How to Navigate Today's Market “Storm” And Profit As The Tide Turns

The U.S. housing market has seen wild swings over the past two years.?

The builders we work with are feeling the pinch of higher mortgage rates, construction costs, and their perceived shift (though not actual, if we look at current inventory stat’s) from a seller's market to one where buyers are more often in the driver’s seat.?

Having lived and profited through several of these cycles, I believe the most important thing you can do to navigate your company to consistent and predictable profitability in the months and years ahead is to…

“Keep Calm And Build On”

Now is NOT the time to panic.? In fact, if we simply examine the facts, you’ll see there’s plenty of reason for optimism. The current slowdown in sales and profit is a temporary phase. The tide will turn, as it always does, and at a certain point, home buyers will come stampeding back into the market.?

The question is, will you be ready?

Let’s take a look at how to navigate today's “interesting” conditions and position your company for even greater profitability when the market bounces back.

Get Your Bearings

During 2021, builders moved from pre-sales to speculative building because of escalating construction costs. Today, with the market transitioning from a strong? seller’s market to a more normalized market, inventories could spike. We see builders beginning to pull back on starts to control expanding inventories.?

The need for housing remains strong, but housing demand has three components: need, desire, and ability. The rapid increase of interest rates during 2022 has affected homebuyers’ desire and ability to purchase a new home.?

Once inflation is tamed and mortgage interest rates stabilize between 4% and 5%, we see housing demand returning quickly. In fact, we see evidence of that now, as rates have dropped and stabilized somewhat during the first quarter of 2023.

If you’ve been in this industry for a decade or two, you know the current slowdown isn’t some new and strange phenomenon. The Great Recession and the weak recovery during the last decade are responsible for creating an estimated housing shortage of around 3.5 million homes at the start of the 2020’s.?

Boomers and Millennials are on the move and these two largest demographic groups want to change where and how they live.?

Baby Boomers who postponed their relocation during the last decade are the retiring empty nesters entering their last stage of housing demand.?

And Millennials are finally having families and embracing a suburban, single-family lifestyle. In addition, the front end of Generation Z (Zoomers) is entering the rental housing market.?

Big Risk In Short-Term Thinking

Reducing inventory and slowing production might seem like a prudent strategy. However, this approach could be counterproductive in the long run. By reducing inventory and slowing production, your company could miss out on significant sales opportunities once the market cycle turns up again, as it always does.

Pent-up Demand

Once mortgage interest rates stabilize, homebuyers will be back — and quite possibly in droves. When that happens, you want to be ready. By maintaining inventory and production levels, you'll be positioned to capitalize on the renewed demand.

When Competition Heats Up

I don’t need to tell you how competitive it is out there. Naturally, everyone’s looking for ways to gain an edge. And when a slowdown occurs, some builders will cut corners. However, doing so puts their reputation at risk and is the kind of myopia that puts companies out of business as tougher, smarter competitors live on to enjoy the good times ahead.

Instead of cutting corners, here are seven ways the strong (including you!) will survive and thrive in the months and years ahead:

1. Manage Land Inventory

Get rid of excess land inventory you don’t need and won't use. Holding onto land for too long is a burden on your cash flow. One way to handle land acquisitions during the inevitable market recovery is to create a land holding group with outside investors.

2. Reduce Direct Costs

Reducing direct construction costs can be done in many ways.?

Re-evaluate your house plans and see where you can reduce square footage. Reducing square footage not only reduces construction costs but also makes your homes more affordable for buyers.?

Take a look at your specifications and features. Most homes have been “overloaded” during the last several years.?

You can also improve your purchasing processes, procedures, and negotiating strategies to reduce construction costs.?

Finally, reduce construction waste by being efficient in managing your inventory — just be careful not to cut back so far you’re not ready for the day when demand picks up again.

3. Make Trade Partners Part of the Team

Your trade partners are valuable assets to your business. Working together to improve construction efficiencies and reduce costs can save you money and time. Make sure that your trade partners are on board with your business plan and willing to work with you to help you achieve your goals.

4. Manage Overhead

To maintain a proper balance in relation to sales volume, consider reducing staff as needed. It can be a hard decision to make, but sometimes it's necessary to ensure your business remains profitable. You may also want to consider outsourcing tasks that can be done more efficiently by someone else.

5. Reduce Pre-Construction and Construction Cycle Times

Developing reasonable schedules for pre-construction and construction cycles and sticking to them is essential to reducing costs and maintaining profitability. Make sure that all parties involved in the process understand the importance of sticking to the schedule.

6. Design New Product

Creating new product lines that are more efficient, smaller, and less expensive to build is another way to reduce costs and stay competitive. This is an excellent opportunity to assess what your customers want and adjust your product offerings to meet their needs.

7. Design Product for the New Reality

Let’s face it: Higher interest rates and the resulting higher monthly mortgage payments mean buyers simply can’t afford as much house as they could last year. To stay competitive, design homes that are more affordable for buyers in today's market. Just remember, discounting sales prices on your old product is a 100% loss of profit.

Now Survive And Thrive!

Stormy seas ahead? Get out your map and compass!

A solid business plan based on sound long-term strategic thinking is key to navigating wild market swings and making sure you’re ready for the next market cycle when demand picks up again.?

And don’t forget — SalesSolveEverything is here to help! For a free strategic planning conversation, give us a call at (888) 738-4020 or visit SalesSolveEverything.com for a wealth of resources to help your company survive and thrive, no matter which phase of the market we’re in.