Unsold Homes Pile Up in Some Areas
Surplus at Entry Level Prompts Builder Incentives; Free Landscaping and AC
By KEMBA J. DUNHAM
Staff Reporter of THE WALL STREET JOURNAL
April 7, 2005; Page D1
The housing market may be red-hot in most places, but newly constructed homes are beginning to pile up in some Midwestern and Southern cities, forcing builders to offer incentives to lure prospective buyers.
Much of the current weakness is in the market for moderately priced or entry-level homes. So far, sales are slowing mainly in areas where population and job growth have been relatively weak, such as Ohio, which has lost more jobs than any other state since 2000. Other lackluster markets include Michigan, Indiana and Kentucky. The Midwest economies have been hurt by problems in manufacturing, partly tied to the automobile industry.
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Nationwide, home sales remain red-hot, and few economists expect the problems in the Midwest to spill over to the rest of the country -- at least not anytime soon. With the national job picture relatively healthy, real-estate experts expect sales to remain brisk overall.
Still, oversupply is hitting some markets with a robust employment picture. Charlotte, N.C., for instance, currently has a job growth rate of 3.5% -- higher than the national average. But so many builders moved into the Charlotte market hoping to capitalize on the expanding economy that competition for buyers has become fierce.
The recent softness has forced builders to offer an array of incentives to attract new buyers, ranging from small perks, such as swanky blinds, to ones valued at thousands of dollars. Developers are offering to pay closing costs, upgrade kitchens at no charge, subsidizing down payments, landscape the property or install air conditioning, or offer additional parking spaces in smaller subdivisions.
Builders have periodically had to resort to incentive programs to keep sales brisk, even in hot markets. The latest round, though, is mostly focused on entry-level homes.
The interior of an Aspen Hills $156,950 townhouse in New Commerce City, Colo.
During a period of lackluster stock-market returns, the strong housing market has been a big driver of both the economy and individual wealth. The National Association of Realtors reported this week that its index of pending home sales -- those for which contracts have been signed but transactions aren't completed -- in February was up 10% from a year earlier. The group also has reported that the national median price for previously occupied homes was $191,000 in February, up 11% from a year before. (In one hot market -- Los Angeles -- median home prices have shot up 166% during the past five years, by some estimates.) For all of 2004, there was a 4.3-month supply of homes available for sale, the lowest annual supply on record, the association said.
The problems in certain regions are a reminder that the housing market is dependent on local economies, which can vary. "What goes on in Las Vegas really has nothing to do with goes on in northern Virginia," says Mike Castleman Sr., chairman and chief executive of housing-market research firm Metrostudy in Houston. "It's really the local builders, the local employers and the local job market that determines how the housing market will perform in that particular area."
Amy Merrill says "it's a buyer's market" in the Akron, Ohio, area. The 43-year-old owner of a marketing and research company has been looking for a home priced at around $175,000 since January. "There's a new 'for sale' sign popping up every day," she says, and that provides her with a wide array of options and allows her to be picky. "I've had no problem in terms of the number of homes I have to choose from, so I'm going to wait until I find the right home at the right price."
In the Detroit area, sellers of entry-level homes "are doing everything but hiring strippers to sell their homes," says Susan Carter, Realtor and associate broker at Woodwardside GMAC Real Estate in Royal Oak, Mich. In the late 1990s, Ms. Carter says, it would take her four to six weeks to sell a home. Now she tells sellers it will take closer to two to three months. This is leading sellers to offer to pay for closing costs or additional commissions to the selling agent -- anything to sell their house.
Rising interest rates could further dissuade first-time home buyers -- typically the first group to feel that pinch. "Existing homeowners or trade-up buyers can use some of their housing equity to make moves, but it's the first-time buyers who will be generally more impacted when rates rise," says Lawrence Yun, a senior economist with the National Association of Realtors. According to Freddie Mac, the average rate on a 30-year fixed mortgage was 6.04% last week, up from an average of 5.52% a year ago.
For the nation's biggest builders, the weakness in the Midwest isn't likely to damp earnings. For smaller builders, it is becoming an issue. Rockford Homes, a Columbus, Ohio, home builder whose houses have an average price of $220,000, says sales have declined 10% since last year. The economy in the city remained relatively stable throughout the downturn, according to Don Wick, Rockford's executive vice president, but that stability attracted too many home builders, which has led to a crowded market at the lower end.
An entry-level house in Columbus, Ohio, built by Rockford Homes, priced at about $165,000.
The company has started to offer such incentives as $5,000 of free upgrades to prospective buyers. Mr. Wick says that while the company did hit its sales target in March, it happened on the very last day of the month. "All over the state, builders are cutting their [profit] margins, offering incentives and increasing their marketing," he says. "That's an indication that something is wrong."
Beazer Homes USA Inc. of Atlanta, one the country's biggest builders, recently said it will take a $131 million goodwill-impairment charge related to the acquisition of another home builder in 2002 that operated mainly in North Carolina, Indiana, Kentucky and Ohio. The company, which builds mainly entry-level homes in those regions, said its business in those areas is suffering in part from "severe price competition" and weak local economies. The company still is projected to report strong earnings this year, as a result of strength in other markets.
Some builders that have suffered are expecting things to turn around soon. Jim Harmon, president of Amber Homes in Aurora, Colo., says his sales declined 50% from the 1999 peak to the company's lowest point in 2003. To lure buyers, his company has offered to pay for closing costs, upgrade appliance and provide outside landscaping as added incentives.
Now, Amber Homes, which sells mostly entry-level homes, expects business to increase at least 30% by the end of its fiscal year in June. One reason, adds Mr. Harmon, is that the flat housing market has attracted a spate of small businesses to the area since it is easy for employees to find place to live. That has propelled job growth.
For potential buyers, this is a welcome trend. Sheri and Joseph Bruno, a Denver couple, started looking for homes in the $350,000 to $380,000 price range last September, and found a surplus of available houses. But many of the newer homes were "highly overpriced, cookie-cutter type of homes," and the couple refused to settle for less than what they wanted, says Ms. Bruno, a 39-year-old dental hygienist.
Finally, after viewing 98 homes, the Brunos found a four-bedroom home in their price range, but only after they expanded their search to include homes that were built in the 1980s. "We finally found a house with good character and good karma, but it wasn't easy," Ms. Bruno says. "There were a lot of houses available, but not a lot of desirable ones, so we were surprised that some were asking for top dollar." |
