Do Higher Interest Rates mean Lower New Home Sales?
Do Higher Interest Rates mean Lower New Home Sales?
5 Sales Tactics for Success as Prices and Rates Increase
The Wall Street Journal recently ran a page-one story entitled “Era of Ultracheap Mortgages Ends as Rates Hit a 7-Year High”. The average rate for a 30-year fixed-rate mortgage rose to 4.61%, the highest rate in seven years and a striking increase over the low rate of 3.31% that home shoppers enjoyed in 2012. Couple that with the steady increase in materials and trade pricing we’ve endured over the last few years and it’s starting to look like even the “Go Go” homebuilding in some markets might be tapping the brakes a bit.
High demand for new homes and very attractive interest rates allowed builders to deal with rising material costs by simply raising prices, a practice that seemed to have little or no effect on sales. But over the last 12 months, as interest rates have started creeping up, and getting some national press headlines, builders have had to introduce more creative ways to keep the sales bell ringing in their Monday morning meetings. First, new home incentives and discounts for both real estate agents and home shoppers, which have been held in check in recent years, have started to show up on the new home landscape. Agent commissions of 5% and 6% are getting more common and certain inventory homes may also include a hefty bonus to the selling agent (BTSA). Sales during softening markets are critical and builders are certainly willing to pay for them! Home shoppers are also benefiting from builder anxiety as they consider buying inventory homes that include discounts in the tens of thousands of dollars off list price. Still, other builders have even modified the compensation structure for their sales teams to accelerate inventory home sales and protect the bottom line. Now, as higher mortgages rates start to put additional pressure on both shoppers and builders, how is a new home salesperson supposed to successfully sell homes as the market tightens?
First, it’s important to look at what increasing material prices really do to the new home shopper’s mindset. In addition to increasing the overall cost of a new construction home, pre-owned homes, or those built with materials purchased years ago when, say, lumber wasn’t so expensive, become more attractive to shoppers. And since there have been so many homes built in the last 7 years, many of these pre-owned homes are very nearly new and often located in communities where there are also new homes available. Many of these homes will be less expensive than the new homes in their preferred area.
Strong demand will absorb price hikes for a while, but the new home market always shifts toward equilibrium to accommodate new prices and may even generate a momentary increase in sales in some price points as buyers rush to purchase homes before they get more expensive, however once these buyers have been cleared from the market, those that remain are forced “down a notch” in the price point of the home they can afford. A home that was priced at $250,000 a few years ago may now be listed at $325,000. One comforting note is that the rises in pricing generally occur gradually over several years and most home shoppers aren’t in the market long enough to actually notice as yesterday’s $400,000 home becomes today’s $550,000 home, but many are easily in the market long enough to see hikes of $10,000 to $15,000 and this is plenty to get them concerned. Those of us in the industry are taking note of both the long and short-term impact materials have on prices. In Texas, we’ve seen many markets continue to report strong unit sales numbers, but instead of those numbers representing homes across all price points, there’s been extreme increase in sales of homes priced at the bottom of the pricing spectrum (below $275,000) and a loss or stagnation of unit sales at the mid-upper level price points. Builders with a well-stratified product line up can weather these pricing storms, but those that are locked into a specific upper mid-level price point are white-knuckling out the storm. They cannot, either because of brand identity or land positions, sell homes at the attractive lower price points, so they’re at the mercy of the market. This is one of the reasons that at first glance, a market can appear healthy, but peeling back a few data layers will reveal that growing or steady unit sales numbers may hide some dangers for certain builders. Escalating materials costs and home prices can leave builders with higher priced homes exposed and vulnerable.
On the other hand, rising interest rates tend to leave buyers out in the cold. Increased interest rates directly impact the price of the home a buyer can afford. Buyers who once qualified for a payment sufficient to purchase a $350,000 home may now only be able to get a $315,00 home for the same monthly payment. Builders will quickly tell you that a $475,000 home buyer from a few years ago is today’s $395,000 buyer. Higher rates also have a significant impact on first-time homebuyers who are looking at homes in the lower part of the pricing spectrum. Rising materials and increased interest rates may put even the least expensive newly built homes out of their price point. Many of these first-time home buyers will start to look at a pre-owned product or stay in their apartment.
Selling in this environment is tricky, but the good sales teams will survive and continue to outperform those that are accustomed to floating on the happy clouds of easy financing and high demand. Challenging times have always separated the professionals from the order-takers in this business, and this go-round will be no different. Here are five things to keep in mind as you sell during this interesting time of rising prices, high material cost, and increasing interest rates.
