 alone, single-family starts exceeded 1. 7 million—far and away the largest number ever. Thanks to a stable economy and low mortgage interest rates, the home building industry has not seen a significant downturn since the early 1990s. This undeniable stretch of strong, stable growth in the home building industry has ushered-in a period of prosperity for major builders and supported a wave of mergers and acquisitions within the industry. In the early 1990s, the top 10 builders in the country accounted for less than 10 percent of all conventional new single-family home sales. By 2004, their share had risen to over 20 percent in most major metropolitan areas; larger builders hold an even greater market share. There are three major reasons for the dramatic increase in the scale among the home builders. The change in the access to capital is one of these reasons. After World War II, the savings and loan industry was the principal source of capital for the home building industry. With the collapse of many of these institutions in the late 1980s, builders had to turn to other sources of financing. Banks and private funds companies have thus, stepped in to fill the need for capitals and investments. These funding companies gave an edge to the housing industries since their presence meant easier access to capitals. Another reason is the change in the land use regulation. More and more communities are restricting residential development in an effort to manage growth. As a result, the development process in many locations takes longer than it once did, with land assembly and entitlement typically more complex and costly. This again creates a premium for scale of operations, since smaller builders often lack the resources to work with local officials over extended periods to secure the necessary approvals. The third reason is the change in economic environment. This has favored large-scale home builder industries. The strong economic environment for home construction over the past decades has ushered a stable growth and low mortgage interest rates that have prevented a major recession in the home building industry since 1991. This combination of market conditions has produced stunning increases in top-line growth and bottom-line financial performance for large home building companies. Between 1999 and 2004, builders of 500 units or more each year realized inflation-adjusted revenue growth of 135 percent. In addition, their gross margins on homes sold and net income each increased about 4. 5 percentage points. With industry consolidation have come new opportunities. To increase their scale and overall capabilities, larger-scale builders have incentives to reinvest in their operations by adding information systems for estimating, scheduling, and purchasing, or investing in panel plants to save time and costs in the construction process. With such investments, larger home builders continue to improve their operating performance, at a much faster rate relative to smaller builders. Better performance encourages even more builder consolidation, which in turn produces even greater scale economies, creates more incentives for investments to leverage these opportunities, and so on. This cycle would dictate further consolidation and greater efficiency in the home building industry in the years ahead. When asked to name the single most important reason for their recent financial performance, over half of the corporate-level survey respondents attributed their success to strong housing market fundamentals, and nearly a third cited their land assembly strategies. Another 13 percent considered improved customer satisfaction the key to profitability. In sharp contrast, few respondents attributed their success to shorter construction cycles, savings on product purchase, man power, on-site construction costs, and other operational efficiencies. Still, evidence of operational improvements does exist, particularly within the divisions of national and international home builders. Although their homes have become bigger and have incorporated higher-quality materials in recent years, national and international home builders have been cut the construction time to minimal, keep cost increases at modest levels, and significantly improve customer satisfaction scores, in parallel to improvements in the quality of finished products. Local divisions of regional builders have been less successful in improving the efficiency of their operations. Improvements in home building efficiency were the most common results from the implementing of innovative operating practices. Studies from Harvard have cited four general types of operating practices that homebuilders especially those at large scale, have used to their advantage. 1. Coordination with subcontractors. Subcontractors are typically the ones who purchase the materials used in home building, making payments to contractors a major expense category for homebuilders. Innovative builder practices in this area include initiatives such as making scheduling information easily accessible to subcontractors, automatically notifying subcontractors of schedule changes, and frequently updating the job site production schedule. As a result, increased efficiencies in the building process and lower production costs is maintained. 2. Component preassembly. Preassembling major components such as roof trusses allows greater precision in manufacturing and often provides cost savings by substituting semi-skilled off-site labor for skilled on-site labor. The preassembly process is also more efficient when done off-site, thereby creating the potential for shorter construction cycle time, and even so, smaller labor costs. 3. Supplier installation. In many product categories, builders have begun to purchase installation services from the manufacturers or distributors. Supplier installation helps to limit product disputes over the source of any problems. In addition, this practice can reduce construction labor needs since product manufacturers and distributors typically serve broader geographic areas than subcontractors. 4. Supply chain management. Supply chain management covers a broad range of practices from price negotiations for products and value-added services to the implementation of information systems to support purchasing and inventory management. Supply chain management is an area where scale economies give larger builders an obvious edge over their smaller competitors. Innovative operating practices help large home builders not only run their operations more efficiently and use their market power more effectively, but also better manage risk especially financial risks and risks in operations. Builders have reduced their exposure by controlling more land through options, joint ventures, and other approaches that keep land costs off their books until they buy the entitled lots. In this way, builders only incur these expenses close to the time of construction. With more efficient operations and better management controls, large builders typically do not begin construction until a home is pre-sold. Across builders surveyed, 73 percent of all homes closed in 2004 were sold before construction began an increase from 70 percent in 1999. National builders pre-sold over three-quarters of homes closed in 2004, while regional builders pre-sold about two-thirds. Larger builders have incentives to adopt innovative operating practices because they have the market power to implement these efficiencies and can leverage the benefits across a broader range of operating divisions. The financial payback for these improvements, however, depends greatly on conditions in the local market. Over the past years, consolidation of the home builders has dramatically changed the home building industry. In addition to improved financial performance, the