One of the chief strategists for key divisions of a public homebuilding company spoke with us recently about measures this executive's team takes as downward pressure on new home prices grows.

Pain points and priorities, as well as a trial-by-error, process of elimination array of tactics map out roughly this way.

Pain points

• Start-to-completion cycle schedules still stretch out up to 60 past normal as legacy supply chain disruptions run their full course
• Federal Reserve-fueled mortgage rate increases a) disqualify some buyers mathematically, b) deter some buyers psychologically, and c) thwart people who own homes with dirt-cheap mortgages to consider a move to a new home
• Cancellations have begun to plague backlogs – impacting both 2022 and 2023 books of business and settlements.
• Rival homebuilders competing in the same markets and submarkets are dropping price [or doling out incentives], siphoning a shrunken pool of buyers towards margin-crushing ASPs.
• Recent buyers – particularly in more recently-opened new neighborhoods – may resent having paid peak prices, while the near-term future cohort may be paying less for what looks like the same product in the same community.

.... to name just a few.

Priorities

• Complete homes under construction, and begin building "unstarted starts" on schedule and on budget
• Go to any length necessary to secure the backlog of sale, and resell cancelled orders as soon as possible to sustain revenue as close to projections and budget
• Decipher a pricing-value proposition that might possibly kickstart and sustain new absorptions pace in the face of ongoing interest rate increases
• Operate by the book on secured-loan covenants and obligations
• Keep team members customer-focused, and keep managers, supervisors, directors, and division leaders team-member focused.

Of course, business imperatives may include land-deal walk-aways, reductions in force, and other non-revenue generating cost actions.

As TBD Dream Team advisor and founder/principal of SLC Advisors Scott Cox notes here:

Evaluate your assets, capital providers and people with a ruthlessly clear-eyed view. So easy to say and so hard to do. Ask the classic question – what would my successor do? Eliminate the baggage of your own history and emotional connections. What would a new person with lots of experience and no personnel connection think of what they see?  I’m not sure there is any piece of advice more important than this. Find a trusted source to help you with this if need be. Who will tell you stuff you don’t want to hear.

If you’ve got partners always double check if your interests are aligned. And if not, you’re better off reworking a deal in a way that sticks in your craw than to carry on with people who are unmotivated."

Tactics

Our chief strategist source gave us a first-hand glimpse at how such tactical advice applies as homebuilders with multiple projects try to get their arms around what is both most painful and highest priority right now – the shifting terrain of weakening buyer motivation and wherewithal, and how to reverse the trends of both.

Strengthening buyer motivation and wherewithal, the strategist says, means bringing architecture, value engineering, marketing, construction operations, finance, and sales into remedial action, evolving product to lower ASPs without harming new neighborhood value.

We've got buyers in some of our newly opened communities who just moved in having paid a peak price for our entry level models, and some who've committed to that price in our backlogs whom we're trying to move across the goal line to settle," says our strategic executive source. "Now orders for that same product have gone soft on us and we have to do something to lower the price barriers for many new buyers so that they can qualify in. So, what we'll do – and this usually helps keep our recent buyers from getting resentful about overpaying for a home they just took delivery on – is get architecture into the room and value engineer the product so that it still lines up with the neighborhood design guidelines, but takes out floor space, or finish detailing, or some area of functionality so that we can bring the cost down for those future releases."

This is not how we'd sell through a community ideally speaking," the strategist adds. "But it is a way for us to remain in good faith with our customers who paid a higher price earlier in the cycle. They know they're in a home with a higher spec and livability experience than someone who comes later in the cycle and pays a lower first-cost for the new home."

As impacts on homebuilding businesses and operations have gone so quickly topsy turvy, with uncertainty, risk, and threats to both capital and customer lifelines to business viability, it may help to remember that households themselves have taken a similar, if not more disruptive, hit.

A Harvard Business Review analysis, "Keeping Up With Customers' Increasingly Dynamic Needs," may help bring light to this issue of what's tolerable and what's non-negotiable for new-home customers as they navigate a tricky pandemic fallout economy.

Authors David Droga and Baiju Shah of Accenture Song write:

In an Accenture survey of 25,000 global consumers, released in July 2022, 60% of them told us their priorities are changing based on global events. Nearly the same number say they’ve completely reassessed their life purpose and values in 2022, up from 50% in 2021.

As they reconcile these changes with the practicalities of everyday life, consumers are making paradoxical decisions. They want to shop based on values like sustainability — but they also want good value for their money. They want to act in their own best interest — but also affect change for others. In the absence of perfect solutions, they’re making choices the best they can in the moment.

Paradoxical decisions are not new, but the way people are accepting them is. In fact, nearly 70% of consumers told us that behaving inconsistently is very human and totally acceptable.

But consumers are also saying that businesses need to keep up. Around two thirds of customers feel that companies are not responding fast enough to their changing needs.

As Scott Cox suggests, every business in homebuilding faces a yellow-pad moment, where, he says, it's time to reassess the business at the most basic level, most importantly looking at who and where customers are and what they need, want, and will pay for.

Tactics that bring all the disciplines and expertise areas builders do best to bear on product, location, price, practices, and promise will set peers apart from one another as bumpy, choppy, iffy conditions play out.

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