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Homebuilder Moneyball

Homebuilder Moneyball

Take an ‘everything matters’ approach to operations, and ‘small ball’ will get you the wins.

With ballparks opening across the country, Clark Ellis for Big Builder draws similarities between the inflated numbers produced by “The Steroid Era” of baseball and the inflated numbers of the early 2000′s housing market.

“The Steroid Era” from 1996 to 2005 produced year after year of incredible baseball records until regulation came down hard on MLB. History has since proven that these numbers were not a meteoric rise in talent, but the result of an external factor: steroids. Here are a few of those numbers:

Isolated Power (ISO): a measure of batting power, 7 of the top 10 scores occurred in the Steroid Era.
40 Home Run Seasons: 27% of all 40 home run seasons occurred in the six seasons from 1996-2001.
Total Home Runs Per Season: Between 1996 and 2005, the average number of league-wide home runs per season was 5208. The average between 1980 and 2014 is 4262.

After “The Steroid Era” the best teams in baseball, once again, are well-rounded clubs focused on pitching, defence, on-base percentage. Baseball calls this razor-sharp focus on the details “small ball” or in Hollywood, Moneyball.

According to Ellis,

In the housing industry, we essentially had our “Steroid Era” as well in the early 2000’s through 2006 or 2007. Interest rates were extremely low, banks were willing to extend credit to consumers with little to no verification, and home building companies were able to borrow using low rates to purchase land and to finance construction. As we all recall, the numbers associated with the results of housing’s “Steroid Era” were just as exceptional for this industry as the baseball numbers were.

And, similar to baseball, homebuilding had its own inflated numbers:

First-Time New Home Buyers: In 2005, these accounted for 600,000 new units. The days of easy financing for the first-time buyer are gone.
Land: Competition has driven land prices up, making pricing from the early 2000′s no longer possible.
Operations: As prices ballooned faster than costs, inflated margins meant lots of flexibility in the operations department. We’ve heard from Scott Sedam and Ken Pinto that pressure from trades and suppliers is increasing fast.

Like the best baseball teams of the past decade, homebuilders must change their focus from a “long ball” to a “small ball” approach to operations and decisions.

Here is Clark Ellis’ How to Play “Small Ball” Top 10 List:

  1. Drive the market research and land evaluation process with realistic product, pricing and costing assumptions, clear roles, responsibilities and accountability. [Solution: Our land development systems manage every aspect of the planning process with strict rules and automation.]
  2. Know your customer: size of segment, demographics, psychographics, submarkets, price points and product needs.
  3. Deliver clean, flexible, low cost and easily constructible product.
  4. Attack and minimize “Sale to Start” cycle time. [Blog: DSLD's 43-day cycle time]
  5. Scheduling system must provide accurate, real-time visibility to trade partners and suppliers as well as internal staff. [Blog: Scheduling for Higher Profits]
  6. Make Material Management a critical discipline with the dual goals of optimizing margins and eliminating time wasted while waiting for additional material to be shipped to the job. [Blog: Pain Points in the Homebuilder Supply Chain]
  7. Engage Trade Partners in a collaborative fashion and develop incentives that align all interests towards executing efficiently, with high quality and on schedule. [Demo our trade partner portals.]
  8. In the context of #4, aggressively and ruthlessly attack Start to Completion (of construction) cycle time with a collaborative and motivated team of builders, trades and suppliers.
  9. Eliminate Punch Lists.
  10. Commit to the market. Partial effort and incomplete execution wastes time and money and only leaves you further behind your competition.

Ellis’ final “small ball” tip is to reduce opportunism: just because a deal is “too good to pass up” does not mean it aligns with your strategy and goals. Reconsider these decisions, while thinking like the manager of the Oakland A’s.

Request a demonstration of how our solutions can help with these goals.

See also: Homebuilder Shark Tank

Read the full article from Big Builder Magazine.
Clark Ellis is a principal at Continuum Advisory Group.

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