Incentives ‘Condition Buyers To Expect A Deal’
The Business Journal reports on the Greater Triad area in North Carolina. “With the growth of new home sales in the Triad starting to slow, national builders are unveiling large-scale promotions and deep discounts hoping to lure buyers to their developments. During a special 12-hour sale last month Centex Homes offered buyers more cash in their wallets, lowering the cost of homes scheduled to be completed in February and March by as much as $30,000.”
“K. Hovnanian Homes is wrapping up a promotion under which buyers at any of its 25 Triad neighborhoods receive a voucher for up to $16,000 in furniture from Rooms to Go. Hovnanian is the Triad’s second largest builder. ‘It is overwhelming what they are offering,’ said Elizabeth Ward Small, a Burlington-based broker. ‘They are doing anything they can to draw a buyer.’”
“Most local home builders and real estate agents say they don’t believe the incentives are a sign of a weakening housing market. Rather, they see it as an indicator of a strong market where builders are getting more competitive, especially in booming areas like eastern Guilford County where new subdivisions are filling up with home in similar price ranges.”
“There are signs that growth could be slowing. Last year, 5,100 new homes were sold in Guilford, Forsyth and Alamance counties. That was a 9 percent increase over 2004, but a long way from the 23 percent growth in new home sales seen between 2003 and 2004. ‘I think everyone is fighting for the customer because we don’t have as many customers,’ said Jan Cox, a Greensboro-based broker.”
“That sentiment is echoed by Scott Wallace, president of Greensboro-based Keystone Homes. who estimates his company is getting 50 percent fewer visitors to its neighborhoods than just a few months ago. A slowing housing market will likely put more pressure to increase sales on builders like Centex and K. Hovnanian, which are publicly traded companies and need to meet shareholder and analyst expectations. That could mean the Triad will see even bigger discounts and incentives from these companies in the future.”
“‘When I open the paper and see that $16,000 (K. Hovnanian furniture) ad, it makes me cringe,’ said Wallace with Keystone.”
“Such incentives do have an impact on how buyers perceive the market across the board. Many local builders said they have prospective buyers come in wanting to know what specials or promotions they are offering, and if they are as lavish as they ads they’ve been seeing. ‘Obviously it puts our sales people in a position to discuss things we would rather not to discuss,’ said Tom Hall, president of Greensboro-based Windsor Homes.”
“To counter such questions, local builders say they seek to change the subject, emphasizing the quality of their homes and the possible benefits of doing business with a local company, as opposed to a national corporation.”
“Sheri Bridges said that once an industry begins these kinds of promotions, it’s difficult to back away from them. Bridge compares the incentives home buyers are offering to those offered by auto makers. As the economy started to improve, the manufacturers announced they would no longer offer large incentives to buyers. Car sales quickly began to decline again. Bridge says if the large builders give away too much now, home buyers will expect the same incentives in the future and may not buy without them. ‘It conditions consumers to expect a deal,’ she said.”
They’re willing to do anything - except lower the selling price. I hope more and more people start to see through this sham.
The $16K discount is a way of “lowering the price” which is (for some reason) cheaper for Hov than to simply reduce the $ price by $16K. It is only worth $16K for the buyer if the furniture purchase is the most preferred course of action for the buyer if you handed him $16K at closing and let him do with it as he wished; otherwise, it is worth less than $16K.
Nonetheless, the incentives do represent a price reduction, even if they are not called such nor accounted for properly in transaction records.
The bag holder is stuck paying interest and property tax on the 16K as long as the home is owed– What a bargain!
‘Don’t piss off the suckers we sold last month and best of all- Comps won’t be affected’
My thoughts exactly. Hope they thought ahead to buy a new rug to land on after falling out of the new chair when they open their next property tax bill.
I hope everyone understands the “value” of a $16,000 decorating allowance. The place where you are required to purchase is certainly overpriced and offering a huge discount to their real customer, the HB. So, in exchange for $6-$8,000 of furniture you get an additional tax assesment on your home of $200-$500 per year forever. Can you say “rent-to-Own?”
Rather like the buyer is short-sheeted.
I AGREE that it is tough to SWALLOW a 30 year Fixed Mortgage on bedsheets and dust ruffles… Worse yet, an A.R.M. where you have no idea how high the cost of those items will be.
20/20 should trade one of their CREDIT CARD stories for this!
I think they try all the incentive tricks first because they are afraid to lower prices and piss previuos buyers off. I have heard of previous buyers actually sueing the builder for lowering their property values. The incentives are actually bogus most of the time. They might give you 15000 in incentives that you could really buy on your own for 2000. Thing is people think they are getting a great deal.
“During a special 12-hour sale last month Centex Homes offered buyers more cash in their wallets, lowering the cost of homes scheduled to be completed in February and March by as much as $30,000.”
Does this $30K discount show up in the sale price (the one reported to the county assessor’s, which shows up later as a comp price)?
“K. Hovnanian Homes is wrapping up a promotion under which buyers at any of its 25 Triad neighborhoods receive a voucher for up to $16,000 in furniture from Rooms to Go. Hovnanian is the Triad’s second largest builder. ‘It is overwhelming what they are offering,’ said Elizabeth Ward Small, a Burlington-based broker. ‘They are doing anything they can to draw a buyer.’”
