The Economy: How to Encourage Clients to Spend Right Now
If you asked homeowners what's weighing heaviest on their minds right now, they'd likely say these two things:
Interest rates
Inflation
As a professional residential contractor, these two things are probably on your mind too - but for different reasons.
The cost of goods for remodeling and custom home building projects have increased exponentially due to pandemic-related challenges and global economic issues. Recent interest rate hikes, brought on as a measure to try and stave off higher inflation, have some homeowners re-thinking their plans to remodel or build their home right now.
And that impacts your ability to keep your pipeline full.
This is why we, as builders, need to work on leading homeowners through the messy headspace about borrowing and spending money on home renovation projects right now.
Because it's still the right time to invest in upgrading your home.
Home Values Are Still Increasing
An important metric to use when evaluating return on investment and making financial housing decisions is the Home Price Index (HPI), which measures the percentage change of housing values from a specific start date. It helps you see how real estate has performed in a particular area over time.
If you look at home price index graphs for the last 100 years, other than a minor blip during the 2007-2009 housing crash, North American home values are still at historic highs.
Throughout the 20th century, many events have impacted market conditions, which have always bounced back. Investing in home remodeling projects has never been a bad bet - and there are over 125 years of history to prove it.
Why Remodeling Makes Sense in This Market
Raising interest rates is a financial mechanism that can help to stop inflation from rising and cool the economy to allow for what the media calls a "gentle landing." In simplistic terms, it helps reduce the cost of things you buy daily, stabilize the housing market, and cool spending.
But interest rates and inflation are relative terms and don't just apply to a particular moment in time. You must look at their historical patterns and remember everything is cyclical - especially financial markets.
Interest Rates Aren't Actually That High
When consumers hear "rising interest rates" in the media, it causes panic and fear, leading homeowners to think twice about borrowing money for home renovations. But even with recent interest rate hikes, we're still in historically low-interest rate territory and record high home price index.
If we look back at the ’80s and early ’90s, mortgage rates peaked at 18 - 20%, almost four times what they are now. At the same time, home price index metrics were barely 35-40% of what they are today, meaning your home was worth a lot less, making it seem like you were paying rent to the bank for the privilege of living in your home.
Context is important because historical data and patterns help us understand current situations.
Think of interest rates like a bag of low-fat potato chips. Low-fat chips are marketed to make you think you're getting the same flavor and quantity of chips but without as much unhealthy fat. But in reality, they're not actually "low-fat," they're just lower in fat than a regular bag of potato chips.
That same concept applies to hearing the media report on "higher interest rates." Before panicking, you have to ask yourself this: "higher, but in relation to what?" The all-time low rates we saw during the pandemic or over the past decade?
Because even if rates are higher now than they were a year or two ago, they aren't anywhere near the highest rates in recent history.
Fixed & Variable Rate Mortgages Aren't Forever
High-interest rates can scare homeowners from borrowing money for renovations or remodels because they fear the variable rates on home equity borrowing or locking into "high-rate" fixed mortgage rates. But here's the thing to remember about a mortgage: you aren't locked into it for 25 or 30 years. You're only locked in for the current mortgage term you have or until you decide to sell.
Fixed-rate mortgages renew every few years, and you'll hit 2 to 3 mortgage cycles during the length of one typical economic cycle (10-14 years). So over the course of these cycles, you'll likely experience terms with both higher and lower rates. In other words, it evens itself out.
And if you look again at the line chart above, you’ll see that we’d have to go back to the ‘50s to match the “higher interest rates” we’re experiencing right now.
You Can't Buy More Time
We'd never get anything done if we always waited until the time was "right" to do something.
I've heard people tell me since 1999 that the Toronto real estate market was going to collapse, so they were "waiting it out." Even just before the pandemic started, when housing prices here seemed they couldn't get higher, I still heard someone saying that.
Here's what's wrong with that logic.
I bought my first home in 1999 for $161,000. Today that home is worth $1.2 million. That's 23 years and a 645% increase in value, or approximately 28% yearly.
If homeowners want to upgrade their space, expand their home for their growing family, or reimagine their backyard into an outdoor oasis, putting it off until they "feel comfortable" means delaying gratification and paying more for it later.
Aside from increasing the long-term value of their homes, showing homeowners that renovating or remodeling now, even in a time of global economic flux, means they get to enjoy their home now instead of doing without and being unhappy. (Future them will thank you for that!).
Why Waiting to Remodel Will End Up Costing You More
Understandably, people get nervous when inflation drives up prices, and their instinct is to curtail spending. But when it comes to home renovation or remodeling, waiting only costs them more.
Labor costs are continually rising, as is the demand for trades. There are only so many experienced trades to go around, particularly now when staffing shortages are at an all-time high.
Paying for them isn't going to be cheaper the longer a homeowner waits. Since labor is the highest cost of goods on a construction project (internal team members and your trades), delaying work means paying more for it later.
Home renovations and remodeling projects also require using commodity goods like wood and steel, which trade daily, meaning their prices rise and fall faster than a yo-yo. As a professional residential contractor, you know that the cost of materials changes constantly, and clients need to understand that waiting only escalates their risk for future higher spending.
Encourage Clients to "Stay the Course"
As professional residential contractors, we understand our industry better than our clients do, and we've seen how economic changes, particularly during the pandemic, have affected our business and homeowners' lives.
It's on us to share that experience and give our clients the confidence they need to spend money in this economy.
Three key arguments to make in favor of remodeling during inflationary periods:
1. Don't bet against history
Home values are always rising, even during times of high-interest rates and inflationary periods. Markets will always bounce back, and the improvements you make now will only increase the value of your home.
2. A good carpenter isn't cheap, and a cheap one isn't good
Labor is the highest cost of goods on a remodeling or renovation project, and it's only getting more expensive. The increased demand for home remodeling since 2020 has contributed to an already significant labor shortage in the industry. Delaying only means homeowners will pay more (and likely wait longer once they decide to pull the trigger).
3. Timing the market is a game of roulette
Like labor, material costs will increase over time, and the volatile nature of commodity items like wood and steel means gambling on pricing. And if you've ever been to a casino, you know the house always wins. So why risk paying more?
There hasn't been a time in recent modern history when the economy hasn't recovered from uncertainty and flux. The 20th century saw two world wars, a great depression, and many other volatile situations. Yet, populations continue to grow, urbanization continues to happen, and financial growth is evident. The pandemic added some uncertainty, but we do have over 100 years of historic growth on our side.
Don't struggle to connect the dots for clients who are hesitant to invest in remodeling or custom-building projects right now because the economy feels shaky. I created the BUILD AND PROFIT SYSTEM to help residential contractors and remodelers run profitable businesses by implementing rock-solid processes and systems to help manage client objections and sell more of the RIGHT jobs.
Click the button below to learn how the BUILD AND PROFIT SYSTEM can help you navigate tricky client conversations.
