By Charles C. Shinn Jr., PhD
Founder and President, Builder Partnerships
While the general economy is very strong with low unemployment, wage growth, expanding employment, and strong consumer spending, we are starting to see some sign of weakening in this 10th year of recovery. The housing sector of the economy began to soften in the early spring of 2018. The impact of deteriorating affordability with home price increases and higher mortgage interest rates is affecting both new and existing home sales. The last time mortgage interest rates caused the housing industry to stumble, it took about a year and a half for the industry to regain its footing.
Home sales for 2019 will be effectively flat compared to 2018. In this environment, you should bracket your 2019 budgets with alternate plans at 10 percent above and 10 percent below budget so you can react quickly to the current uncertainty.
Watch your spec inventories. Watch your cash; establish a minimum and get an operating line of credit. Control your land inventory; land causes bankruptcies and developers currently are offloading land.
Look at the customer’s monthly mortgage payments; try to keep them about where they were during the first half of 2018. Tools to achieve this include interest buy-downs, variable mortgage rates, and interest rate locks.
Discounting, which a number of public builders are already doing, has minimum impact on sales velocity and each dollar of discount is a dollar of lost profit. Tricks we have used in prior market slow-downs in the market to counter affordability issues include:
• Reduce your direct construction costs with efficient product design using value engineering.
• Reduce the size of your homes with more open floor plans. They are small, but live big.
• Reduce the standard specifications by eliminating or reducing features or reducing the grade of material.
• Reduce your sales price dollar for dollar from the cost savings, which increases your competitiveness, improves your affordability, and increases your rate of profitability since you didn’t reduce your margin.