How Builders Can Dial Up Value While Others Compete On Price

Resilient and resolute, home seekers keep stretching for their goal of new-homeownership. At the same time, prices and interest rates keep grinding upward into the stratosphere, making them stretch more.

One-third (34%) of REALTORS® report that the main reason [their most recent] buyer has not yet purchased is that there are not enough available homes for purchase in their budget. Almost one in five (18%) say their buyer is waiting for mortgage rates to drop, as higher prices are affecting affordability. Nine percent say their buyer is waiting for prices to drop. These are the same top three reasons uncovered in the concurrent 2023 REALTORS® Experiences and Barriers of Prospective Homebuyers Across Races/Ethnicities conducted for NAR by Morning Consult.*" – National Association of Realtors

To date this year, new-home builders competed for customers with an unanticipated, atypical advantage: They've been selling new homes in to a market void of serious competition from existing home sales. However, now new home sales are on track to settle below recently elevated levels – at least to an "old normal" pre-pandemic range – and months' supply of new homes is creeping upward.

New single-family home inventory in August was 436,000, down 5.2% compared to a year ago. This represents a 7.8 months’ supply at the current building pace. A measure near a 6 months’ supply is considered balanced. Of the total home inventory, including both new and resale homes, newly built homes represent an elevated share of 31% of those available for sale." - Robert Dietz, Eye On Housing

Even without competition from resales – given that fewer and fewer homeowners with mortgages that pre-date the Fed's early 2022 rate hikes will likely give up their historically-low monthly payments to sell and buy at today's rates – more new homebuilders will find themselves competing more fiercely with one another for buyers as a cost-of-living crisis and a higher-for-longer rate regime wear and weigh on their expectations for better times ahead.

We continue focusing on Inventory, which decreased ~5.0% YoY, but increased +2.5% MoM on a Not Seasonally Adjusted basis to 443K. Inventory is at its highest YTD level," writes Truman Patterson, homebuilder and homebuilding products research leader at Wolfe Research.

Most homebuilders have worked minor miracles to keep absorption rates per community per month at better-than-expected levels, and they'll continue pushing switches and levers to keep pace up and standing inventory down:

1). By buying down mortgages and an array of other incentives, options, upgrades, and discounts, and

2). by value-engineering floorplans and elevations to cut costs, reduce square-footage, standardize SKUs, and thereby lower asking prices.

The heavy-lifting now for new construction homebuilders – after all that effective effort and focus on the cost side of their balance sheet and the average-selling-price concessions to greater affordability – comes on the value side of the page. The risk of not standing out, standing apart, and standing above increases on an axis equal to or greater than the trajectory of monthly payments as price and rates push higher.

A way to stand-out, stand apart, and stand above – as market and submarket head-to-head competition heats up in the months ahead, and new-home marketshare wars intensify – comes through in two bedrock principles marketing guru Joseph Michelli spotlights in a recent post about brands.

• Brands are promises kept (or broken) ... Brands are only as strong as the experiences that support them
• C.R.U.D. best measures brand strength: * Credible, * Relevant, *Unique, and *Durable

Michelli's insights shine on a critical force-factor in how homebuilders can compete – not just with economic conditions and resales, but with each other – as market conditions continue to hammer at the nation's demand universe in the months ahead. Consumers, customers, and homebuyers – they all demand that promises be kept and that their experience in the process of shopping, committing, and following through on a home purchase is a positive, simple, and straightforward process.

That, of course, includes essential ride-along matters like a pathway through mortgage finance and homeowners' insurance options.

A recent McKinsey analysis, Elevating customer experience: A win–win for insurers and customers, strikes a familiar chord in a homebuyer's new-home purchase experience when it comes to the homeowners' insurance ride-along.

Buying insurance can seem daunting. Customers often find themselves confused and overwhelmed by the plethora of options. The survey found that on average, customers contact their insurer four times in the process of learning about and considering different insurance products. Even after a purchase, customers may not fully understand the value that insurance provides. Roughly 40% of insurance customers who considered canceling their policy were considering doing so because they believed the policy was not necessary or did not provide sufficient value. Complicating matters further is the highly intermediated distribution system of traditional insurers that can include agents, brokers, aggregators, and B2B2C (group channels). All of these factors can hamstring an insurance carrier’s ability to deliver a superior experience to its customers.

The inherent complexity of insurance products requires a more deliberate effort from insurers to inform and educate customers. Products need to be simplified and transparent, and product information must be widely accessible and easy to understand. Insurers should also harness the expertise of their agents and advisers to provide personalized advice that can help customers navigate the process and understand the various trade-offs of their decisions." – McKinsey & Company

This "inherent complexity" carries across, of course, into any purchase of any home. In a market where first-time and entry-level homebuyers make up such a large – and price- and rate-sensitive – share of all new-home purchases, simplifying and clarifying the process amounts to a promise either kept or broken, as Joseph Michelli would say.

One of the great things about Westwood Insurance Agency is the seamless insurance process that we offer our builder partners and their homebuyers," says Mark Tribendis, Vice President of Business Development at Westwood Insurance Agency. "I've seen firsthand in meetings with builder partners just how important homeowners’ insurance is for them. It’s an honor for us to deliver that necessary component for them. Then the builder can focus on the process with the homebuyer, and the homebuyer can then enjoy –things like picking out flooring and cabinetry, etc., not to mention the additional options they can add because they’ve likely saved some money on insurance. Our goal with our builder partners as well as the homebuyer is to make that a seamless process, and to get that process done upfront, in a transparent way."

By being transparent with homebuyers, Westwood demonstrates our commitment to open and honest communication. This fosters confidence in the agency's promise to provide the necessary support and communication upfront for the homebuyer as they navigate through that insurance process."