CONFUSION IN A COOLING MARKET
By Bob Schultz, New Home Specialist Inc.
A cooling housing market is no longer a threat lingering somewhere in the future. It is here. Even national builders like KB Home and Toll Brothers are starting to see the effects.
“There are signs that consumer demand in the U.S. residential housing at current prices is softening,” The Wall Street Journal quotes a recent KB Home report saying.[1]
The News-Press, in Fort Myers, Florida, reported that Toll Brothers said new orders in the first quarter fell by 21 percent, and that The National Association of Realtors said home sales in 2006 are expected to fall from last year.[2]
The good news is that you can still succeed in a cooling market. But you must have a clear understanding of how the market works in times like these.
A cooling market is a confused market.
Buyers are confused. They suddenly see prices dropping or leveling, when they are used to prices rising. They aren’t sure if they should take advantage now, or hold out for better deals later.
The marketplace itself is confused. Interest rates have risen, and continue to rise. Some builders are offering huge incentives to get prospects to buy. There are more re-sales. The market is over-saturated with properties that investors are trying to flip. These conditions have reduced potential buyers’ sense of urgency.
“There’s virtually no sense of urgency, and buyers can take their time considering multiple properties,” says a recent South Florida Sun-Sentinel article[3]. The News-Press quotes housing analyst John Tomlinson saying that, nationally, “The higher-end buyers are beginning to realize they don’t have to rush in – that maybe if they hold out prices will moderate.”
Builders are also confused. In some places, when the market was at its hottest, prospects were offering more than 100 percent of the listed price for a home. The market was so hot that many people were buying houses within a day or two of first looking. It has been a builders’ market, and, suddenly, it is not. Builders don’t know what sorts of measures they should take – should they discount their homes? Build fewer of them? They see a need to lower prices, and in many cases they can afford to do it, but they are also afraid that doing so will signal market weakness and discourage people from buying.
The salespeople who work for builders become confused. Their sales slow down. They don’t get them as quickly or easily as they are accustomed to. They think their builders should be lowering prices, offering incentives and spending more money on advertising so they can continue to make sales as easily as they did when the market was hot.
To thrive in a cooling market, you must not be confused.
We know that the market never drops to zero. What is occurring now is a process of market corrections. The market has been unsustainably hot, fueled by low interest rates, investors and an extreme sense of urgency because of quickly rising prices. Houses have appreciated by as much as 30 to 40 percent in some areas over the past three or four years. Now, interest rates are increasing, investors are backing off, and market corrections are adjusting the housing market back to a more natural, sustainable state.
The fact that the market is cooling doesn’t mean it is turning into a bad market. It is simply returning to normal. Imagine that the average yearly temperature over a period of centuries in a given area is 75 degrees. Suddenly, the average temperature in that area jumps to 115 degrees. It stays there for a few years, and then begins to fall. If the average temperature the next year is 95 degrees, are you going to say that it’s abnormally cold? Of course not. It has just been abnormally hot for a few years, and now it is returning to normal. The same thing is happening with the housing market.
As the market changes, you must identify which things you can and can’t control, and then learn how to improve on the things that you can control.
You can’t control interest rates, but you can control people’s perception of interest rates. You can’t control what the competition does, but you can control what you do – presentation and sales skills, Follow-Through®, appointment-setting, how your models look, etcetera. You can’t control what the articles in the newspaper say, but you can control what you put in the newspaper. You can’t control the weather outside of your sales office, but you can control what kind of environment people experience when they come into contact with you.
As the market changes, there will be less traffic to convert, so you must work to increase conversion ratio. Make every prospect who walks through your door count.
Even though buyers are confused, if they show up at your sales office, they are at least thinking about buying a new home. It is your job to un-confuse them. Have a solid, planned presentation to help guide them through the buying process. Cause them to think it through. Get them to recognize that, even though interest rates have risen, they are still the lowest, on average, that they have been in 50 years. Help them to realize that interest rates are probably not going to fall soon, and are likely to continue rising. Point out to them that construction costs are going to continue to increase because of oil prices and hurricane damage. Make them understand that now is still a better time to buy than later – that their buying power will never be greater than it is right now.
You can use the following script:
“Mr. & Mrs. Homebuyer, with interest still the lowest that have been, on average, in nearly 50 years, and with rapidly rising costs of construction, due unfortunately in part to the recent hurricanes and oil prices, your buying power for a brand new home will probably never be as great as it is today. Consequently, the only thing that waiting to acquire a brand new home might accomplish for you is an erosion of that buying power.”
(Pause)
“And I’m sure that you don’t want to have you pay more than you need to own the home you want, do you?”
Below are some other specific things you can do to succeed in the confused market:
1. Maintain strong, thorough knowledge of your marketplace. Research the re-sale market. Track the following re-sale information on a monthly basis:
. How many listings go unsold
. How many close
. The average sales price
. Average sales price as a percent of listed price
. Average days on the market prior to selling
2. Look at trends. As the market cools, there will be more re-sales than before, and they will stay on the market longer. How many re-sales and investor sales are available? At what rate are they selling compared to normal market absorption (the average over the last 12 months)? You can use this information to estimate how long it will take to sell your inventory. Also note the names of the Realtors® who are selling the re-sales. They can help you. If they sell something in your price range in your market, you can reach out to them and get to know them, and they may be able to sell some of your homes.3. Cut back your operating costs. Look at every aspect of overhead. Identify areas where you can you consolidate, and do so.
4. Compare your prices with other selling prices in your marketplace. You may need to rework your product. You might need to downgrade the specs of some of your models. As interest rates increase, even gradually or marginally, people’s buying power decreases. They can no longer afford to pay the same prices that they could afford when rates were even slightly lower, because monthly payments are higher. You may need to reposition your product to be more in line with current sales prices.
5. Assure prospective buyers that your market is a strong market. Never let them think that it is weak. Always tell them that business is incredible. Don’t ever let them suspect that you may be struggling. Be a beacon of clarity and reassurance when everything else is confusing to them.
In an extraordinary market, it is easy for ordinary salespeople to look like very good salespeople. But in an ordinary market, it takes hard work to be an extraordinary salesperson. As the market becomes more ordinary, many salespeople will get out of the business and go back to doing what they did before the housing boom. But those who keep a clear focus, stay informed about their marketplace, perfect their presentation and practice diligent follow-through will continue to succeed even in tough times.
Bob Schultz, MIRM, CSP, is North America’s foremost new home sales and management expert. He is the author of two best selling books, The Official Handbook for New Home Salespeople and Smart SellingSM Techniques. His company, New Home Specialist Inc., is a full service management consulting and sales company, producing books, manuals and systems for home builders, developers and Realtors. Bob and his hand-selected facilitators present custom sales training programs, management seminars and strategic business planning retreats throughout North America. For information about how to increase your revenue, visit www.newhomespecialist.com or call us at 561-368-1151.
[1] “KB Homes blames declining orders on cooling market”. The Wall Street Journal. Feb. 14, 2006. P A2.
[2] “Builders’ stocks take hit”. The News-Press. Fort Myers, Fla. Feb 8, 2006. Pp D1, D3.
[3] “S. Florida housing market cooling off as demand wanes, some sellers are cutting prices”. South Florida Sun Sentinel, Fort Lauderdale, Fla.: Feb 11, 2006. P 1A.
