Disruption Comes to Housing: Part I - Why

In the first of a three-part blog series, I delve into the why, what, and how of disruptive innovation in the housing industry. 

I say this as observation, not judgment: The housing industry is a huge innovation lagger.

I’m not talking about incremental innovation–there’s plenty of that–I’m talking about transformational innovation. Like personal transportation shifting overnight from the horse and buggy to the internal combustion engine automobile at the turn of the 20th Century and once again a hundred years later from the internal combustion engine to the electric car.

Or personal communication in recent decades shifting from landline phones to cell phones and then to smart phones. We could also look at the 50-odd technologies made obsolete by smart phones. That’s the kind of innovation I’m talking about; the kind that virtually every other industry has experienced.

Now it’s housing’s turn. Finally. This three-part blog series will lay out the “Why,” “What,” and “How” behind this disruptive innovation.

Disruption Comes to Housing Adobe stock In this first blog, we’ll explore the “Why” by examining five crises converging on the housing industry that are starting to exceed the builder pain threshold required to drive change.

The second blog will examine the “What” laying out the home of the future with certainty. This forecast is arrived at by connecting the dots between market-ready innovations and pain relief they provide to the five crises.

The final blog in this series will look at the “How” by suggesting a new business model to effectively cross the market diffusion chasm between early adopters and mainstream users. Other strategies ignoring this chasm have impressively failed.

I’ve been an extremely passionate industry observer over a long career. This includes the privilege to lead national certification programs like ENERGY STAR Certified Home and Zero Energy Ready Home that have effectively transformed the housing industry to high-performance. Now I am excited to share what this all has taught me about a much larger disruption looming ahead for this incredibly important industry.

Housing in 2023 … Oh, the Pain

I’ve always been impressed with home builders. They navigate huge risks embedded in possibly the most challenging of all industries, which are completely out of their control.

This includes availability and cost of land, inflating material costs, supply chain vulnerabilities, changing interest rates, volatile design trends and preferences, availability/cost of critical trades, constantly changing codes, costly new regulations, and cyclic consumer confidence tied to the national economy. I could go on, but you get the point: Builders are always in pain.

Now the pain has gotten dramatically worse. This is because of five crises converging on the industry that are moving builders beyond the pain threshold for change. Each of these crises will be covered briefly in this blog with much greater details available in the Housing 2.0 book and workshops.

Crisis #1: Lack of User Experience Readiness

User experience (UX) matters in all products. It really matters in housing. After all, housing is the ultimate consumer product. Nothing comes close to it in size, cost, emotion, risk, and transaction cost and complexity.

Moreover, the amount of information available to home buyers is increasing exponentially. That’s why it is critical every home builder is ready to meet growing UX expectations. However, personal observations have made it clear that UX readiness has become a crisis.

In my role leading national housing programs I have observed 10,000s of homes and have personally assessed huge opportunities to improve UX (see Housing 2.0 book for more details on the five key housing UXs).

Moreover, the peer review data bears out these observations. I have compiled five-star rating results onto a spreadsheet for approximately 150 production builders from what I consider one of the most credible independent peer review programs.

The results were scary. Over 75 percent of the builders had an average score below 2-stars. When my wife and I are traveling, we screen out any restaurant with less than a 4-star review for just a $100 meal.

What is the chance that much more informed buyers, increasingly aware of builder peer reviews, would spend hundreds of thousands or over a million dollars for a home from a builder with less than a 4-star rating? This suggests a lack of readiness to leverage the growing opportunities to deliver transformational experiences.

Crisis #2: Lack of Affordability

While the median home price has been increasing exponentially for the past half-century, median household income has remained relatively flat (see Figure 1). This means the gap between home prices and household income is also increasing exponentially. That is not sustainable.

The economic analysis can get very complicated, so I’ll keep it simple. If the cost of a product blows way past the consumer’s ability to pay for it, eventually things don’t go well. Recent low mortgage interest rates that were sure to increase and inventory shortages can only get you so far.

Consider that the $144,000 average income needed to afford a home in 2021 was two times the $70,000 median household income at that time. And the disconnect has only gotten worse.

I just presented a Housing 2.0 Workshop at the 2023 Pacific Coast Builder Conference (PCBC) in Anaheim and made this point locally relevant. A recent news story featured a professional couple making over $200,000 combined income who said, “It’s hilarious to think they could afford a home in Los Angeles.”

You know you have a problem when a couple in the 95th percentile of household income can no longer purchase a basic home in a state with an outbound move rate that rose to nearly 60 percent in 2021.²

Virtually all major population centers with a few exceptions are in similar situations where housing prices are disconnected from household incomes. But we all know this with never-ending news reports about the housing affordability crisis.

