Even though the home building industry is ripe for disruptive innovation (BIG not incremental reductions in cycle times and costs) it might be that the industry cannot afford to innovate.
The problem with the housing market (one of them) is a confusion of identity. Just like a bank balance sheet where an entry can be both an asset and a liability, a house has the same two opposing identities. For most people their house is their biggest investment (asset) and like any good investor the goal is to buy low and sell high. On the other hand housing is a cost (liability) and it’s always good to keep costs low. In other words when people can afford to buy a house they usually jump in and wait for the price to soar (meanwhile controlling their housing costs) so they can get rich selling to someone else. But in order for home owners to get rich off this legal Ponzi scheme and for prices to go higher there needs to be more buyers than sellers. (Simple stuff so far right?)
Unfortunately, the higher house prices go the fewer people there are that can afford to buy in and the chances of getting rich from selling your house diminishes. That’s where banks step in with their version of a solution to solve the problem. Banks have a vested interest in higher priced houses (protecting the value of your shared asset) so they facilitate the buy in by loaning more and more money to buyers which drives up prices and makes happy bankers and happy sellers. (It’s all good right?) Only it’s not, because the rising entry prices and falling incomes are eliminating more and more of the desperately needed buyers from being able to qualify for a loan and keep the cycle going. (One recent Gallup poll over a two year period showed a 34% increase in the number of people who gave up hope of ever owing a home.) For a market to be healthy there needs to be lots of participation and when participation drops it might be time to look out below. (Are you with me so far??)
So, this is where the identity crisis becomes a problem. We need to be able to lower the entry cost of buying a home and simultaneously keep home values high for banks and owners. (When you figure that one out let me know!) But wait, maybe it’s time for a good old fashioned market correction to help make housing costs temporarily cheaper right? Unfortunately, the last time this happened, lending standards tightened and many would be buyers lost their jobs which exacerbated the problem. So, what do you do when the only people who could drive up housing prices can’t afford a house? If we continue to loan money to keep prices up and increase participation we will have to have lower lending standards…. oh, wait we already tried that! Or, we can focus on those really BIG not incremental (say 50% reductions in cycle times and costs and improvements in productivity. But wait… if we cause a big drop in home building costs wouldn’t that lower the value of all homes overnight? Think about what digital cameras did to film or the fax and email did to snail mail or cell phones did to land line phones, etc. etc.
The real questions are, can our whole “home owner investment philosophy” and our (still on life support) banking system and economy afford that kind of lowered housing price that might come from disruptive innovation? And, how can we avoid another housing calamity if we don’t innovate to lower housing costs?
I would love to hear your ideas on how to solve this problem??? Just click the “comments” right below the “like” or “tweet” icons to add you thoughts.
By: Kevin Minne
InnovationGrowthSystems.com
720-354-0291
The problem with the housing market (one of them) is a confusion of identity. Just like a bank balance sheet where an entry can be both an asset and a liability, a house has the same two opposing identities. For most people their house is their biggest investment (asset) and like any good investor the goal is to buy low and sell high. On the other hand housing is a cost (liability) and it’s always good to keep costs low. In other words when people can afford to buy a house they usually jump in and wait for the price to soar (meanwhile controlling their housing costs) so they can get rich selling to someone else. But in order for home owners to get rich off this legal Ponzi scheme and for prices to go higher there needs to be more buyers than sellers. (Simple stuff so far right?)
Unfortunately, the higher house prices go the fewer people there are that can afford to buy in and the chances of getting rich from selling your house diminishes. That’s where banks step in with their version of a solution to solve the problem. Banks have a vested interest in higher priced houses (protecting the value of your shared asset) so they facilitate the buy in by loaning more and more money to buyers which drives up prices and makes happy bankers and happy sellers. (It’s all good right?) Only it’s not, because the rising entry prices and falling incomes are eliminating more and more of the desperately needed buyers from being able to qualify for a loan and keep the cycle going. (One recent Gallup poll over a two year period showed a 34% increase in the number of people who gave up hope of ever owing a home.) For a market to be healthy there needs to be lots of participation and when participation drops it might be time to look out below. (Are you with me so far??)
So, this is where the identity crisis becomes a problem. We need to be able to lower the entry cost of buying a home and simultaneously keep home values high for banks and owners. (When you figure that one out let me know!) But wait, maybe it’s time for a good old fashioned market correction to help make housing costs temporarily cheaper right? Unfortunately, the last time this happened, lending standards tightened and many would be buyers lost their jobs which exacerbated the problem. So, what do you do when the only people who could drive up housing prices can’t afford a house? If we continue to loan money to keep prices up and increase participation we will have to have lower lending standards…. oh, wait we already tried that! Or, we can focus on those really BIG not incremental (say 50% reductions in cycle times and costs and improvements in productivity. But wait… if we cause a big drop in home building costs wouldn’t that lower the value of all homes overnight? Think about what digital cameras did to film or the fax and email did to snail mail or cell phones did to land line phones, etc. etc.
The real questions are, can our whole “home owner investment philosophy” and our (still on life support) banking system and economy afford that kind of lowered housing price that might come from disruptive innovation? And, how can we avoid another housing calamity if we don’t innovate to lower housing costs?
I would love to hear your ideas on how to solve this problem??? Just click the “comments” right below the “like” or “tweet” icons to add you thoughts.
By: Kevin Minne
InnovationGrowthSystems.com
720-354-0291
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