How Can Custom Builders Respond to the Current Market?

Despite high interest rates and a challenged new construction market, the custom home industry remains a thriving, exciting industry sector, according to Grant Farnsworth, president of the Farnsworth Group, a home improvement market research firm. 

"The custom builder and custom home segment is interesting because while there's been a slowdown in new home construction, specifically at the entry-level, the custom build and high-end market tends to be more resilient," says Farnsworth. "We've got folks with strong equity positions who may be ready to build their dream home or retirement home. It may be different from entry-level or middle-market offerings."

In this episode of Taking Care of Business, host and custom builder Duane Johns and Farnsworth discuss current trends in the home building industry, focusing on changing client behaviors, market challenges, and strategies for custom builders to adapt to evolving consumer needs. Farnsworth shares insights on market dynamics, affordability issues, and the impact of generational shifts on home buying patterns.

But to capture these clients, Farnsworth suggests understanding their new behaviors and catering your messaging to them.

"Clients do a lot of research online before engaging with a builder. By the time they contact you, they've probably already made many decisions on features, types of homes, and what they want," says Farnsworth. "Builders need to be prepared to validate their research and offer additional support rather than starting from scratch. Clear messaging, strong online visibility, and a helpful, informative website can go a long way."

Timestamps:

0:00 - Introduction and background of Grant Farnsworth
3:42 - Impact of COVID-19 and demographic shifts on the industry
5:48 - Discussion on housing supply and demand challenges
8:04 - Analysis of home equity and its effect on the market
10:34 - Changing perceptions of Millennial homebuyers
13:51 - The importance of online research for homebuyers
16:19 - Evolving client behaviors and budget sensitivity
21:22 - Post-COVID shift in homeowner perspectives
24:58 - Communication challenges between contractors and homeowners
27:33 - Preparing for future client behaviors and demographics
30:50 - Adapting to different communication preferences across generations
32:25 - Industry outlook for the next 6-12 months
34:29 - The return of competition in the market

Transcript:

Duane Johns: Today's guest is the president of the Farnsworth Group. His firm conducts custom research exclusively for the building products, home improvement, and lawn and ranch industries by providing strategic insights that help organizations better understand their customer, product, brand, and overall market. For over 20 years, he has consulted on qualitative and quantitative research for a variety of manufacturers, retailers, and associations ranging from Fortune 100 firms to startups. It is my pleasure to welcome Grant Farnsworth to this episode of Taking Care of Business. Welcome, Grant.

Tell us about your background. What led you to launch the Farnsworth Group? Let the audience know a little about who you are.

Grant Farnsworth: My name's Grant Farnsworth. Our firm focuses exclusively on the building products and home improvement space. We love this space. It's exciting to use the products we've worked on in our homes, see them at retail, and drive around communities to see the construction of homes for products or brands we've worked on. We do custom research mostly for manufacturers in the space, but we also work on the supply side.

The company was founded about 35 years ago, and we've always had this core focus. Every day we conduct research on behalf of our clients, talking to homeowners, DIYers, contractors, and specifiers to understand what's going on in their minds.

For our organization, we'll talk a lot about mindset today, DJ, more than metrics. We're looking at attitudes, behaviors, sentiment, and confidence. How are homeowners and pros feeling? Why are they feeling that way? This seems more useful in predicting future trends than traditional metrics our industry customarily looked at. We love getting into the customer's mind and helping our clients make better strategic decisions.

Johns: That's a good setup. I'm excited to dive into the topic. When we were trading ideas about this discussion, you brought up homeowner client behavior. There have been big changes, with COVID bringing many changes for all of us. We also have a huge demographic shift. Baby boomers, once the core of this industry and many others, are waning, and Millennials and Gen Z are coming up. We're living in different times. Expectations are different and will likely continue to change.

Farnsworth: The pandemic gave a lot of attention to the home improvement space. Homeowners were at the forefront, doing DIY projects they would have never considered had they not been stuck at home for a year or two, trying their hand at something new.

Our industry got a lot of airtime during the pandemic, specifically homeowners and DIY. We've seen it continue to a certain degree, but it has been cooling over the last 18 months. There are some challenges this year, but there's still a lot of upside for our industry as we look out five to eight years.

