The New Home Sales 2023 Survival Guide With David M. Rice

Around the 1st of April, one four-letter word will matter most for most firms that do business as America's homebuilders in the middle of what used to be known as Selling Season.

Pace.

The reason April will be pivotal for homebuilding enterprises, regional operators, and single-market players, especially a moment such high-stakes bets are stacking up in belief that inflation is bound for a fast, steep drop, is that it's then that pace will need to come off life-support, and begin to find its legs – or else, not.

Since pace and its ability to take on a life of its own is so crucial, April of this year will also serve as an inflection point because most firms who prize success, particularly for their new projects, neighborhoods, and communities, need to fully embrace a "reset" mentality. That means that pace over the most robust gross and net margins companies ever recorded.

It's hard to do, and oh so tempting not to, says David Rice, who is founder of New Home Star, whose 500 team members and technologies serve homebuilders in 30 markets, notching 9,000 closings, generating revenues of $3.5 billion in 2022.

The opportunity is to come in and find how efficiently you can operate and grab pace," says Rice, who's evolving New Home Star homebuilder services array up the value chain from where it has secured a strong position as a new-home sales recruitment, support, and training bureau builders can tap into for a full-stack technology-enabled sales-enablement solutions platform. "If you can establish pace, then you can start to add back margin. The faulty strategy is to come in with margin as the priority. You can open and get some of those, but before long you realize that you caught what might have been the most motivated demand, as we all experience in any location. You always see some people who want to live right there, and then. Only later, you realize you can’t accomplish pace but you’ve got people in backlog, and now it’s clear that you’ve put your community in a backward position – where you’ve started out a little stronger than you’ll be able to maintain."

While the battle starting with the back-half of 2022 through the present time has been protecting and delivering backlog buyers across a terrain riddled with risk -- both elongated closing schedules, volatile rates, and weakening prices – April 2023 marks a brightline. In neighborhoods part-way through their inventory of planned homes, keeping as many backlog buyers on the beam remains a point of focus.

Still the critical multivariable calculus of the season is reprogramming densities, renegotiating costs downward, value engineering product, re-optimizing build-cycles, and throwing in a gut-wrenching dollop of hard-won per-unit margin to make the numbers work to do one thing: reignite pace.

We talked with New Home Star's Rice about the collision of strategy and tactics that characterizes today's real-time, community by community, client by client tool set, to both seal the deal on backlog buyers and to replenish the pipeline of new orders in a year Rice expects to test even the best of operators' staying power and resilience under adversity.

Here's a curated set of take-aways from our conversation that speak to 2022 lessons-learned, 2023 outlook and strategy recommendations, and a longer-view look at the who, what, and how of sales in the very near future of newly applied technology and data.

We'll begin with an overview of what to expect of the 2023 new home sales market, based on a Federal Reserve-engineered end to the housing boom that was. For context, the National Association of Home Builders economist Rose Quint reports:

The share of adults planning a home purchase in the next 12 months dropped to 13% in the final quarter of 2022, down from 15% in the previous quarter." Eye On Housing

On 2023 New Home Demand

Quotes From David M. Rice, founder, New Home Star

We love that interest rates have fallen, and are now below 6.5% again. That helps the overall market. Even so, I think a lot about the market being smaller. From a demand perspective, it wouldn’t surprise me if we lost 30% to 35% of demand this year.

But we weren’t meeting all of the demand with supply last year. So it looks to me as though we won’t feel that whole 35% pullback, because we weren’t meeting all of the demand to begin with.

In those places where you really do feel the pullback, there are going to be the winners at the project level and the community count … that will continue to hit goals. They’re going to have to compromise margin because of what the other guys do to try to hit numbers. But I have watched in the past six months, and never has been as clear than now, that where you have a really good operator and those places where you don’t.

Tactics For Back Half Of 2022

You look at what action the Fed finally took in June and interest rates flew up as they did, it immediately affected affordability. This is because home prices had been allowed to creep so high because of interest rates being so low.

