Do You See the Market?

Home Financing

Understanding your buyers’ financing preferences can give you a distinct advantage in changing market conditions.

Although the demand for new construction homes is growing, builders are right to spend time researching markets before they break ground. They evaluate sales data, market trends, design preferences and construction costs to ensure the highest probability of success – defined as selling the home quickly and at full price. There is a lot of risk and reward in new home construction, so knowing your buyers is essential to success.

However, despite the research into where and what to build, few builders research how buyers finance their home purchases in the areas they are building in. Buyer financing preferences are often ignored because the data isn’t readily available or understood. This means leaving an important data point in your market research for lenders to figure out and missing an opportunity to let it inform your marketing strategy and the planning of new neighborhoods.

Understanding buyer attitudes, financing preferences, and what housing costs buyers consider, is critical to adapting quickly to market changes that are outside your control. Here are the top three benefits you can expect with factoring in buyers’ financing preferences:

  • Reduce your current pipeline risk
  • Increase lead retention and conversion
  • Develop a strategy for creating affordability in advance of market change

What should I know about my buyers’ financing preferences?

  • Buyer demographics and credit profile

New Homebuyers Georgia

  • Financing programs and price points used by new homebuyers

Buyer Financing Preferences Analysis

  • Buyer financial strength as measured by down payment

Buyer Financial Strength Analysis

  • Sales price distribution and trend

Sales Trend Analysis

New Homes Sold Analysis

  • Competition
    • Who is selling homes in your area?
    • What is the average price point?
    • How are buyers financing their purchases?
    • What financing structures or incentives are they offering?

How do you use this information?

Here are three case studies that highlight the value of understanding buyer financing preferences.

Builder Case Study #1

Issue: Builder raised prices in one new community, and sales have significantly slowed. Prices increased from $260,000 to $280,000+ due to increasing construction costs. The builder is unsure how to address the decline. Is price the issue? Can $20,000 make that big of a difference?

Data: Buyer financing preferences for this area revealed that over 50% of all new homebuyers rely on VA financing, primarily because the new community is located near a military base. The builder didn’t know that active military service members generally do not spend more than their housing allowance, even if they qualify. So, if the house payment is more than their housing allowance, they generally won’t purchase the home though they can technically afford it.

Solution: Offer a house payment that is similar to homes costing $260,000. The lower payment was created by applying a small seller credit of $4,000 to buy the rate down, which resulted in monthly house payments (principal and interest) equal to a $260,000 home. The increase in housing affordability became the primary focus for all social media posts, CRM emails and online(web) content.

Builder Case Study #2

Issue: Builder has been successfully raising prices in one new community for several quarters. Sales were consistent until the last two price increases. Sales decreased from 15 per week to 4 per month. The homes are located in a large metro area and prices are within range for the greater area. The builder is unsure why sales have declined in this community while other communities are still selling. Why is pricing an issue?

Data: Upon reviewing buyer financing preferences for this community, it was discovered that over 60% of all new homebuyers rely on FHA financing with an average down payment of 5%. FHA has a loan size limit for this area. The last two price increases eliminated buyers from using FHA because they could no longer come up with the down payment to make up the difference between the FHA loan limit and sales price. Sales slowed because 60% of buyers in the area were eliminated.

Solution: There is no easy solution for this specific situation. Decreasing pricing in a new community that has more homes to build and sell is not a viable option. The builder decided to subsidize a low down agency program that appealed to housing affordability with low down payment financing and higher loan limits. The program allowed them to maintain favorable qualification standards. The sales team was trained on this new offering and shared this new financing option with their buyers using social media, website and CRM-generated email.

Builder Case Study #3 (Issue 1)

Issue: Builder is concerned about rising interest rates and the impact on their pipeline. They have over 120 homes under construction that are 8-9 months from completion. They have determined that over 70% of their pipeline does not have their interest rate locked. They are worried about the risk and impact of rising interest rates on their pipeline.

Data: Upon reviewing buyer financing preferences for all communities, builder learned that over 83% of their buyers put less than 10% down. This buyer profile has limited financial strength and little to no ability to maintain their financing qualification if interest rates rise. Given that 70% of their buyers have unlocked loans, their pipeline is at significant risk – i.e., buyers won’t qualify.

Solution: Builder marketed a 9-month extended lock incentive to all buyers under contract who did not have their interest rate locked. The promotion resulted in 40+ buyers locking in their rate, thereby reducing pipeline risk by a third.

Builder Case Study #3 (Issue 2)

Issue: Builder in case study #3 was also concerned about retaining and converting sales leads in a rising interest rate environment. The financing profile was the same for both sales leads and buyers under contract. A rise in interest rates while buyers wait for available inventory to be released would result in a loss of both purchasing power and sales leads.

Solution: Builder marketed a long-term lock and shop incentive to all contacts in their CRM. The lock and shop allowed buyers to lock their rates up to 360 days before selecting and closing on a home. The incentive focused on securing buyers’ purchasing power and interest rate, mitigating one of the most significant risks to waiting. In addition, the long-term lock and shops help create a qualified pool of future buyers.

Where do I get this type of market intel?

Your lenders can provide you with details on buyer demographics, financing preferences and market trends. If you are unable to obtain this vital data, please reach out to me directly for assistance.

Understanding how buyers are financing their home purchase is essential to your ability to adjust your sales strategies in changing market conditions. While we can’t be sure what the market will look like day to day, having this knowledge will enable you to prepare for those changes by reducing risk and maintaining more consistent sales.

 

Contact me directly.

ANTHONY GRASST
National Sales Director – Builder Division
c: 206-245-3656
e: Anthony.Grasst@homebridge.com

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