Builders Sweeten
Deals on New Homes
Amid Predictions Sales Will Slow,
Developers Throw In Extras;
Flat-Screen TVs, 'Bonus' Rooms
By RUTH SIMON
Staff Reporter of THE WALL STREET JOURNAL
December 7, 2004; Page D1
In an attempt to keep new-home sales at their recent fever pitch, builders are starting to sweeten the pot for potential buyers. Developers are throwing in free or discounted upgrades such as high-end kitchens, paying higher commissions to real-estate brokers and providing low-cost financing. A handful are beginning to cut asking prices.
The influx of incentives comes amid signs that the housing market may have peaked after three years of record sales, rising home prices and record low mortgage rates -- and as consumers have demonstrated their insistence on getting a good deal, as Wal-Mart and General Motors have learned. Seventy-two percent of home builders now say they are encountering "some" or "significant" buyer resistance to price increases, according to a new survey by the National Association of Home Builders. To overcome that resistance, 28% of the builders surveyed are offering more optional items at no charge, according to the survey, up from 12% a year ago. And 17% of the builders surveyed are increasing their use of outside real-estate agents and brokers, up from 7% last year. Other tactics include paying closing costs and points on mortgage loans.
The deals range from flat-screen TVs to extra rooms and go beyond the end-of-year marketing efforts developers routinely engage in. The enticements come as the builder's association is predicting sales of new single-family homes to drop 5.1% next year from a record 1.18 million. In recent months, brokers have reported fewer multiple bids and higher inventories for existing homes in some markets. For homebuyers, the increased use of incentives is yet another sign that the dynamics of the housing market have begun to shift, making it less of a seller's market.
Across the country, builders are stepping up their incentive programs. Ryland Group Inc., which builds homes in 27 markets, now budgets an average of 3.7% of a home's purchase price for buyer incentives, up from 3.2% earlier this year. On a $254,000 home, the builder will kick in roughly $9,400 for extras such as a "bonus" room, landscaping and window coverings. Ryland is offering home buyers free flat-screen TVs in Atlanta and a choice of upgrades, including stainless-steel appliances and the first year's homeowners' association dues, in Minneapolis.
D.R. Horton Inc. started offering upgraded gourmet kitchens with granite countertops, stainless steel appliances and full tile backsplashes in a few of its developments in Charlotte, N.C., a year ago at no cost to the buyer. In January, it plans to expand the program to nearly all its homes there.
Builders are also working harder to woo real-estate brokers in the hope they will bring in more sales. In Austin, Texas, Centex Corp. is paying brokers commissions of as much as 7%. During the past two months, builders in Washington, D.C., have begun paying commissions of 2.5% to 3% on condo sales, says Bo Menkiti, president of the Menkiti Group at Coldwell Banker, up from "either nothing or 2%."
"From California to Florida to Texas to Illinois, there's been a steady ratcheting up of the intensity of sales and marketing efforts," says Mike Inselmann, president of Metrostudy, which tracks more than 30 markets.
New-home sales have skyrocketed during recent years, thanks in part to low mortgage rates. Sales of new single-family homes climbed 7.4% in October from the previous year, according to the Commerce Department, and are on pace to a new record for the fourth year in a row. The average price of a new home climbed to $286,700 in October, according to Commerce, up more than 18% from a year earlier.
But many economists expect home sales to slow next year as mortgage rates rise. "Trying to maintain these kinds of levels of growth going ahead strikes me as a tough thing to do," says National Association of Home Builders chief economist David Seiders, who expects 30-year fixed-rate mortgages to reach 6.8% next year.
The increased use of incentives is particularly noticeable in markets such as Las Vegas and Orange County, Calif., where sales had until recently been hot. In October, Pulte Homes Inc. cut prices in its Pulte and Del Web subdivisions in Las Vegas by an average of $70,000. A Pulte spokesman says the company had been "too aggressive with price increases this year and found in September that traffic to our subdivisions had dropped off dramatically."
Other Las Vegas builders are using a range of come-ons. Builders of entry-level homes now often offer washer-dryers, refrigerators and mini-blinds as extras, says Larry Murphy, president of SalesTraq, which tracks the Las Vegas housing market. Buyers of move-up and higher-priced homes often get $5,000 to $20,000 in credits at the builder's home decorating center, says Mr. Murphy, who maintains a list of builder incentives. Earlier this year, demand for new homes was so strong that his incentive list "went to nothing."
In Orange County, builders such as Taylor Woodrow Homes Inc. and Standard Pacific Corp. have begun paying commissions to outside brokers instead of relying solely on their own agents. Some builders in the Riverside-San Bernardino, Calif., area have begun cutting prices, according to Carl Reichardt, an analyst with Wachovia Securities, a unit of Wachovia Corp.
As mortgage rates edge upward, builders are also using financing deals as a selling point. Often builders will pay $5,000 of closing costs or pick up the first six months of interest, provided the buyer takes out a mortgage with the builder's financing arm or one of its preferred lenders.
Recently, some builders have once again begun offering "2-1 buy-down" deals, in which they buy down the interest rate on the mortgage by two percentage points the first year and by one percentage point the next. That can help buyers purchase a house that might be otherwise outside of their price range, says John Brawner, director of the national builder division of GMAC Mortgage, a unit of General Motors Corp. "We're seeing it introduced now because not only are housing prices going up, but rates are increasing," he says.
In Denver, D.R. Horton's Continental Series unit is picking up 1.5% of the loan amount for buyers who finance through its mortgage unit. For $400,000 homes near completion, the company is also throwing in a $20,000 to $30,000 credit that can be used toward air conditioning, fancier light fixtures and other upgrades, to reduce financing costs or as a credit off the total purchase price. Incentives helped the Denver unit post record sales for the fiscal year that ended in October, though "profits were not the best," says Troy Warrick, director of marketing. Incentives are "kind of a necessary evil at this point," Mr. Warrick says.
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