How to fix a building industry in turmoil

Last Thursday and Friday I attended the annual Building Industry Show (BIS) in Long Beach, CA. To be sure, this year's event was a somber affair, with a smaller exhibit space, fewer education classes (that were often sparsely filled), and a high ratio of exhibit staff to visitors. In other words, what could be expected from an industry in recession.

But I also saw some of the same faces that are industry fixtures -- people who manage to squeak through the bad times to excel in the good.

I also ran into some former colleagues from Hanley Wood Market Intelligence, and we discussed some of our former and current competitors who remain busy only because they're willing to manipulate data and arrive at pricing & absorption recommendations requested by the client.

It's one thing to be aggressive and then add multiple caveats as disclaimers. It's quite another to offer recommendations on the financial feasibility of a multi-million dollar development that have no basis in reality.

Just so I'm clear on this practice: it is called fraud. Like Enron did when cooking the books, only worse because it's impacted an entire industry.

This practice of always blessing a client's project, no matter how unhinged from market fundamentals, was a direct contributor to the size of the housing boom and the degree of the bust.

I'm going to be talking a lot more about this unfortunate history in the months ahead, because I don't think the building industry can either recover or regain the trust of Congress or the home buying public until they're confident that a repeat of this same self-indulgent practice is eliminated.

That's also why I've been working a lot closer with Beacon Economics -- no one would ever accuse them of rolling over to spin bad news into gold for a client. The data is the data. Period. And that's also why they're gradually catching the eye of an industry that is sick and tired of being lied to. I'd say that's called capitulation. And it's a good thing.

I think Supreme Court Justice Louis Brandeis put it best when he opined, "Sunshine is the best antiseptic," and fewer places will that be more true in 2009 than upon Wall Street executives, bank officers and certain developers.

So if you're a builder, investor or a lender with a project that's gone bust, I urge you to hire some decent forensic accountants and a legal team who can help you piece together the history of whatever due diligence was done for a construction loan by the development team.

Was the feasibility analysis done in-house or was an outside and theoretically 'objective' company contracted? If a separate consultant was hired, what is the reputation of that company?

Have other projects on which a company consulted gone bust because the market changed or because their recommendations had no basis in reality even based on the boom-enriched valuations of the day?

Even better, hire a consultant with a reputation for objectivity to conduct a peer review analysis of previous market studies and determine whether the data available at the time of the analysis supported the final recommendations.

Only then can you learn from such mistakes and prevent future ones from taking place.