We found ourselves with massive backlogs, and massive margins in backlogs, and the desire to continue selling wasn’t as great as the desire to keep those massive margins in backlogs. What that meant was we had to figure out a way to not publicly lower prices. If we did, we felt like that was going to bring the backlog in demanding those same discounts.

In many of our places, we introduced a small floor plan, often the smallest plan they had on their books that wasn’t already being offered in that community. We offered it at the lowest price that we could bring it in. It was practically a marketing initiative.

We didn’t want or expect customers to come clamoring for it, per se. But we knew that because no one in backlog had that plan – it was a new plan – we could market very low and get away with it, and that it would bring traffic out. Then we combined that traffic driving move with having really significant incentive money to spend.

Instead, the sales agent gets $50,000 in back pocket money and when the person says, ‘I don’t really like the small plan,’ and you can say, ‘how about the one that you do like, … what if I can get it for you for about the same price?’ and then the answer would be ‘yes.’

In most cases, depending on who the target consumer group is, we’re still up against the obstacle of financing. Even with that $40- or $50,000 price discount, it wasn’t as powerful as us taking this same amount of money or a portion of that money and getting with our lending partners, and being really aggressive and buying down the rates.

So we spent the last five months of last year in those places where they were payment sensitive showing customers how to use our money to buy down their rates, and then doing whatever other things we needed to do to make the deal still viable for them.

So our margins were compromised greatly. In fact in some cases, they were squeezed so much that you wouldn’t have structured the business, nor taken the land deal, nor taken on those costs. But we anticipated the costs in the supply chain coming down and we wanted to keep the lights on and keep the trades coming. Then lumber did drop fast. Other costs are a little bit slower moving.

That was the way that the smartest builders who we work with have been navigating that downturn in the back half of last year.

Holding Onto Backlog Buyers: 2022 Vs. 2009

Early on, we decided that we were going to keep our incentives private so that we didn’t drive a whole new group of backlog in with demands for price reductions. But certainly, there were demands and concerns that we had to pacify. One of the policies we put in place early is that before any customer would be allowed to cancel with paperwork, we would bring our director in. So we had sales management coming in with the salesperson and we were giving those sales managers tools to keep someone in backlog at their discretion if that person was going to cancel.

It might sound like, 'If I could do this for you, would you be willing to go ahead and close on your home?' And there were a lot of 'if I could, would you …?' scenarios that we were running to keep backlog closing. In most cases, what that customer needed is more acceptable than the idea of canceling and you're having to remarket and find a buyer at a new land basis.

When I was trying to manage cancellations back in 2007, 08, and 09, I had no emotion to appeal to because most of the cancellations I was dealing with were pure math. They were being bought on speculation.

Here you did have real buyers attached to the homes and there is real emotion.

One thing I learned in that last go-round in 2008-09, looking back to 2005-06, I wish that I had treated my waiting list differently. And this time we did that. I’m proud of New Home Star being proactive with our builder partners in saying to them, many, many months before June 2022 happened, we were telling our builder partners to raise earnest money deposits and use that as one measure to get a higher quality buyer out of a reservation list rather than taking them in chronological order according to who had come in first.

We were also more intentional about sending out contingency removal letters and letting people know – before interest rates started heading upward – that their contingency period had passed and their earnest money was going ‘hard.’ If you said that to someone in March of 2022, they’d say, ‘no problem, I’m so happy I got one!’ But if I sent one to someone in June of 2022, just three months later, they would say, ‘no, no, no, I want out!’ Our proactivity with regard to deposits and those letters that made those deposits go ‘hard,’ served us really well in the softening that we saw.

The Pace Vs. Price Dilemma

Knowing where we are in the market cycle right now, I’d be willing to come in and capture some pace before I’d try to work on maximizing price and grow it incrementally to block in my backlog. We're not feeling super confident about how the Fed will navigate its funds rate policy over the coming 12 to 18 months. None of us are so sure about it.

