4 TIPS TO HELP HOMEBUILDERS SUCCEED THROUGH SLOWER BUSINESS CYCLES

We all know homebuilding is a cyclical industry, which means, as a business owner, homebuilders must be prepared to work through the slower periods to be able to prosper when the industry is at its strongest.

The recent challenges for some builders have been clear. Midway through 2024, interest rates are still high, causing many potential buyers to postpone buying a home. Additionally, the results of the upcoming elections are uncertain, which can cause many to take a more cautionary approach to their finances. Thankfully, there is good news and good advice to help homebuilders weather uncertainty and even come through stronger on the other side.

The good news first: there will be an “other side”. While we may not be able to forecast what’s going to happen in 12 months – let alone 24 or 36 months – in America, our markets have always come back over the long term. As The Build Show host and professional builder Matt Risinger put it: “By buying today or being a builder, you’re betting that the overall American economy is going to do well over time, and everybody since World War II who has done that has won that bet.”

In a conversation with Paul Evans, Vice President of Millwork and Innovation at Builders FirstSource, Risinger also offers home builders sound advice for navigating economic uncertainty in the months ahead.

HOMEBUILDER TIP #1: INVEST IN YOUR BUSINESS STRATEGICALLY

Home construction projects take a long time to deliver a return on investment, especially if you invest in speculative projects or buy a lot of raw land. Risinger knows from experience; early on, he overextended himself personally and professionally and ended up with very expensive spec houses under construction that took much longer to sell than planned.

An unpredictable market is not the time to start those kinds of projects, or to take on additional debt if you can push pause. That includes near-term investments in growing your home-building business, like hiring additional staff or making equipment purchases.

“We need to have good contingencies in place. We need to have cash reserves in place. We need to be thinking a little bit cautiously when the forecast is cloudy,” Risinger says.

HOMEBUILDER TIP #3: EDUCATE POTENTIAL BUYERS

Interest rates are the most high-profile issue facing the industry, but instead of feeding the fire, be a part of the solution. Make sure your customers know there’s an abundance of brand-new homes available now.

Through selling new homes, builders might have options to help sales. Some builders are working with buyers in order to help them get into their homes. Evans says that if your buyers need additional help with financing, an option for some builders has been to buy down their loans by a couple of points to get your buyers in the door.

The current interest rates might seem scary, but reiterate to buyers that there’s no need to wait out the market if they see something they’re excited to buy. If interest rates go down, they can always refinance. If interest rates go up, they will be glad to have moved when they could. In the meantime, they can settle into a home they own. Homeowners in the 1980’s were paying interest rates often well over 10%, but as time went on, they were able to refinance their homes and take advantage of lower payments.

It’s important to remember – and remind our prospects – that interest rates have been this high before; people still bought, lived good lives and refinanced when the opportunity presented itself.

HOMEBUILDER TIP #4: BUILD AND SELL HOMES FOR THE LONG TERM

Make sure you talk with your buyers about how long they plan to stay in a home. They’ll approach their decisions differently, and they will ultimately be more protected if they can purchase for the long term now.

If you’re a builder who doesn’t yet own a home, Risinger suggests to go ahead and buy one. He uses himself as an example of not trying to play the market timing game. He bought a house in 2007 and immediately put about $150,000 into it just as the housing market crashed. He was underwater for a while, but since he stayed in the house, he sold it 15 years later and made a great profit – more than double what he put into it.

As homebuilders, we should build for the long term, and resist pressure from investors to meet short-term benchmarks in ways that will cost in the long run. Focus on building quality homes that protect your buyers over time, so they can live there comfortably and securely for years, as the economy and their families grow. Never cheapen the work you want to take pride in, work on which your reputation is founded.

It all comes full circle to faith in the future, paired with a bit of smart planning now. “Make decisions for the long term for you, not based on someone’s desire for you,” Risinger advises. “Building long term, thinking long term, that’s why we’re such a great country.”