Growth in US home values outpaces that of incomes

Figure 1: Median home price compared to median household income

Crisis #3: Lack of Trades

Another housing crisis constantly in the news is the lack of trades. There is a tsunami of older workers retiring from the construction workforce with a meager pipeline of younger workers interested in joining the trades.

This crisis is exacerbated by a national immigration crisis that has significantly reduced the entry of construction workers from our southern border. As a result, trades are consistently cited as the most significant problem confronting builders (see Figure 2).

This includes a recent NAHB survey where 85 percent of builders expected cost and availability of labor to be a significant problem.³

Results from a more recent survey indicated over 90 percent of builders reported framing crew and carpenter shortages in 2022. Looking ahead, recent analyses indicate this crisis is only getting worse with 2.2 million net new hires needed in the construction industry from 2022 to 2024. 

If you’re a builder and not figuring out how to manage in a world with growing strains on trades, significantly greater pain lies ahead.

Percent of builders and remodelers reporting subcontractor shortages

Figure 2: Housing Trade Shortage

Crisis #4: Lack of Productivity

It probably comes as no surprise to casual observers of construction that the housing industry has a profound productivity issue. Detailed industry assessments make it clear that this is in fact a crisis.

A famous McKinsey & Company evaluation of the construction industry concluded construction productivity has remained flat over the past 30 years while manufacturing has nearly doubled (see Figure 3).

In a separate study, a $200 billion cost was calculated for the labor productivity gap across the U.S. construction industry, and  that it could be closed by adopting 21st century manufacturing methods such as prefabrication, robotic automation, and additive manufacturing.

We know the housing industry today opts for variable costs over fixed costs to manage the vast risk factors discussed earlier. Thus, there is a high dependency on outsourcing all critical construction work with trades and significant barriers to advanced manufacturing methods. Houston, we have a crisis.

Overview of productivity improvement over time

Figure 3: Lack of Housing Productivity Compared to Manufacturing

Crisis #5: Lack of Digitization

Virtually every industry is vastly more digitized than housing. This was the finding in one study that ranked housing as the least digitized industry except for agriculture and hunting.

This represents a crisis because digitization exploits data, software and technology to deliver a better UX at lower cost. And remember the importance of UX and affordability. To the degree that some architects and builders are utilizing building information modeling (BIM), that’s a good start. But only a start.

There is only a tiny amount of power users that can fully leverage the faster, better, cheaper potential from fully digitizing housing including reduced cycle time, automated bill of materials, enhanced quality, full system integration, enabled machine learning, increased production efficiency, minimized waste, and substantially reduced rework. All of these benefits are too vital to be missing from the housing industry.

Why Housing Disruption Now

The brief overview of the five housing crises presented in this article suggests builder pain thresholds are at a breaking point. There are vast opportunities to improve housing UX and homebuyers have vastly greater information to identify the industry laggers.

Home buyers have reached their financing limits in a growing number of markets and already we are seeing significant migration from high-cost to low-cost markets. Builders know they need a longer-term solution for the rapidly worsening trade landscape. The costs of being the industry with the lowest productivity and digitization are becoming too much to absorb in the retail cost of housing. It’s time for disruption.

In the next blog, “What” the future of housing looks like will be laid out with four innovations that can be applied today to mitigate this pain. In the meantime, please take advantage of Housing 2.0 resources that provide a playbook for adapting to the inevitable disruption looming ahead rather than being left behind.

This Housing 2.0 presentation is sponsored by:  Jinko Solar, LP Building Solutions,  Mitsubishi Electric Panasonic, Schneider Electric  and Sunnova.

¹ “Home Prices are Now Rising Much Faster than Incomes, Studies Show,” Jessica Dickler, CNBC, November 10, 2021
² “A Professional Couple Who Make Over $200,000 Combines Say it’s ‘Hilarious’ to Think They Could Afford a Home in Los Angeles,” Alena Botros, Fortune, April 10,2023
³ “Top Challenges for Builders: Cost/Availability of Labor in 2019 and 2020,” Ashok Chaluvadi, NAHB Eye on Housing, February 7, 2020
⁴ Spring 2022 HBI Construction Labor Market Report, Home Builders Institute, June 2022
⁵ “The Construction Productivity Imperative,” Sriram Changali, Azam Mohammad, and Mark van Nieuwland, McKinsey & Company, July 1, 2015
⁶ “Reinventing Construction: A Route to Higher Productivity,” Filipe Barbosa, Jonathan Woetzel, Jan Mischke, Maria Joao Ribeirinho, Mukund Sridhar, Matthew Parsons, Nick Bertram, and Stephanie Brown, McKinsey & Company, February 2017
‘Imagining Construction’s Digital Future,” McKinsey Productivity Sciences Center, Singapore, June 2016