It’s obvious to say that those first-time homebuyers that were knocked out of the market in June when prices jumped up are the most payment sensitive. When I have payment-sensitive homebuyers I am probably going to build enough margin my sales price that I can offer a lot of assistance on rate buy-down and other financial incentives that might make the purchase more approachable for them.

Then when I’m thinking about the next level up where it’s first move up, well then what I’ve got on my mind, ‘What is my feeder pool? Where are my buyers likely coming from?’ ‘What’s the resale market in the markets where my buyer’s coming from?’ ‘How does that affect my pricing and what changes if any do I expect to occur in this migration of buyers into the state?’

You really need intelligent decision making around a pricing strategy of every community. You ideally have a group of experienced people who also have good exposure to other things.

One of the things New Home Star does extremely well being in 30-plus markets – we have fantastic exposure – and when someone’s making these decisions at the local level, they have immediate access to national exposure where we’re looking at things at this level of depth.

It gives our local builder partners a great advantage when they’ve got someone sitting there who can access information from so many different markets and hears national trends every week on our calls.

Sales As A Core Business Competency

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. We don’t think that it’s an intuitive process.

Then you have a builder who is typically needing to go in and lock up large commitments of land and then desiring to build a limited number of floorplans and have restrictions even then about what you can change to it for their own operational needs and to drive some operational efficiency.

New Home Star finds ourselves right in between those two forces where you have demand that wants whatever they want wherever they want it and their way … And, they’d like to find it easily and finance it efficiently.

They you have supply that right now is constituted in the way the lot supply comes to market and the way that builders have operational priorities and preferences.

The strategy and the intelligence of New Home Star is in between those two, looking for ways to be more efficient. Most of the time right now, It manifests in us recruiting sales people to work on our payroll, but in fact, dedicated to a builder. This way, it looks and feels just like an in-house sales team. However, it gives the builder the advantage of having a national sales organization that focuses just on one thing, doing that part of their business better than they would do it on their own.

So much of our thinking – our high-level thinking – of where things are going still has to come down to brass tacks of – right now – how the industry is still mostly conducting its transaction between supply and demand by way of that traditional sales conduit.

What's Next As Sales Migrates Up Strategy's Value Chain?

We’re migrating the role from a tactical level to a strategic core competence. And 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.

We are already sitting in a spot operationally where – having met with a bunch of the big publics and looking everywhere we can look, we think that New Home Star has proven already that it has the strongest operational sales enablement platform in the industry. It’s been said to us by some of the biggest publics. They’ve said, 'there’s nothing like this in the industry.

When I say 'this,' we describe sales enablement in a way that it includes the sales person running marketing from their seat, and building a business plan for the community from their seat, and managing their CRM, and in some cases projecting margin and suggesting incentives. Inside of that technology the person has the ability to do what a sales agent typically wouldn’t have the skillset to do that we have wizards that help and we have consultants who help and we have managers that help. From there, we’re growing outward. My aspiration and design plan is to bring that through chains and links all the way back to what someday the consumer and a household will interact with, and looking for that connection.

You start to see all of these aspects of intelligent design coming from the perspective of ‘who is the target consumer?’ Now, isn’t every agent doing that? Practically, you would say, ‘no way.’

They don’t have the support to do it. They don’t have the training to do it. The average sales agent in our industry doesn’t have the bandwidth naturally, and it isn’t getting developed anywhere.

So, in light of what we understand about sales agents, we’ve taken technology and made it so that a typical sales agent can arrive at ‘this is my target consumer’ and now we use linkages inside of our system to allow them to say, ‘so as a result, I’m going to offer them this financing, this incentive, I’m going to pull back these options, I’m going to do these marketing initiatives.’

That’s what we’ve achieved. We're early on the curve still."