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Buy your next house from a warehouse

In a nondescript warehouse on the outskirts of Chicago's O'Hare airport, one of the largest U.S. home builders is doing what it does best—building homes, or, at least, parts of homes. There are full-scale frames of 11 main floors and second floors, complete with cardboard kitchens, stairways leading nowhere and floors taped with outlines of furniture and fireplaces. It could almost be the scene of a crime; instead, it is the scene of a unique experiment in market research.

"I remember watching one of our chief engineers at Toyota who spent a whole year watching how people interact and use their product, their vehicle, and we decided that would be the best thing to do here—have people run through homes, see what they need, how they would interact where they would go, and then as a team we started working on how can we actually do this in the home building," said Deborah Wahl, chief marketing officer for Pulte Group.

Wahl spent 20 years marketing cars and came to Pulte in 2009, when the nation's home builders were struggling to stay alive. They were barely building, eking out the lowest volumes in recorded history as home values plummeted and foreclosures raged. Pulte was in a better position than most, having bought out entry-level builder Centex and already being established in the active, 55 adult sector with its Del Webb division.

By 2011 Wahl had dreamed up the concept of Life Tested designs. The company would find huge warehouses, build prototypes of various home designs and run focus groups through them from top to bottom.

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"It actually ends up being a cost savings for us," noted Wahl. "We would go and build the best house we could and build it fully and put it into market, and then if it sold we made money and if it didn't sell that was a sunk investment. Here we now have several points where we're able to test how these designs work, if people need them, so by the time they get built we know these houses are valuable. They'll sell, there's less waste in the system."

Focus group discussing test homes by Pulte.
Source: Diana Olick
Focus group discussing test homes by Pulte.

Home builders are facing a tough buyer market, as mortgage interest rates rise and wage growth struggles. They are facing soaring land costs as well as limited labor and supplies. This pushed Pulte to raise prices 9 percent in the second quarter of this year from a year ago, even as the company faced a 12 percent drop in net new orders.

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The summer has not proved much better for the builders. Mortgage applications to purchase a newly built home dropped 14 percent from July, according to a new report from the Mortgage Bankers Association. Still, demand is there, and after building next to nothing during the housing crash, U.S. builders are now faced with renewing the nation's housing stock. That, Pulte executives say, is why innovation is so important.

"When I was at my first conference, I met someone and referenced that I was doing market research," said Ian Wild, Pulte's director of market research. "The fellow said, 'Let me tell you how I do market research. I get in my car and I drive down the road to the competition and I say what's selling and why?' And as a result of that, the innovation in the home building industry is, well, there's very little."

So on a hot September morning, with the roar of O'Hare's traffic overhead, small groups of homeowners wind their way through the rows of homes in frames of back doors and out frames of front doors, gripping their clipboards and checklists, and eyeing every detail and every measure of space.

"It's much easier than looking at a blueprint, where you keep turning it around trying to understand which way the door swings. Will this be this way?" asked Chicago-area homeowner Sasha Zingerman, motioning. "It's much more comprehendible, and you can physically picture yourself in that space. You could see how you would orient yourself there."

The subjects are paid to offer their opinions, and after the tours they sit down with a moderator to tell what they like, and more importantly what they do not like.

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"I like how it all flows together. It's open, it's airy, there's a lot of light coming in. It seems like a happy environment," said one woman.

Pulte gets at least five new design ideas from each of these events, which are held across the country, according to Wahl. The latest trends are full home automation (running every system in the home through a smartphone), larger mud rooms, or as Pulte calls them, Everyday Entries. Dining rooms are out, larger kids' bathrooms are in.

"I don't think I would ever use the formal dining room, so it would be a wasted space for a room that I don't use often enough," added another.

After living through the worst housing crash since the Great Depression, today's home buyers are more skeptical and less trusting of home builders. Some blame builders for throwing up far too many houses, selling them to speculators and turning a blind eye to an overheated market that was bound to bust. They are treading back in slowly and finding higher prices.

In fact, the premium for new construction today is, "abnormally high," according to researchers at John Burns Real Estate Consulting. They compared two similar homes, one built in 2003 and one built today; the older home was priced at $400,000, the new home at $480,000.

"With limited supply and elevated investor purchasing activity in the resale market, new home builders are benefiting from the spillover of demand for housing with the ability to provide homes and increase prices faster than their respective resale market," according to the researchers.

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Most of the subjects in the Pulte focus groups said they would be interested in buying a new home, but some are still cash-strapped or underwater on their current homes. Still, they seemed energized just walking through the frames of future models.

"Overall desire for new home is huge, and that is the best news for all of us," beamed Wahl, as she headed through the door frame of the Everyday Entry.

By CNBC's Diana Olick. Follow her on Twitter @Diana_Olick.

Questions?Comments? facebook.com/DianaOlickCNBC

  • Diana Olick serves as CNBC's real estate correspondent as well as the editor of the Realty Check section on CNBC.com.

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