How Builders Play Defense And Offense Through Volatile Times

In market-rate residential real estate and construction, you can run but you can't hide when it comes to buzzwords and sports analogies. They're woven – it seems perpetually – into a business cultural fabric of competitors and rivals, racing the "cyclical" clock, winning and losing.

What inning are we in? Is it a sprint or a marathon? What's the gameplan? Have we got a playbook? We work as a team, we tackle the issues, drive results, and we play to win, whether it's the short game or the long game. Of course, it goes on.

Today's pick – in the context of a period of volatility the severity and duration of which is anybody's guess – orbits a sportsy strategic question:

Is it time to play on defense or offense?"

For those whose livelihoods mean plowing today's dollars and their short-term lending rates into a long-term tomorrow's returns – right now, full of question marks – the response to the offense or defense question can only be "both-and" not "either-or."

McKinsey & Co. – which may or may not be prone to over-mining the language's supply of buzzwords – has a take on the question, packaged and ready precisely for times like these.

We are beginning to see two leadership mindsets emerge. One group is generally cautious. They are more on the defense, battening down the hatches on balance sheets, doing all the right things on expenses, planning out scenarios, but strategically they are in a 'wait and watch' mode. We also see another group that are very much on the offense, thinking about the M&A pipeline given current valuations, planning material resource reallocations, and figuring out how they can pull ahead of the pack, to use that racing analogy. They are conservative on managing the downside but bold and aggressive on capturing the upside." – McKinsey & Co., How ambidextrous leaders manage through volatile times

Let's bring this down to earth from its realm of abstraction.

In a canvas of eight name-brand residential real estate economics resources as to where they'd plot 30-year fixed mortgage interest rate averages for 2023, Fortune magazine staffer Lance Lambert freeze-frames a moment in time, just past mid-February 2023.

Here's how Lambert recaps this particular moment of intense flux, i.e. volatility.

On Friday, the average 30-year fixed mortgage rate swung back up to 6.8%. Over the past few weeks, rates have steadily climbed as financial markets, which have seen stronger than expected economic and inflationary data, are pricing in higher odds of the Fed holding interest rates higher for longer.

That 6.8% mortgage rate is the highest reading measured by Mortgage News Daily since early November. It also means that affordability is once again deteriorating." – Lance Lambert, Fortune, Housing market once again braces for higher mortgage rates—where 8 experts see rates going this year

Net, net, the spread among these eight "expert" analytics resources – ones that make a living based on their reliability and accuracy in these matters – ranges for 2023 from 5.2% on the low end of the spectrum to 7.4% on the high end. Dumbed down, that's about a $400 difference from the low-end estimate to the higher one on a hypothetical monthly payment on a $500,000 home.

In this intense a level of volatility, builders are, and have been, and will continue to serve as textbook case studies in strategic ambidexterity. That goes with the turf.

On a day-to-day, hour-to-hour, neighborhood by neighborhood, customer by customer basis these days, builders are playing both on offense and defense. They're rigorously adding starts in direct causal relation to their completions and closings. They're trading 200, 300, 400 basis-points of margins for the moment ratchet down sales prices – subject to geography and submarket activity – by 10% or more from where they'd been selling homes six or eight months ago.

They're locking in qualified buyers on ready-to-occupy or "progressed" new homes with firm close dates with mortgage rate buydowns that can shave as much as two percentage points off the mortgage rate. For other, more discretionary buyers and the healthy percentage with the wherewithal for all-cash deals, they're working magic in the design centers or at the lot premium level, supplanting hesitation and doubt with assurances of greater value on the dollar.

These sales, marketing, and inventory management tools are but a single dimension of gears, switches, and levers engaged with operational, procurement, land development, financial, and numerous other direct and indirect inputs and outflows.

The deep, closely-guarded secret of success – and one that not only bears on the present moment of intensified volatility but a longer-term strategic timeframe within which the best business will transform their operating models – is gaining predictive insight from actual home shopping and buying behavior rather than using snapshot proxies for demand, stale Census-based data, or inferred job formation and wage and income benchmarks.

In days like these, what should be, could be, may be demand for new homes is material only insofar as strategists' wherewithal to move – on offense – across cyclical spheres.

What is demand and what will be demand – based on learnable patterns, associations, common triggers, and actual behaviors – puts sales together with an entire set of business linkages that stem from each knowledge base for every customer into a connected business model – land, operations, purchasing, construction, finance, etc.

We’re constantly looking for ways to reduce the friction that a customer experiences when they’re out in the market on the internet looking for a new home," David Rice, founder and ceo of New Home Star tells The Builder's Daily. We don’t think that it’s an intuitive process. As a holistic new home sales company, our promise is to find ways to connect demand and supply more efficiently, no matter what part of the cycle we're in."

Whether it's finding a percentage point on price, or knocking down a monthly mortgage payment by $250, or by adding an option or upgrade, or a combination, every potential, successful, and failed customer pathway becomes critical information to add into a system-wide knowledge base visible to all the other parts of an operation.

We’re migrating the sales role from a tactical level to a strategic core competence," Rice says. "The way that that proves out right now typically still looks like a sales organization that has a strong consulting component. But we believe that technologies that we are developing and bringing forward are going to help take it past consulting and into developing tools and programs that that will help drive efficiency in the markets."

As that occurs, homebuilding strategists can expect to play on both offense and defense, with a game plan and a single playbook for everybody on the team to get across the goal line, and, of course, beat the competition and win.