adoption of innovative practices and methodologies related to product distribution and assembly line and development, has improved the operational performance of large builders along such dimensions as construction cycle time, efficiency of the building process, stability, style, and overall quality of structures, and customer satisfaction. In generating these efficiencies, builders have helped to streamline processes throughout the entire homebuilding industry. Home buyers have also benefited in parallel to the home building improvements. More efficient builder operations have kept construction costs low and customer satisfaction levels high, allowing builders to offer more model home options and more product choices without any corresponding increases in prices. In addition, greater efficiency has enabled builders to pre-sell more homes, which in turn has reduced the risk of overbuilding, and thus reduced the risk or putting the company financial trend line on the red. By keeping supply in line with demand, home builders have helped to bring greater stability to house prices, since overbuilding has historically been a principal cause of house price declines. Whether these improvements will continue as market conditions change remains to be seen. One encouraging sign is that operating efficiencies, as opposed to financial performance, have increased most in more competitive markets. If the housing market weakens in the years ahead and competition increases, larger builders still have the potential to improve their operations and maintain their strong financial performance. In communities where demand is strong but residential development opportunities are limited, house price appreciation tends to be high. In markets where price appreciation is low, land is generally more accessible and builders face fewer barriers to entry. As a result, construction activity can respond very quickly to changes in demand. As market conditions shift, however, builders can get caught with excess inventory, which drives down area-wide house prices. In these markets, builders must run their operations efficiently to remain profitable. In high-appreciation markets, demand for new homes is generally greater than the number of homes that can be added under existing land use and building regulations. This limits the risk of rapid overbuilding. Given that it takes more time and resources to build in these markets, higher barriers to entry and higher land costs push up the average price of homes sold. Builders working in these communities generally put a premium on their land acquisition and development strategy. Since they are often able to achieve higher margins on homes sold in these markets, they may put less emphasis on operational efficiencies. The market conditions that have helped to create a more efficient home building industry over the past years have also, in turn, favored the housing consumers. A more stable economy, with more muted cycles and low inflation, has produced some of the lowest long-term interest rates in a generation. Low interest rates, together with low unemployment rates, have also provided greater financial security for many citizens and thus given them more initiative to build their own households or improve their current household. Internationally, house prices have raised an average of 127 percent since 1990, with nearly half of this increase coming since 2000. Until recently, economic cycles interacted with housing cycles to produce tremendous volatility in home prices. From 1975 to 1993, house prices rose more slowly than overall inflation in 10 of the 19 years, or over half of the time. In each of the 12 years since 1993, however, house price appreciation has exceeded the pace of inflation. Builders that have already adopted more innovative practices have clearly profited from their investments. New practices related to product distribution and assembly has improved the operational performance of large builders, particularly in terms of construction cycle time and customer satisfaction, and thus greatly increasing their profits. Although being in the housing industry has a lot of economic advantages it is undeniable that there are still various external, economical, factors that can negatively affect this industry. A low economy, and low living standards, would most likely correspond to a decrease in the demands for housing industries. Natural disasters and calamities such as earthquakes, floods and typhoons that would occur at an unfortunate time, would leave home builders hanging in the deadlines for finishing their projects, since building cannot continued during such occasions. Generally speaking, the housing industry reflects the type of economy in a given region or locality. A region with a high economic state, low inflation, and high monetary value would most likely have a high level of housing industry in turn. The houses in the said region would also be of high quality; however, man power for construction would also come at higher rates at such an area. A stable economy in terms of monetary value and inflation would be the most ideal economy for a successful housing industry. Even high-performing builders still have the potential to make more improvements. Given that their strong financial performance has largely resulted from their leading land positions in booming housing markets, builders just have not to focus on implementing innovative practices and on maximizing operational efficiencies. Larger builders are those that would especially benefit from focusing on efficiency. Local builders with closings of 10,000 homes or more in 2004 reported implementing only half of the common innovative practices, while the divisions of builders with sales of 2,500 to 10,000 homes implemented less than 40 percent of the innovative practices. There are many valid reasons why implementation has been relatively weak. The corporate offices of larger builders report above-average development of innovative procedures, but implementation at the division level has often lagged. With the increase in the number of acquisitions in recent years, many of these divisions have only recently come under management of the acquiring builder and may thus need additional time to implement new systems and procedures. Furthermore, given their strong financial performance in recent years, corporate offices have less incentive and reason to develop new procedures for their local divisions, and local divisions have less incentive and reason to implement such changes. Whether builders will seize these opportunities remains to be seen. One encouraging sign, however, is that operational improvements have increased the most where house price appreciation is relatively low and no one builder dominates the market. If the house building industry weakens in the years ahead, house price appreciation is likely to slow and more builders are likely to compete within individual markets, these are exactly the conditions that lead to the development and implementation of operational improvements made in recent years. This means that a crisis such as the weakening of the economy leading to the weakening of the housing market, although has its undeniable negative effects in the housing industry, on the positive side, it would somehow force the home building industry to continuously and further develop and implement more and more innovations in their systems. Nonetheless, this would consequently lead to further innovations and efficiencies in the home building industry, and thus more high quality and affordable choices of homes for the consumers. References What’s next for housing industy CIOs. Retrieved April 20, 2008, from http://www. cio. com/article/134004 Seiders, D. F. (2006, September 19). 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