October 24th, 2018

U.S. Home Builders Take Note …

The “National Pool” of Prospective Homebuyers has Shrunk by an estimated 5 Million Households …

A Series of Solutions:
Introduction … Thinking Outside the Box

This really should not surprise you …
 
It’s only common-sense, that when mortgage interest rates increase … the pool of prospective home-buyers that can qualify for the corresponding higher mortgage payments, shrinks.
 
It’s also common-sense, that if you are building homes in a marketplace where the cost of building a home increases, and you are forced to increase the Sales Price of these homes … the pool of prospective home-buyers that can afford to purchase a higher priced home, shrinks.
 
Understanding the impact that these all so important financial variables have on the prospective pool of home-buyers is very, very important to a home builder. Thankfully, a fine group of very smart folks at the National Association of Home Builders (NAHB) do important work in this area and their work, as published in an annual report referred to as "New Home Prices and Households Priced Out of the Market by a $1,000 Price Increase" (NAHB Report) is an important read. This report measures the impact of various economic factors on households looking to buy a median priced home (national average is $296,400) with a 10% down-payment using a 30 yr fixed rate loan.
 
None of this is earth-shattering news, right? It’s pretty basic that one of the survival skills of every business/industry should be understanding how the ebbs and flows of the economic landscape impacts their customers … home building is no different.
 
Maybe so … but the earth-shattering news IS the size of the potential impact on the home building industry and the potential for lost opportunities … keep reading.

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Over the last few months a number of my industry contacts, in unrelated conversations, have told me that this “shrinking home-buyer pool” is having a serious impact on their business … so I figured it was a good time to take a look at these numbers.
 
Let’s start off looking at interest rates. Over the last 12 months, we have seen them move up approximately 1% (from 4% - 5%). We all know that this is bad for housing … but how bad?
 
Using my TCO™ software to analyze the data found in the 2016 edition of the NAHB Report, the results support that on a national basis, this increase in the cost of mortgage financing has “priced out” approximately 4,207,9991 households! … that’s right, 4.2 million households … Hello!!!

Next, let’s look at home prices. Using data from the same national NAHB Report as a baseline and assuming an average price increase of $10,000, the numbers support that we have lost an additional 1,529,0302 households.

 
This is nothing short of Amazing … we have seen 5,737,029 households “priced out” of buying a home in the last 12 months alone!

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Looking at this challenge nationally, it’s easy to understand that a number like “5.7 million households” may be a bit daunting and difficult to relate to, therefore, I’ve often found that modeling numbers for the home building industry using a more manageable, single hypothetical home builder may help put it into perspective. To that end … let’s say you work for or sell goods / services to a successful home builder with operations in markets across the US. Let’s also say that your average sales price is $300,000, your average gross sales margin (GSM) is 20% and you maintain .5% market share (5,000+/- homes annually, assuming new homes sales are 1,000,000 nationwide).
 
 
How does this shrinking homebuyer pool impact you? … Check out the math:
 
5,737,029 households lost, multiplied by .5% market share = 28,685 potential households you lost
 
$300,000 multiplied by 20% gross sales margin (GSM) = $60,000 in potential lost GSM per home
 
If 2% of these lost households were real buyers before the market shrank, you could have potentially lost 573 in new closed deals (representing $172 million in new home sales and $34 Million in Gross Sales Margin)
 
Maybe you’re thinking a much more modest impact, so let’s of let’s we cut it all the way back to only 25 homes … this still represents potential loss of top-line revenue of $7.5 million. You pick the number … $172 million or $7.5 million or some number in between … any number is bad news!
 
So, my bet is that some of you are thinking, “Isn’t this guy just a Bowl of Sunshine?”
 
Well, actually, I am … but I don’t dance around the truth and only deal in facts. Throughout my 33 year career as a residential lender, I have focused my work on thinking outside the box to solve puzzles like this and one thing always rings true … before you can develop and implement a scalable and replicable solution, you have to be honest with yourself about the challenge … and folks, this one is real.
 
One of the most interesting things about the how home builders typically react to markets where the buyer pool is shrinking & prices are increasing, is that they will usually head down one of two very predictable paths. Some will take the “cut back on standard features” route, eliminating items like fireplaces, cutting back on wood floors and maybe reducing the quality of their cabinets. Other builders will take the “get the purchasing guy to beat up our vender’s” route … adopting a policy to squeeze every dime possible out of every supplier/vender that they can.
 
Two observations …
 
(1) each of these strategies may somewhat address the “price increase” challenge, but do very little on the interest rate impact … and if you are going to start down the “we have the lowest price” road, then you may end up boxing yourself into a business model based on price and is this really where you want to be?
 
(2) it is all but certain, that by using either of these strategies, the home-buyer ends up with LESS.
 
And unless you have been living under a log for the last 10 years … today’s buyers don’t accept LESS … quite the contrary, they want MORE, MORE and MORE.

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So, by now I bet some of you are saying … “Well, if you are so smart, what would you do?”
 
In a nutshell … I’d encourage you to set yourself apart from your competition and Give Your Buyers MORE
 
How, you may ask? …
 
Start with an open mind and consider the following steps …

Step 1 – Stay focused on your customer … you have built your business meeting their needs, you know who they are, you know what they want … make a commitment to be the home builder that gives it to them. Never forget that while buying a home is a transaction, owning one is a long-term deal … make sure your marketing teams are treating your prospective buyers as home-owners, vs. simply buyers.
 
Step 2 – Consider letting go of “Sacred Cows”. While I am a big proponent of having strong, long term relationships with your suppliers and vendors, I encourage my clients to keep an open mind for opportunities which may improve the homes that they build and drive additional profitability to their bottom line. It’s one thing to have a deal with a supplier, vendor, lender or title company that drives a few hundred or even a thousand dollars back to you … it’s a totally different thing when the relationship can help you increase your closed sales by 1, 2, 10, 50, 100 more homes. I challenge you to expect more from these relationships and you may just find it.
 
Step 3 – Look for “holistic solutions” which build on the quality that you build into your homes and amplify your value proposition. Take steps to deliver more than your competition and then resist the temptation to let your extra efforts get lost in a list of your “standard features”. To me, that would be like selling a Ferrari and never mentioning the hand-built motor that generates 500 horse power. Make it a point to “sell” everything that makes your homes a step above the rest.
 
Step 4 – And last but surely not least … make it your business to understand the power of high-performance homes. This is our future folks and you need to get on board. I started this process ten years ago and it has greatly enhanced my business. Your home-owners expect their homes to be energy efficient, they are learning about HERS Ratings and they love knowing that you are building a better home (partly because it benefits them, and partly because they want to tell all their friends how smart they were when they decided to purchase your rock-star house). They are eager to learn how the homes that you build may be more durable, have better indoor air quality, are more comfortable to live in and cost less to own. Don’t fall into the trap of building “barely code” because it is cheaper … your buyers want to understand this stuff, so sell to it.
 
If you are interested in seeing how “thinking outside the box” can help you or your home builder clients, I’d love to discuss it further with you. Feel free to shoot me an email at kerry_langley@ucbi.com or call me on my cell @ 770-365-7769 (may be a good idea to text me first, I get lots of junk phone calls and my phone screens most of them).

1, 2 - The figures illustrated here are based on an analysis of the data published by the National Association of Home Builders in their report titled, "New Home Prices and Households Priced Out of the Market by a $1,000 Price Increase" 2016 edition. The analysis was generated using the “TCO-flex” module of the TCO™ - Total Cost of Ownership software program which was developed by Kerry M. Langley and is owned by TCO Consulting, LLC. This article is not intended to be an offer to extend credit.
 
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