With U.S. stocks losing roughly one-third of their value in a month due to the coronavirus, it is likely that even in a recovery consumers will be jittery with regard to major purchases. Of course, the duration of coronavirus will be a driving force, but it is likely that the housing market will experience a slow down. New construction has the potential to be especially hard hit, as jittery buyers may become more conservative with their budgets.
New construction for homes is often situation for buyers in which homes are advertised as being custom-made. This often involves a situation where the base model is quite basic, but the consumer is offered a wide variety of options that they can upgrade to, but at a cost. For example, getting hardwood flooring in an area that is not standard or adding a deck may cost more. With many builders, some the “upgrades” may be things that an uninitiated buyer may have thought would standard, such as a kitchen backsplash or even basic frames for mirrors.
Having been through this process myself, perhaps the most jarring aspect is having to balance the fact that one is making about as high involvement of a purchase as there is (and wanting to get everything right in their “custom home”), but is forced to accept mark-ups at a level they many simply would not accept in almost any other context. There are commonly thousands of samples for cabinets, countertops and flooring, and many buyers feel overwhelmed.
A survey conducted by Wakefield Research for Meritage Homes drives home how stressful making selections in the new home-buying process can be for a typical consumer. The following findings reinforce how time consuming and stressful the process is for buyers:
• Nearly 40% of new home buyers spent more than 20 hours in the design center throughout the course of the building process. Once decision choices were made, buyers still experienced stress by worrying if they made the wrong decisions and often experienced buyer’s remorse.
• Forty-five percent of buyers noted they exceeded their budget in upgrades by over $21,000 on average, a level that leads to considerable dissatisfaction.
• Thirty-seven percent of buyers said their homes didn’t turn out the way they wanted — 26% of buyers found that their design selections did not come together as expected in the end.
In response to concerns about buyer stress and cost-overruns, Meritage Homes, the seventh-largest public home builder in the U.S., recently announced the launch of a new approach to the new home buying process. The company, which operates in Arizona, California, Colorado, Florida, Georgia, North Carolina, Tennessee, and Texas, Meritage recognized that most buyers experience a paradox of choice caused by the gigantic number of choices. Moreover, they recognize that the high cost of many of these choices is a source of stress for many buyers.
Steve Hilton, CEO of Meritage describes the decision to move to a new interior design selection process as part of the company’s business model, (known as Design Collections) as follows:
“Most leading new construction homebuilders offer an overabundance of options, with which buyers can experience ‘choice paralysis’, leading to stress and indecisiveness. We were seeing this and knew we could do better for our customers. In addition…we identified top pain points, which centered around three main concerns: the time needed to design the interior of their new home, making cohesive style choices and sticking to their budget.”
Consistent with this thinking, the Design Collections program offers buyers fewer choices, but those that are available are carefully thought out by staff at the company’s Studio M Design Centers. Pricing is transparent, and because Meritage is able to buy in bulk, consumers are allowed to select options are a lower margin than is often the case with competitors. Pricing is transparent, and because buyers choose from a more limited number of options, the decision process is streamlined.
I asked Hilton why he thought the “upgrade” model had become so dominant in the industry in spite of buyer stress and even buyer remorse being common. He replied:
“Many new construction homebuilder advertisements tout low home prices, but buyers slowly come to the painful realization that the low home prices are for a bare-bones option, and the gorgeous home in the ad is full of expensive upgrades. By the time this realization is made, most buyers are deep in the process, having invested a lot of time, money and energy. They accept their losses and tolerate the mark-ups, because it is the industry norm, and before Design Collections, there wasn’t much of an alternative available for buyers.”
Hilton also observes that a large majority of their buyers still upgrade, but recognize that they are getting good value because the builder is purchasing fewer option in larger quantities. He notes, “we used to offer around 50 dishwasher models, and in our research found that only a couple of options were being selected by buyers more than 50% of that time. This knowledge led us to narrow our selection to the top five most frequently selected models for buyers to choose from. By purchasing the top options in larger quantities from manufacturers, we are receiving a better wholesale rate, so it is of less cost to us, while offering customers streamlined, designer-curated, data-backed options so they can make choices in confidence and enjoy the experience.”
While Meritage’s model does have the drawback of somewhat less selection for a buyer who wants an almost limitless set of choices, especially if they are not budget constrained, I suspect most buyers in the company’s target market will be happier knowing that they are getting a bit more bang for the buck. Moreover, the transparency in pricing is a big positive from an ethical perspective. Of course, buyer satisfaction is influenced by multiple factors and to fully please customers the company will have to deliver on multiple dimensions. That said, the business model looks like a winner.