On October 17th, the Washington Post published a piece identifying an “unseen force holding back affordable housing.” While I have written extensively about the supply side forces (land shortages, labor shortages, overall supply shortages) that are pushing new construction housing beyond their real value, and limiting the availability of affordable housing, this article highlights another real factor: oligopolies.
U.S. housing debates rarely involve the “O” word. But oligopolies, a cousin of monopolies in which a few powerful players corner the market, are emerging everywhere. From 2006 to 2015, the number of builders who controlled 90 percent of a typical market dropped by a quarter, according to a recent working paper by economists Luis Quintero and Jacob Cosman of Carey Business School at Johns Hopkins.
The economists find this dwindling competition has cost the country approximately 150,000 additional homes a year— all else being equal. With fewer competitors, builders are under less pressure to beat out rival projects, and can time their efforts so that they produce fewer homes while charging higher prices (Van Dam, 2019).
It’s important to understand what this report is saying, and what it isn’t saying. First, the housing industry isn’t actually controlled by only a few powerful companies; there are thousands of home builders, and the largest builders still only control around 30% of all production. However, these bigger builders control a much larger share of the overall market in submarkets with more than 25,000 residents. In fact, by the U.S. government's own measures of market competition, the vast majority of these markets are considered “highly consolidated,” which means they are dominated by a few players. Typically, these anti-competitive situations spur regulation or at least encourage questions about whether regulation is necessary to ensure healthy competition.
While the Washington Post piece focuses on this issue as a cost driver (though it acknowledges it’s difficult to disentangle the impact of this reality from the other cost drivers), it highlights a broader issue that the homebuilding industry must tackle. The more concentrated a market becomes, the less customer-centric it will be. Setting cost aside, the fewer options a customer has to consider, the less responsive the producers of the product have to be.
Moreover, if and when the next recession hits, especially if there is a strong contraction, this consolidation will get worse. Smaller builders will struggle to survive, and larger players will come to gobble the competition up. Meaning, this problem is likely to worsen over time and not improve.
If you’re a home builder, the obvious question may be: why should I care? After all, if you’re not bought out and you can still deliver your numbers, does this really matter? The short answer is yes.
The longer answer is that there are two reasons why. First, these larger builders will ultimately set the market for you. They will make it harder to buy land as local developers will prefer their deeper pockets. They will also set the price floor for your vendors, and your costs will ultimately be higher as you have less buying power. And it could become even more difficult to engage in direct competition with them successfully.
The second reason is more complex, though. The housing industry is perfectly set up for major disruption, even as the barrier to entry for that disruption is quite high. The industry has effectively leveraged the exact same model for decades. Can you think of many industries that thrive in which that is true, especially as technology advances?
What’s more likely, though difficult to predict when/who/how is that someone is going to disrupt this entire structure and put the customer first. That actor (or those actors) will have a chance to create a completely different buying experience for customers. With the customer at the center of the process, this model could move quickly and completely upend the system once it catches. In fact, this type of structure may be the only way regional and local builders will be able to push back on the big companies controlling their markets.
What can you do in the meantime? Focus your energies on customer segmentation and customer alignment. Spend time determining which parts of the city are best for which customers, rank the opportunities for each customer group, determine which customer groups you want to target, and then develop product, features, options, and processes that align with their wants and needs. You can beat the big companies now if you’re more responsive to the customer and better aligned with their preferences and goals. Larger builders’ strength is their size. Your strength must be your ability to remain nimble and meet the customer where they are more quickly.
You can avoid the problem they create by doing so. And you can best position yourself for that day in the future when someone disrupts this industry with a customer-centric model. It’s a matter of when, not if.
References
The Washington Post. (2019). Economists identify an unseen force holding back affordable housing. Retrieved October 17, 2019, from https://www.washingtonpost.com/business/2019/10/17/economists-identify-an-unseen-force-holding-back-affordable-housing/.