Johns: I'm involved with NAHB at the national level and sit on a few committees. We're in this high interest rate, high inflation environment, but the demand and supply are still out of balance. We can't seem to catch up. The more demand goes up, the expense of building goes up. Builders can't find a way to put out an affordable, attainable product. What's this low supply, high demand situation doing to the industry?

Farnsworth: There are certainly negatives. The ability to scale up and build quickly is limited. Historically, you have those three L's: Labor, land, and lumber. All three have inherent challenges. I think there's a fourth L called logistics that hasn't been great either. There are constraints to how quickly we can ramp up on new construction, home improvement, and larger remodeling projects.

The lack of inventory on the housing side is key to the industry's foundation right now. This lack of inventory, expected to continue, drives high home prices. It's supply-demand 101. If you don't have it to sell, when you do, it's going to cost something. These high prices are translating into high home equity. We have around $200,000 of equity per owner-occupied home nationally, varying by market and geographic areas.

As we think about the home improvement space, we've got high home equities and homeowners largely staying put. They don't have many options if they were to move, and they don't want to give up their mortgage rates. Over 60% of those with mortgages have a sub-4% mortgage. That's tough to walk away from. The lock-in effect is real. The longer these mortgages stay elevated, the longer people will likely push off moving.

We've got a nice storm brewing where we have good equity, homeowners wanting to work on their homes, and they may not want to move. They have larger projects looming if they're going to stay for another 10 years.

We're setting ourselves up for some larger projects, probably as we get into 2025, once confidence turns from neutral to positive. We'll likely see a return to larger projects, more contractor-oriented, because of those underlying fundamentals of supply and demand you mentioned.

Johns: As a builder and remodeler myself, I think the audience is aware we've been struggling to get products. Interest rates have certainly impacted activity volume. One thing on my mind is that with low supply and high demand, we're seeing potential growth in custom builds. As a builder, it seems to be more of an opportunity to focus on custom homes. Do you see growth in that sector, or is the balance still too much on the high end and still difficult?

Farnsworth: I think it's more of a balance on the high end. The custom builder and custom home segment is interesting because while there's been a slowdown in new home construction, specifically at the entry level, the custom build and high-end market tends to be more resilient. We've got folks with strong equity positions who may be ready to build their dream home or retirement home. It may be different from entry-level or middle-market offerings.

I think there is opportunity. It may be more high-end opportunity, but that's not bad. If you can cater to that segment and provide solutions that meet custom homeowner needs, it's still a good opportunity. There's still demand there.

Johns: I'm seeing that too. The custom build market is an exciting place to be. It's where you can provide value and offer solutions. Even with Millennials and some Gen Z moving into the home-buying space, I think it's a great opportunity.

Farnsworth: Millennials are coming of age and buying homes. Last year was the first year we saw more Millennial homeowners than renters. That's the tipping point we're at. As we look out, Millennials, once in that home-owning phase, will have similar aspirations as previous generations.

Johns: It's exciting to see Millennials coming into their own. Once they're in that phase of looking to buy their first home or move into their first custom build, it's exciting. Gen Z is also starting to come up, which is another opportunity. We see Gen Z showing interest in home ownership, but they're a bit behind the Millennial generation in terms of age and readiness to buy.

Farnsworth: From the work perspective, Millennials have been interesting. Many have college degrees and maybe more debt than previous generations. They've been slower to move into the home-buying phase. Affordability is still a challenge, but there are ways builders can work with them, whether it's financial assistance from family or smaller square footage options that are more affordable. There's a way to make it work.
Johns: As far as the clients themselves, how they research and approach the home-buying process has changed. Many listeners to this show are builders and remodelers. You've got a strong online presence as a builder.

What should builders focus on to be successful in getting their message out to clients?

Farnsworth: The key is being where your clients are. Clients do a lot of research online before engaging with a builder. By the time they contact you, they've probably already made many decisions on features, types of homes, and what they want. Builders need to be prepared to validate their research and offer additional support rather than starting from scratch. Clear messaging, strong online visibility, and a helpful, informative website can go a long way. Embrace the digital shift and make sure your messaging is concise and accessible.

Johns: Clear, straightforward communication is critical. Any final thoughts on client behavior trends that builders should be aware of?
Farnsworth: One trend we're seeing is increased sensitivity to budget. Clients are becoming more price-conscious and looking for ways to stay within their budgets. Builders should be prepared to offer options and solutions that accommodate various budget levels while still meeting client needs.
 

Listen to the full episode above.