Leadership

Incentives: They're Not All Only About Price, ... But About Value Too

The power of incentives to trigger sales can work not just for would-be home shoppers who've been priced out, but for discretionary buyers who're psyched out of partaking as prices show weakness.

Leadership

Incentives: They're Not All Only About Price, ... But About Value Too

The power of incentives to trigger sales can work not just for would-be home shoppers who've been priced out, but for discretionary buyers who're psyched out of partaking as prices show weakness.

September 28th, 2022
Incentives: They're Not All Only About Price, ... But About Value Too
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Between spiralling home mortgage rates and cost of living challenges on the one hand and spreading home price capitulation on the other, more people who dream of buying a new home can't, and more people with the wherewithal to do so won't.

Millions are priced out. Hundreds of thousands are psyched out. Who does that leave, who wakes up this morning or tomorrow morning and decides to buy a new home right now?

In that context, Collaborative Fund sage Morgan Housel's musings here about the force incentives exert in our lives strike close to home.

It's something for him to write this of incentives ...

The Most Powerful Force In The World"

As I tried to wrap my brain around what Housel was getting at, my mind jolted to an instance that illustrates a recent case in point, the arrival of Covid-19 in early 2020, and the spectre of devastation it signaled for life as we knew it.

It was as if family formation-aged collective unconscious – particularly among biological-clock-sensitive Millennial adults with good jobs and sufficient career tenure and performance track-records to have gained some leverage at work – hit a tripwire.

Homes, apartments, etc. they occupied then – spending day-and-night shelter-at-home time cooped up with the feeling of nowhere else to go – felt suddenly claustrophobic, ill-suited for the job of work-play-eat-rest-etc., and vulnerable to contagion of one sort or other.

They wanted out. They wanted new and unlived in. They wanted now

A deep-felt, technology-enabled, monetary-policy-supercharged collective "homing" instinct released itself, a tsunami powered by the sway of the incentive to live in and own in communities and neighborhoods new homebuilders were putting on the map.

Housel's words describe the pandemic new home boom phenomenon to a tee.

No matter how much information and context you have, nothing is more persuasive than what you desperately want or need to be true. And as Daniel Kahneman once wrote, “It is easier to recognize other people’s mistakes than our own.” What makes incentives powerful is not just how they influence other people’s decisions, but how blind we can be to how they impact our own.
A big thing here is recognizing that people are not calculators; they are storytellers. There’s too much information and too many blind spots for people to calculate exactly how the world works. Stories are the only realistic solution, simplifying complex problems into a few simple sentences. And the best story always wins – not the best idea or the right idea, but just whatever sounds the best and gets people nodding their head the most. Ben Franklin once wrote, “If you are to persuade, appeal to interest and not to reason.” Incentives fuel stories that justify people’s actions and beliefs, offering comfort even when they’re doing things they know are wrong and believe things they know aren’t true.

When people began "homing" as the destructive impacts and implications of Covid pronounced themselves and upended lives and livelihoods, a job that homebuilders and masterplan community placemakers and new neighborhood developers were doing got people "nodding their head," feeling the feeling of wanting that. The physical reality of the story that got so many people nodding their heads – so many Millennials who'd bided their time in their household and family formation lifecycle -- was the new home in the new home community homebuilders were making real.

Safety. Sanctuary. Health. Well-being. Comfort. Peace of mind. Refuge. Quiet. Privacy. Space. Security. Balance.

A fast-spreading health crisis stimulated and catalyzed the power of these incentives like the flip of a switch.

Their value as motivators over the past 24 to 30 months may never be calculable.

Their role as a root cause may be hidden in plain sight in data like this, from the Federal Reserve Bank of San Francisco, which draws cause and effect conclusions and insights from the rise in remote work and housing demand, resulting in home price inflation.

Source: Federal Reserve Bank of San Francisco
The transition to remote work because of the COVID-19 pandemic has been a key driver of the recent surge in housing prices. Using variation in how attractive cities are for remote work, Mondragon and Wieland (2022) demonstrate that the transition to remote work was directly responsible for 15 percentage points of national housing price growth since November 2019. This suggests that the fundamentals of housing demand have changed, such that the persistence of remote work is likely to affect the future path of real estate prices and inflation."

Certainly, it's the case that correlation between the remote work trend and home price increase trends is very strong. But this study may misstate the importance of remote work to account for the strong demand in places people tended to migrate to. Instead, the root cause may have been the 'homing' instinct – with a full array of basic incentives – as the primary driver, with remote work technologies empowering the moves and the surge in demand.

All of this is to say that while most higher volume production homebuilders are ruthlessly and feverishly focused on efforts to bend costs and prices back to where some of those who've been priced out of new homeownership can get back in the game, some builders may find that an alternative tactical focus will do more for their business.

A gem, apropos of such a strategy, is right there smack in the concluding lines of Morgan Housel's piece.

It’s easy to underestimate how much good people can do, how talented they can become, and what they can accomplish when you view them in an environment where they haven’t yet found their proper positive incentives."

Homebuilders that can appreciate prospective discretionary buyers – the ones not priced-out but are psychologically gun-shy about making a purchase when prices may be falling – "in an environment where they haven't yet found their proper positive incentives" have the opportunity to help them.

It may be a story – their story – that starts in late 2022 or some time in 2023, and clearly conveys how a dozen timeless incentives can become the true reality of a life they want for themselves.

  • Safety.
  • Sanctuary.
  • Health.
  • Well-being.
  • Comfort.
  • Peace of mind.
  • Refuge.
  • Quiet.
  • Privacy.
  • Space.
  • Security.
  • Balance.

Whether it's a housing bust or not, there's never not a time a homebuilder, community developer, etc. can not serve a role in enabling a prospective buyer to be the customer they long to be.

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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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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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