What builders can expect as interest rates rise and potential recession looms
In an effort to curtail inflation, the Federal Open Market Committee announced another hike in interest rates between 4.25% to 4.5% on Dec. 14, 2022. The committee acknowledges that while the unemployment rate is low, inflation remains elevated. It cited imbalances with supply and demand related to the pandemic, higher food and energy prices and other price pressures.
“The Committee is strongly committed to returning inflation to its 2% objective,” the FOMC says in a statement. “In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook.”
In the meantime, how is this rise in interest rates affecting the pool industry, and what can builders expect in the coming months?
Dick Lyon, founder and CEO of Lyon Financial, doesn’t believe there will be a long-term impact, but he says the immediate changes will be determined by the lenders involved.
“Lenders with a ‘cash direct to consumer’ business model have had to raise their rates dramatically because of the volatility inherent in that type of loan,” Lyon says. “They hand out large sums of cash — up to $100,000 — to a customer and hope they manage the money and pay the builder correctly.”
Lyon explains that method is very risky for the lender, and in 90% of cases, it’s a customer’s first experience with the pool building process.
“We have seen large numbers of dealers go out of business in the last year, taking the customer’s money with them and never finishing the pool,” Lyon says. “Lenders are seeing higher losses from this type of lending and are increasing rates because of it.”
Lyon Financial has been providing swimming pool and home improvement financing options for 44 years and has weathered more than 10 recessions. Lyon says now is when experience and reputation pay off and suggests pool builders employ evasive action. “Pay close attention to your business, offer low-cost financing and make your service and product the best you can offer to the public,” he advises.
Scott Rhodes, president of Rhodes Custom Pools in Rogersville, Missouri, says his business hasn’t been affected by interest rates, specifically because most of his customers are paying cash and not financing their new pool builds. “I’d say maybe one in every 15 – 20 we build finances or has a construction loan,” he says. “Our market area has a lot of people moving here from the Sunbelt states where they sold their homes well above the national average.”
While most of his customers are not financing their pools, he has also not experienced a slow down in requests for quotes. However, Rhodes expects a recession is around the corner and says that is where his business would begin to see a drop.
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Rhodes has also weathered several recessions, and says for his first 10 years in business, he focused on pool service and repairs. The main changes during a recession were customers canceling pool services because they couldn’t afford it, or customers being less willing to repair or replace equipment if it still seemed to be working.
For the past 22 years, Rhodes has been building and renovating pools, with 14 of those years in Southern California and eight in Missouri. While building in California, Rhodes recalls going through two recessions. “We saw demand for new construction slow way down, and the majority of our work was pool renovation,” he explains. “Also, during that time, the Virginia Graeme Baker Act was passed mandating that all commercial pools adhere to a new standard on suction covers and main drains.” Rhodes and his team spent a couple of years doing commercial pool upgrades while demand for building was slow.
From my 32 years of experience in the swimming pool industry, I would highly recommend that you recession-proof your company and the services you offer. Be willing to adjust your focus when the demand changes from one type of work to another.”
Scott Rhodes, Rhodes Custom Pools
“From my 32 years of experience in the swimming pool industry, I would highly recommend that you recession-proof your company and the services you offer,” Rhodes advises. “Be willing to adjust your focus when the demand changes from one type of work to another.”
Rhodes suggests builders be ready to offer more to customers such as building, renovation, service or repair. “Keep learning, go to trade shows, sign up for industry classes and certifications,” he says.
Rhodes also recommends learning to do more of your own work instead of relying on subcontractors as another way to prepare and reminds builders to steward their online presence. Some to-dos he encourages are keeping a clean website with current projects and information as well as regularly posting project updates and pictures on the company’s social media pages. Some not-to-dos include being afraid to ask customers for online reviews and getting political on social media.
“Build relationships, not just pools,” Rhodes says. “Do quality work, keep your projects moving, communicate well, be honest, have integrity and take care of your customers.”
Lyon says builders are no longer inundated with customers clamoring for pools and need to be ready for what that means. He warns that rates may vary dramatically, and a customer with excellent credit could pay as little as $600 a month or as much as $1,100 a month for the same financed $100,000 pool project. “They’re basically getting the same type of [unsecured] loan, but the interest rate makes all the difference in the payment,” he explains. “Unfortunately, customers may pay more, and builders may lose deals because of that, when consumers aren’t made aware of what’s available to them.”
Lyon believes smart and savvy builders are managing their businesses more cautiously now than ever before. “Expenses like payroll, product costs and advertising need to be watched even more closely,” he explains. “Now, every job counts — meaning, the builder must pay more attention to their consumer.”