A Gap Grows: Buyers Vs. Those Who Now Wait On The Sidelines

In April and May, a widening gap wedged would-be new-home buyers into at least two separate pools, one actively paddling to a destination and the other treading water.

Some of them, in a "life happens" group – like those expecting the imminent arrival of a new family member, or a relocation, or some other family event-related motivation – will continue to work with homebuilders to secure the financial incentive mix they need or want to move forward without hesitancy.

Others are in a "wait-and-see" group. They represent an unclear share of the buyer universe but a growing number of prospects. From what we hear, they now bet that waiting to pull the trigger on a purchase will be worth it to them. The end of the month's mid-year bright line could mean either 30-year fixed mortgage interest rates or asking prices – or both – will likely move in their favor, they believe.

Homebuilders, aware of the potential for a seasonal slowdown, are strategizing to maintain their momentum. They are considering deeper incentives, discounts, and concessions to attract potential buyers.

The pressure on homebuilders to adapt to market trends is further intensified by the aggressive strategies of large enterprises. These enterprises, driven by the need to maintain their pace, are engaging in price contests that could potentially weaken or eliminate smaller rivals.

Those well-used incentives took-kits – mortgage buy-downs, free options and upgrades, dollars back at closing, waived lot premiums, etc. – have done yeoman's work since the Fed's funds rate hockey stick from early 2022 through 2023 strove to throttle momentum by ratcheting up new-home buyers' barriers to entry.

After 18 months of better-than-expected sales results, a couple of months of worse-than-seasonally typical numbers have raised worry levels.

Here are two reminders for leaders and strategists.

One is patience. Smart money is on at least one Fed rate cut by yearend. When that cut occurs, "all hell is going to break loose" powered by a big bulge of pent-up demand from the people who've chosen to wait on the sidelines, according to the CEO of a multi-regional homebuilding portfolio of companies.

The other is – having for months so effectively worked your operations to lower barriers customers must get over to become buyers – is to commit, invest, and install tools in the tool kit that go hand in hand with lowering the barriers.

Chip and Dan Heath's book Switch describes two ways to motivate people to change (i.e., become your customer). One is to lower barriers that block or slow their path, or "shrink the change." Incentives, buy-downs, free upgrades, etc. do this.

The other is to ignite in your customer a step-change expectation of his or her or their own value and ability to achieve more. Get them emotionally engaged.

Homebuilding operator teams are so often wizards at shrinking the barriers for their would-be customers, at the expense of focusing on the flip side of those tactics.

Sparking a flame of excitement, urgency, and desire so strong that your client prospect will strive to great lengths to stay on a path to become your customer and close on one of your homes happens too rarely.

With the kind of data, technology, and knowledge homebuilders can bring to each of their "stores" and the people who engage with them in person or virtually, a whole toolkit — beyond lowering the barriers — should play an ever bigger role in causing a home seeker to pre-experience a better, more valued self in your community and in your home.

Otherwise, he, she, and/or they, are likely to be on the sidelines waiting for the first whiff of a Fed rate cut before they get back in the game.