5 Ways to Prepare for the Impact of Rising Interest Rates

The home building industry is plowing through 2022 at a breakneck speed. Supply chain issues left many builders with uncompleted homes in 2021, resulting in large backlogs. Consumers are buying whatever is available, and the industry is becoming complacent.

But change is coming.

The Federal Reserve has announced a series of interest rate increases over the next 18 months. The warning flag is visible. Here are five ways to prepare for the impact of these interest rate increases.

1. Reduce the spec load. Spec building has been one of the primary strategies builders implemented to protect margins over the last two years. Price increases and material shortages made it difficult to meet customer demands with a margin meeting fiscal responsibility. As interest rates begin to climb, demand could fall. When the market softens and buyers are not as excited about a new home purchase, specs could sit finished. A finished house loses margin daily.
2. Focus on the customer. Over the past two years, the industry has become complacent about knowing the buyer. Now is the time to refocus on the buyer, understand what is important to them, learn why they are buying as interest rates rise, and determine how to produce the product they are looking for.
3. Prepare marketing budgets. Many builders have not felt the need to spend much on marketing over the last two years. With the expected softening of demand, marketing is going to become a priority again. Marketing budgets may need to be adjusted to the new sales environment.
4. Set up financing programs. This is not the first time the home building industry has had to adjust to rising interest rates. To help mitigate the increased cost to the buyer, be sure mortgage incentives are added to your sales tool belt.
5. Tighten up overhead. Overhead spend has grown over the past two years as builders scrambled to do everything possible to meet demand, manage the challenges, and make the best margins possible. As the sales pace begins to slow, overhead, especially fixed overhead, will impact profit margins. The time is now to review expenses and develop plans to cut back.

Rising interest rates have historically softened new home sales. The coming increases will do the same this time around. Though the need for housing units is still strong, the willingness and ability to purchase will be eroded over the next 18 months. Change is coming, and no builder should be unprepared.