Creating manmade islands for foreigners in the deserts of Dubai. Building burgeoning housing developments in exurban Tracy, Calif. These were just a couple of trends that stood out as odd to forecaster and Stanford University teacher Paul Saffo in the years leading up to the housing downturn.
"Forecasting looks at how hidden currents in the present signal possible changes in direction for companies, societies or the world at large," Saffo wrote in an article for the Harvard Business Review. To Saffo, who spoke at the Pacific Coast Builders Conference (PCBC) in San Francisco last week, the forecaster’s job is to apply common sense to spy those indicators of change.
"When you see something strange, write it down. Keep a notebook. Put it down in a computer," Saffo advised conference attendees. "The difference between reality and a forecast is that a forecast has to be believable, conceivable, reliable. Reality is under no such constraints."
In December 2007, for example, he noticed that the price of Google stock was nearing $800 a share. At the same time, gold was approaching $800 an ounce. He thought it peculiar that both should be happening simultaneously; usually, when times are good, the price of gold goes down while the price of stock goes up, and vice versa.
"Sure enough, it means fundamental change is up ahead," he said.
Less than a year later, in November 2008, Saffo announced that the economy would be driven not by consumers, but by what he called the "creator." A creator is someone who both produces and consumes at the same time — what others might call a "prosumer," he said. Whether working or playing, even "passive" activities require a person "to put something in to get something out."
Surfing the Web or playing a video game is not the same as watching television, for example — it requires engagement. And now everyone can do things previously relegated to professionals, such as producing video.
How does one foresee the rise of such an economy? Look for the things that don’t fit.
"The new creator economy is one where everybody is doing something that under the old consumer economy wouldn’t make sense," Saffo said.
The classic example he gave was Google. Before Google, people were used to paying for services such as Lexis-Nexis to search.
With Google, "search is ‘free,’ yet the Google founders are richer than God. How can that be?" he said.
"The simple answer is that Google is not free. You pay with every search query you put in."
What is at first strange can signal an upcoming transformative change. While most people are wary of change and uncertainty, "uncertainty equals opportunity," Saffo told attendees. "I believe there has never been a time of greater opportunity for your business if you take the long view."
Real estate professionals should recognize the full range of possibilities for particular events that can happen in their business, he said — whether it’s a disaster like the Gulf oil spill or the introduction of a new form of technology — and take actions that could influence how their business does in the future.
"Embrace uncertainty. Without uncertainty, there can be no competitive advantage, no opportunity for you to see ahead of others," he said.
In trying to see those upcoming trends, Saffo advises looking for an "S curve" of change. Although we envision the future as a straight line, "change is never linear," he said. Rather, "change starts slowly and incrementally, putters along quietly, and then suddenly explodes, eventually tapering off and even dropping back down," Saffo wrote.
As an example, "the mother of all S curves" is Moore’s Law, which, roughly, postulates that silicon circuit density — and therefore computing power — will double every couple of years or so. Moore’s Law has yet to see the last curve in its "S," as circuit density has not yet begun to taper off.
Major, world-changing ideas, including the personal computer and the Internet, had been around for about 20 years before taking off into the mainstream. The challenge is to look for indicators that such a change is coming before that moment when the change explodes. That requires that we both make forecasts and update them as we receive conflicting information.
"Good forecasting is an iterative process," Saffo said.
After a forecast, don’t pave the cow paths, Saffo admonished, referring to the many horse and cow paths that were simply paved over in the East Coast with the arrival of the automobile.
"We always tend to use new technology and new ideas to preserve some old tradition. Take work from home: a lot of people in your business said, ‘We’ll build telecommuting offices in these housing developments we’re building out in the valley.’ That’s paving the cow paths," Saffo said.
Changes can come in the form of constants, cycles or novelties. Moore’s Law is an example of something that never changes: a constant. It is Moore’s Law that gave rise to the Internet, which, though it had little to do with the real estate business at first, nevertheless transformed it and became the "solvent leaching the glue of where we buy our houses," Saffo said.
A cycle allows us to look to the past to try to gauge how the present is unfolding in relation to history. The current high rate of unemployment is an example of a cycle. The current cycle isn’t behaving like previous recovery cycles, Saffo said — usually jobs drop and then bounce back up, but so far jobs have plunged and only increased slightly.
Sometime during the past 18 months, for the first time in human history the majority of the planet’s population became urban dwellers. That’s an example of a significant novelty.
"Most people now live in cities. That’s never happened before. But it’s mostly subject of cocktail party conversation and then on to what’s Paris Hilton doing. My advice is to pay attention to those important novelties that may zip by," Saffo said.
No matter the change, analysis of history can be useful in meeting it or taking advantage of it. And when looking back at history always look back at least twice as far as you’re looking forward, Saffo said. That time span is necessary to try to ferret out patterns.
"History — especially recent history — rarely repeats itself directly," Saffo said.
A history of the economy, for example, shows a shift from an agriculture-based economy to an industry-based economy. Then, the industrial economy shifts again — to a consumer economy after World War II.
Whereas previously the economy had operated under the continuous threat of scarcity and rationing was common, the shift to a consumer economy occurred not because factories were not making enough of what people wanted, but because they discovered they could make more than people wanted, Saffo said.
"The challenge was inflating consumer desire. Within organizations, power shifted from the vice president of manufacturing to the vice president of sales and marketing," Saffo said. "The symbol of this economy was not the time clock, but the charge card. We were well on a pattern where people were buying things that they didn’t have the money for."
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