Marketing & Sales

Incentives Field Guide: Speed, Fast Feedback, And A MicroStrategy

A study fielded by New Home Star on incentives initiatives across 250 builders in more than 25 markets points up what's working, why, and how to sustain efficacy in a new world of motion and volatility.

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New Home Star

Together with

Marketing & Sales

Incentives Field Guide: Speed, Fast Feedback, And A MicroStrategy

A study fielded by New Home Star on incentives initiatives across 250 builders in more than 25 markets points up what's working, why, and how to sustain efficacy in a new world of motion and volatility.

Together with
December 22nd, 2022
Incentives Field Guide: Speed, Fast Feedback, And A MicroStrategy
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In this shocked and stressed market, homebuilding principals and operators – wizards at logistics, multi-streamed project management, motivation, marketing and sales development, negotiation, land acquisition, etc. – will survive or perish on two technical axes of expertise: Differential Calculus and Psychology.

One proficiency – over-simplistically -- sizes what goes out in costs. The other skill impacts what may come in in revenue.

Resetting prices, recalibrating incentives, terms on costs (i.e. timber!, lumber), overhead expense, cost of sales, volume of work in process, start-to-completion dates, and finance repayment schedules, etc. – on the fly, in real time, as external variables like interest rates, consumer metrics, and household formations heave and pivot – all to 1. cause sales, and 2. make money takes epic skills in differential calculus, which helps recognize rates of change in motion, velocity, space, time, and money.

Getting people who want to, need to, ought to, or are able to buy a new home to do so now requires intuitive or learned proficiency in applied psychology. What better way to help people climb over the big barriers in their minds about now being a good or a bad time to make a purchase?

Be good at applying those two basic skills to a customer base, a footprint, a capital stack, a value-stream of partners, and team members, and chances are, a way through the shock and stress will unfurl in the weeks and months ahead. Everybody – national publics, multiregional private builders, single-state, and single-market homebuilders – is doing this, either at the enterprise or the midsized headquarters, or the kitchen-table-pickup truck level.  

What goes out (expense) and what comes in (revenue) are in motion in a backdrop of a household cost-of-living convulsion.

Elasticity characterized how far consumers would go to pay for new homes before the price decoupled from payment power; now, elasticity will likely measure how far companies can lower both their selling prices and their business and production costs until they hit a tolerance limit.

The point is that the biggest risk to homebuilders right now is a failure to act decisively enough to mark the [profitable] price to market. Failure to do so will dredge up sorry reminders of instance from 12 to 14 years ago, like the following.

We had to sell three homes that month."

It was the principal owner and president of one of the mid-Atlantic's erstwhile fastest-growing regional homebuilding firms. It was a devastating account, a fateful moment in the arc of history – in 2009-10 – for a company that seemed bound to ascend unimpeded. Until that month.

We sold just one. That was it. Done."

The firm's lenders called in the debt, forcing a firm that had been exploding the prior 36 months in growth and demand – and the need for a deeper land pipeline – into insolvency. It came down to two homes not sold during a do-or-die 30-day stretch. The story, as wrenching as it was to hear from this crestfallen private homebuilding juggernaut's leader, was far too common. Firms fell by the scores, the hundreds. It was a rout.

And in so many cases, the math worked the same way, over and over and over. Pace languishes. Prices nosedive. The internal rates of return on the lots – modeled and acquired when prices were hopping one or two years earlier – begin to buckle, and the banks' covenants do their job. According to the strategic leader of one of America's top privately-held production homebuilders, more than one of every two of them met the same fate.

It must be part of why economics – or, at least, housing economics -- traffics as "the dismal science." It not only defies being boxed into the formulas of simple supply and demand. It also wreaks havoc – financial, professional, often personal – on those who play in its sandbox believing they're up on all the game's rules and they've figured out how to win it everytime.

Dismal – when you've got three homes to sell and a company's solvency along with a personal fortune riding on doing that – means the odds stack pretty damned high against you. That's how the dismal science works down in the dirt of real-world homebuilding and residential real estate.

What's different this time – we keep hearing and it's true – is better balance sheets, more solid loans, less land exposure, far more equity, a less daunting inventory overhang, a better jobs and wages backdrop (fingers-crossed), and a generational "underbuild" vis a vis population, household, jobs, and family formation trends.

What's no different – we've read over and over again and it's true – is that nearly everybody can be wrong about what's next. No, households aren't piling up debt and using homes as an ATM as they did back then. This doesn't mean, necessarily, the center of all of our assumptions about supply and demand will hold.

Clearly, what we're seeing in our research and hearing from our teams in many of the U.S. most-active new home construction markets, is the need to understand customers' changing wants and needs to be able to match the moving parts of the business with the raw data of incentivizing sales," says Oren Jacobson, Lead Market Analyst for New Home Star.

In October, New Home Star scrubbed incentives and promotions programs from 200 homebuilders in 25 markets to understand the toolset of incentives they're triggering in efforts to close backlogged homes, move inventory, and drive traffic and conversions for new orders.

Here's the data set New Home Star put together:

  • Primary types of incentives by price range
  • Incentives value vs. ASP by price range – Spec/Inventory
  • Incentive value vs. ASP by price range – Build to order
  • Incentives ranked by impact

A few of the high-level insights that emerged – [remember, this was in October 2022]

  • Interest rate buydowns are far more common on inventory than TBB [to-be-built] homes; likely a reflection of the challenge/cost of buying a long-term lock + reduced rate
  • Inventory appears to “require” rate buydowns and discounts
  • While it’s a small sample size, price discounts are more common than interest rate buydowns on inventory below $300,000 which is likely a reflection of a major affordability issue for entry level buyers
  • Majority of “largest discounts” for inventory under $300,000 (community entry point) exceeds 10% and a third near 20%
  • While the most common value of the “largest discounts’ for inventory is under $20,000, more than 70% of reported incentive values exceed that amount
  • Price discounts on TBB homes were only reported 32% of the time
  • However, free upgrades were reported about half the time (likely to add value to the customer while protecting margins)
  • Without question, finance-based incentives are considered by respondents as the most impactful incentives in the market
  • The most cited example was a 2/1 buydown
The overriding insight – from an intelligence-gathering standpoint – that came through in the data is the critical need and alignment around the speed with which the builders sales teams are getting the data, the constancy of the feedback loops that show the effectiveness and impact of the incentive initiatives, and the micro-specific strategies and tactics that come out of each market and submarket's activity," says Jacobson. "The broader conditions of the market are one thing. But, it's the microstrategy you get from fast, actionable data on who's doing what and what's working that can turn into the kinds of traffic and conversion impacts builders want right now."

Had that homebuilding firm principal owner and president we referred to above accessed speed, a strong customer feedback-loop on efficacy, and a micro-strategy for what it would take to move those three homes that month 13 or 14 years ago, moving those three home sales that month may have been plausible.

We'll see how it works this time around.

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.

MORE IN Marketing & Sales

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