Leadership

A Price-To-Market Chapter Begins To Reset The Back Half Of 2022

Just the way builders revolutionized a tech-enabled, friction-freer homebuyer experience in Spring 2020, they now face the need to transform their product development and build-cycle for a higher-interest rate new normal.

Leadership

A Price-To-Market Chapter Begins To Reset The Back Half Of 2022

Just the way builders revolutionized a tech-enabled, friction-freer homebuyer experience in Spring 2020, they now face the need to transform their product development and build-cycle for a higher-interest rate new normal.

June 30th, 2022
A Price-To-Market Chapter Begins To Reset The Back Half Of 2022
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Hope, we hear so often in this business, is not a strategy. Just as true, homebuilding team leaders and their partners would say, nor is worry.

The back half of 2022 is not the one the wisest, most canny people in most organizations' budget planning sessions -- beginning at the end of last Summer and concluding in late Fall – would have had in mind as they foresaw the business, nor could have reasonably forecast.

Here's a few snippets [providing free links where possible] of what likely never crossed the minds of those putting together forecast models and budgets for 2022 in Q3 2021.

Financial Times:

US stocks have shed about $9tn this year as the Federal Reserve's attempt to rein in runaway inflation and mounting concerns over global growth sent investors dashing away from the world's biggest equities market.'

Wall Street Journal

Now, investors seem to be in agreement about only one thing: More volatility is ahead. That is because central banks from the U.S. to India and New Zealand plan to keep raising interest rates to try to rein in inflation. The moves will likely slow down growth, potentially tipping economies into recession and generating further tumult across markets.
“That’s the biggest risk right now—inflation and the Fed,” said Katie Nixon, chief investment officer for Northern Trust Wealth Management.

Harvard Business Review

As the business environment adjusts to higher inflation and less abundant capital, companies need to stop prioritizing growth above all else while recognizing that innovation remains essential. They will need better thought-through strategies that pay attention to costs as well as necessary changes to technologies and business models."

Or you choose the source. And these convulsions don't even speak to the thrashing consumer households are getting on the cost-of-living and cost-of-borrowing fronts. Three matters cascade down through this inflection point that are hard to argue.

  • A V for Variance now occupies most homebuilding business, operations, and financial plans – as well as those firms whose revenues build largely on new home construction and real estate. This V carries through not just the next six months of 2022, but well into three-year forecasts. That V is non-ambiguous. It hits volume, it hits revenue, and it hits margins.
  • A different but related V for Variance now occupies the financial means, outlook, and options for millions upon millions of households, now no longer able to partake of the punchbowl of readily attainable, low-cost borrowings as a household-level business plan. This V, too, is non-ambiguous. Higher mortgage costs, higher cost-of-living expenses, and lower savings capability, etc. will impact housing preferences and behavior.
  • If neither hope nor worry amount to strategies, then homebuilding enterprises large and small have little other choice now than to set about a putting together action plans that take hope and worry out of the leadership equation.

1. To level-set projections and de-risk forward investments with a dramatically pitched and fluid new set of business KPI outcome drivers, and,

2. To re-run the numbers on customer household prospects without the happy-talk  accompanying assumptions of a tight labor market, employee leverage on income, free-reign on who works where and when, and clear sailing on job-growth, engagement, and career-advancement.

Remember worst-case business scenarios circa '07 or '08? They were, if you don't remember, a reversal of 20% or so from '05 and '06 peaks in volume. We're not saying what happened in '06 and '07 and '08 and '09 will occur. We're saying that the capacity to recognize exactly which and how many assumptions had gone cuckoo was impaired.

Experienced homebuilding operators by and large have girded themselves to take on heavier weather, and have reinforced margins to allow for some give-back on price points and pace. They've taken down debt levels, re-termed their own loans farther out and at lower cost; they've rebalanced owned- vs. controlled access to lots, and disciplined operations to produce strong cash flow with historically deep order backlogs.

All in, it's dashboard you'd expect of a professionalized business community of what's ahead that could hardly be more solid and assuring.

At the same time, a new price-to-market chapter has opened in vanguard sub-markets and markets.

As flashes of weakness, time-for-sale on the market, a nagging pick-up in cancelation rates, push-back on prices, demand for mortgage rate locks, and signs – in the community next door or down the way – of even more aggressive incentives and concessions, free options and upgrades, out-and-out discounts, etc., feeling is that negative momentum is building.

While all real estate is hyper local in the best of times, the most difficult of times can level markets – all of them for a period, at least – into a single big, eerily quiet housing trough. A mentality, an Animal Spirits collective behavioral trend takes hold.

Price-to-market skills, deftness, timing – all intended to recalibrate and gain visible management control of price and pace – are tactical tools builders all know well and draw on as a First Response to softening conditions.

They will go some distance as an alert system for businesses to take further measures – difficult ones like reductions in force, land write-downs or walk-aways, and other portfolio choices to secure the ongoing health and value-making potential of the business.

What they don't do is to re-engage and reignite households that would and could be customers if and when the widening gap between payment power and cost to own gets narrowed.

The yawning distances – for a household faced with making a housing preference decision in a no-more-easy-money era – between the outlay and monthly payments for a new home versus, say a single-family rental, or an apartment, or an existing home – have laid out the strategic plotline here.

That plotline means new product, researched, designed, developed, value engineered, land-planned, and – in no uncertain terms – professionally marketed and sold – with a no-more-easy-money consumer household balance sheet and priorities list in mind.

That true new normal lower square-footage product and higher-density land-plan and higher-velocity construction  line should likely have dawned on everybody as obvious the moment COVID-19 originally shook and shocked and upended things in February/March 2020.

Instead, what happened happened. Now what will happen will happen. The race now is not to cut costs faster than your revenue declines. That race is rarely one you can win. The race now is to a new product produced in such a way that it can win over a household – now, and for the next few years – whose hand has been forced on the financial front.

If 2020 – and the pandemic crisis – was the year builders and their partners shot forward 8 years or more to put technology to work to eliminate friction from the buyer's purchase journey, 2022 needs to start the 12-month step-change – a decade of advances in a 12-month period -- in putting technology to work to modernize the build-cycle.

We don't believe the homebuying market is going to stabilize at "normal." It's going to take a true product, land-plan, and process strategy to reignite Millennial momentum, because to most of them 6% or higher interest rates are not normal, no matter what history says.

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ABOUT THE AUTHOR

John McManus

John McManus

President and Founder

John McManus, founder and president of The Builder’s Daily, is an award-winning editorial, programming, and digital content strategist. TBD's purpose is a community capable of constant improvement.

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ABOUT THE AUTHOR

John McManus

John McManus

President and Founder

John McManus, founder and president of The Builder’s Daily, is an award-winning editorial, programming, and digital content strategist. TBD's purpose is a community capable of constant improvement.

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