THE JOKE’S ON US IN THE HOMEBUILDING INDUSTRY

My children and grandchildren came down to Florida to visit for the Christmas holiday. My son was reading the newspaper and found a coupon for a local Italian restaurant offering a $10 discount on a $20 dollar purchase. He asked my wife if we go there and she answered “not anymore, your dad got very sick the last time we ate there”. And my son responded “but it’s 50% off” and my wife said, “OK, take the coupon.”

Now although the second half of that exchange was probably said in jest at my expense, as it was said loudly enough for me to hear, I realized that much of the homebuilding business today is in many ways very similar to that – “let’s try for a quick fix“ (something cheap) even though we know that it’s not going to work (or will make us sick). And unfortunately, that joke is at our expense and it’s not funny at all.

In one of the markets in which I am active, one of the local builders has been complaining that his sales people are not performing and wishes to replace them all. His concern is not just that the sales rate is slower than he would like but also that pricing discounts are required on the homes that are sold, eroding his profit. I am familiar with this builder’s developments, his homes and his sales people as I visit them every few months to track competitive activity. And while this builder’s sales staff may not all be super stars, they are at least above average in the marketplace and they are familiar with the builder’s homes and communities, his internal processes and his competition.

From what I have seen, it appears that this builder has several viable opportunities to increase his sales, not by changing the sales personnel but by increasing his perceived value, strengthening his USP (Unique Selling Proposition) and creating new home designs to “spice up” his product line which has become tired and stale. But that would require some real effort and investment in his company so I am betting that instead he will “take and use the coupon” and change his sales staff within the next few weeks.

for_sale_signAnd the new sales team will not be any more talented. They will not be familiar with the homes or the builder. So the opportunities for real improvement will have been ignored and, even worse, the new sales people will stumble around while trying to learn the neighborhoods and the homes for much of the Spring sales season (and the end of the tax credit window), they will need to continue and probably even increase the pricing discounts, and the result will be a net loss of sales and income, not a gain, and the builder will become ill.

Except for a new restaurant trying to gain awareness and recognition, a coupon is evidence that the market does not perceive adequate value at the list (menu) price to stimulate sufficient business so the price must be lowered.  Homebuilding often follows the same strategy but instead of coupons we advertise discounts and other incentives and/or negotiate them at the point of sale.

When the tax credit which is, effectively, another “coupon”, expires in a few months, what will those homebuilders who have not established sufficient perceived value do except replace the tax credit with even further discounts? And at some point in time, which I believe is in the very near term, that increased discounting must translate into an actual loss for every home sold forcing these builders out of business.

The good news is that those builders who have established real value and a viable USP will have the opportunity to grow and prosper and increase market share. But that’s just my opinion.

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