First, change your Mindset. It’s no surprise that attitude is critical for new home salespeople during times where rates and prices increase. Shoppers who enter your model have only been new home shopping for 6 or so months. They haven’t seen 6 years of rate and material hikes as many of us have and they’re still excited about the new home purchase. They’re only comparing today’s prices to those prices they saw a few months ago and want to get the best deal they can. Marginal qualifiers will drop out of the buyer population, so those that remain are serious. The people who walk into your model during these times are buyers, not shoppers. They still want to buy a home and have not been scared away from the market by alarming headlines. The first few months of rate hikes are always the best, and you’ll have a lot of help to get the buyer to purchase. This is the time when people that are ready to buy know they need to make a decision in the next 30 days and the only question is whether they’re going to buy a home from you or someone else. Their agent and mortgage company are all unwittingly working on your behalf to get them to buy before they can no longer qualify for a home at a particular price point. Your goal is to create a short-term relationship with these people based on value and urgency. Incentives, discounts and available inventory should help you move homes to nervous buyers in the next 30 days. You probably have a 20-30 day window to get the deal; after that, they may no longer be able to afford homes in your community, or they’ll have to do without wood floors, granite or a pool. Hard closes are appropriate for these buyers. Ask for the order on their first visit, find out what it would take to get the buyer to buy this home today. Long-term relationships are based on trust and connection, but short-term ones, like these, are based on value, ability, and urgency. Help them understand that they need to buy before the home and their mortgage opportunity window evaporates with the next rate hike and they’re looking at a lower-priced home to accommodate their budgeted monthly payment.
Second, change your Game. If the buyer is looking at your new home, they’re looking at other new homes around you. Know your competition’s price, product, and presentation. Create a phantom Yahoo or Gmail account and secret shop your competition online. Find out what they’re saying and selling- and then outperform them. This is also the easiest way to know their inventory, their unique selling proposition, their price and all their discounts and promotions. You can’t beat the competition if you don’t know the competition. Work on your presentation until it is the absolute best that you can deliver. You will only get one chance with this buyer to get them to come back. Become the best new home sales person in your area. Be able to answer the question “Why are you better than the other guy” in a couple of short sentences. Practice it until you know it by rote and it comes naturally. Develop an effective elevator speech about the top three reasons why people buy your homes in this community; chances are these shoppers will buy for the same reasons. You don’t have to be the best new home salesperson in the city, but you’d better be the best one in your community and the surrounding area. Like the two gazelles that were looking at an approaching group of lions. One gazelle asked the other if he thought he could outrun all the approaching lions, to which the other gazelle replied, “I don’t have to outrun all the lions, I only have to outrun you.” Know your pitch and rehearse it until you don’t stumble when you deliver it. You may not get the deal the first time the shopper visits your model, but you could lose it if you don’t know your product. Win the battle of the “new home salesperson” in your area and you’ll win the battle for the shopper.
Third, create a clear, concise pitch on New Versus Used Homes. Understand that most used homes that your buyer is considering were probably built during the “new home boom” of the in the last eight years. Don’t assume they’re buying a home that was built 20 or 25 years ago and go into your new versus used pitch for a house that is ancient. Shoppers are now comparing new homes to “nearly new” homes and the distinctions between those two aren’t nearly as easy to explain as the “new vs used” pitches we were all giving a few years ago. Have a good pitch on “new versus used” for recently built homes. Also, a used home is a used home- even if your builder built the used home. You’ll also want to take some time to review the pre-owned homes in your neighborhood. Look them up on the local real estate sites and even visit them during an open house. Know your competition. And realize that the competition may not be the builder down the street, but the pre-owned homes in the area. Scout the used homes that are for sale in your area. Highlight your home’s smart technology (not available even a few years ago), new design (different use of space such as unique or additional rooms or outdoor living spaces), and, of course, how much longer your energy efficient appliances and systems will last as compared to those used in homes just a few years ago. Scout pre-owned homes in your area and make sure you let the shopper see and feel why your home is better than the pre-owned home for sale down the street.
Fourth, don’t underestimate “Newness”. Newness is still critical to buyers. Work words like new, first time, built for your family, fresh, custom, personal selection, unique, yours alone, only one and lifestyle into your presentation because they resonate with buyers. Newness is one thing that every new home has over every single other pre-owned home in the city. In the surveys that we give home shoppers, newness is top reason that buyers say that they bought a new home. Newness encompasses the feel and smell of the home, the neatly trimmed landscaping, customization, personalization, new community, new playgrounds, new appliances that have never been used to cook another family’s meals or wash another family’s dishes, new schools, churches or business that are planned for the area and the appealing fact that no one has ever, ever, ever lived in this home. Everyone likes to be first! People buy new homes because they like newness.
Fifth, execute Powerful, Time-Sensitive and Purposeful Follow-Up. Because many of these buyers will drop out of your price point in 30 days, every single bit of information you send them should deal with available homes, desirable lots, time-sensitive discounts or opportunities and homes that came back on the market because other buyers took too long or lost their opportunity. You should also let them know about homes or homesites that are no longer available. Let the marketing department handle the long-term nurturing; you need to establish an intense short-term relationship with the buyer that will either end in a sale in the next couple of weeks, or you’ll never see the buyer again. The very best value you can deliver a shopper that has already decided to buy is to get them information on houses you have available right now. Your emails should always contain a couple of pictures and links to videos of the available homes you have. Every time a home sells, let the prospects know that supply is dwindling. The purpose of every piece of information you deliver is to enhance this destination-driven short-term relationship and help them buy a home.
Selling homes in a tightening market is certainly different than selling during a period of growth. But steel sharpens steel and tight markets create sales superstars. Challenging times allow the best, most prepared salespeople to create distance between themselves and others in the industry. The playbook is a little different than selling them during a booming industry, but executing these plays effectively during the coming months will keep shoppers in your pipeline and money in your pocket.