Homebuilders: Facing the Reality of Persistent High Rates
It's important to recognize that, despite continued optimistic forecasts from the National Association of Realtors, interest rates are unlikely to decrease substantially later this year. With current mortgage rates hovering around 7% it continues to be a challenging market for buyers. Current economic indicators suggest potential challenges ahead, even if the news highlights a strong economy and stock market performance. The pool of buyers who can afford homes at current rates and prices is shrinking, and inventory is increasing. As of April, the St. Louis Federal Reserve reported 9.1 months of new home inventory supply, up from a recent low of 6.9 months in May 2023. For context, during the great financial crisis, new home inventory peaked at 12.2 months, whereas a healthy market typically has about six months of inventory.
Inventory levels are market-specific, so homebuilders should closely monitor their local conditions and manage their inventory accordingly. Creativity in moving inventory off the books is essential. At current rates, holding finished inventory can cost around $50 per day in carrying costs, which include utilities and interest carry, highlighting the financial impact of accumulating unsold homes. While reducing sale prices can negatively affect appraisal comps, consider non-price reduction incentives. Closing costs are a great way to help cash strapped buyers get closed in a home they might not necessarily think they can afford. Offering move-in-ready packages that include items like blinds, washer, dryer, and refrigerator can help sell homes without lowering their prices. Additionally, offering to cover some closing costs or adding value through incentives like free fence installation for immediate contracts can be effective. Yes, this will erode margins against forecasts, but would you rather be stuck with inventory you can’t sell or slightly reduced margins.
To ensure your team is on the same page and effectively addressing the current market challenges, consider discussing the following points:
Local Market Conditions: Regularly review local housing inventory levels and buyer demand to tailor your sales strategies effectively.
Creative Sales Incentives: Brainstorm potential non-price reduction incentives, such as move-in-ready packages and closing cost assistance, to attract buyers without negatively impacting appraisal comps.
Inventory Management Costs: Evaluate the carrying costs of unsold inventory and explore ways to reduce these expenses.
Buyer Affordability: Discuss the impact of current mortgage rates on buyer affordability and consider strategies to make homes more accessible, such as offering financial incentives or value-added packages.
Strategic Flexibility: Encourage a mindset of agility and adaptability within your team to quickly respond to market changes and opportunities.
In conclusion, navigating inventory management challenges requires a strategic approach tailored to the current market landscape. By closely monitoring local conditions and implementing creative sales strategies, homebuilders can mitigate risks and capitalize on opportunities in an ever-changing industry. Stay informed, stay agile, and stay ahead of the curve to thrive in today's competitive market environment.