Does the “comp price” for this home later show up before or after the $16K in kind furniture discount? My guess is the Hov and Realtors would both rather report the pre-discount price if they could legally get away with it, even though the post-discount price would more accurately reflect the value of the deal.
It depends on the HUD 1. If the HUD 1 shows sale price as discounted price then all subsequent comps will be based on the “new sale price” if the HUD 1 reflects 30K lender credit and they are not making any more at that price then it should not affect comps.
Excuse me lender credit should be builder credit.
Do MLS prices reflect new home sales by developers? If so, then are those incentives deducted from the home prices?
see, prices never go down
in UK reports of rebound ? = wierd
“Rather, they see it as an indicator of a strong market where builders are getting more competitive”
Uh-huh. More competition = strong market. yup yup yup. Way to understand capitalism Mr. builder!
“To counter such questions, local builders say they seek to change the subject, emphasizing the quality of their homes and the possible benefits of doing business with a local company, as opposed to a national corporation.”
some of these guys are so gonna be bankrupt it’s not even funny.
The big builders if I understand it correctly, do not want to piss off SELLERS and REALTORS and the rest of the industry by lowering prices and instead offering incentives.
I’d like to see a comment from the other local builders and realtors that believe incentives ARE a sign of a weakening housing market. I wonder why the paper didn’t have a quick chat with those folks - advertising revenue?
But my friend who bought a home to flip in Charlotte told me if I wanted to move there I better do it quick ’cause prices are only going to go up . . .
You’re supposed to pay tax on that “free” furniture, too.
They’re offering incentives for only one reason; homes aren’t selling and they know it. Ask the auto industry why they had to go to 0% financing, employee pricing, and other incentives. Because no one was buying them.
The big surge of building in January is to finish homes so people have less time to cancel. I’d be weary of buying any home that was put up in less then 3 months. A LOT of settling happens, and if not correct you’ll see all that settling when your drywall and spackel starts cracking.
“The big surge of building in January is to finish homes so people have less time to cancel.”
That is very true, excellent thought.
Anyone who has been inside a Rooms to Go store knows that $16,000 of their furniture is equal to $3,000 cash.
Yes, the mark up its ridiculous. They are getting to be like jewelers.
Another scam is giving you incentice to us their lender. I have seen them tack on another 7500 to price if you use outside lender. Do I smell a kickback here or what. They also give you an incentive by paying closing costs. Don’t you dare talk about lowering the price!!!
You are SO right! The first time I saw that in an ad I smelled a rat but couldn’t put my finger on it. That just didn’t make sense to me.
So here’s a comment and a few questions: Out of the few of us who participate here, and who-knows-how-many lurkers, most of us *do* smell a rat and wouldn’t touch these so-called incentive offers and the use-our-preferred-lender builders with a ten foot pole. My question is why is it that there are so many people who *don’t* see, don’t read between the lines, don’t think for themselves?? Are they that gullible? Or, is it desperation? Sometimes I think I over analyze in my daily life (from trying to decide which is the best mp3 player to buy to which vendor should I use at work who will give me the best deal on a 250GB hard drive). I just want the best bang for my hard earned buck…..and yes, the best savings for my employer because more savings means a healthier company, and the healthier the company is the better it is for me. It’s such a no-brainer rationale but too many people do not use the brains they were born with and that is tragic. They’d rather buy the snake oil and then when someone asks why they did it they will try to convince you until they are blue in the face that it was a good deal. Saving face? Well, it’s too late…the bad guys already have your money.
It’s best to THINK people! Anyone out there who reads these posts, PLEASE, do yourself and your family a favor: If you can’t think while the real estate agents are trying to sell you a house, then go home and do your homework! If they say that the sale will go away, or this is the last day of the incentive (or any other BS line), don’t let the scare tactics reel you in. It will be there tomorrow or next weekend…if it’s not, there are always other homes to look at. Be strong, be patient, be informed.
(off the soapbox now)
BayQT~
Interesting side note. Rooms to Go is offering “no payment, no down payment, and no interest” until January 2008.
Same strategy as the homebuilders are using.
….and the gullibles will think they are getting something for nothing. They don’t realize that the clock is still ticking on the interest….that if they don’t pay it off by 2008 then (in most cases) the interest is added on retroactively from the date that they bought the damn thing.
People need to ask questions, educate themselves.
BayQT~
Sorry OT, but this is a true gem from the Voice of San Diego (at least SD has one journalistic outlet that somehow rises above truthiness!):
http://www.voiceofsandiego.org/site/apps/nl/content2.asp?c=euLTJbMUKvH&b=486837&ct=1984615
THANKS PATRICK!
Speaking of great incentives, how about the opportunity to own a home of your own, to enjoy the amazing wealth effect of real estate ownership, with no skin in the game?
‘NAR President Thomas Stevens says he isn’t worried that nearly half of first-time home buyers put no money down, but adds, “If the number was higher than that, I’d be concerned.”‘
http://www.usatoday.com/money/perfi/housing/2006-01-17-real-estate-usat_x.htm
[laughing]…. ‘NAR President Thomas Stevens says he isn’t worried that nearly half of first-time home buyers put no money down, but adds, “If the number was higher than that, I’d be concerned.”‘ [laughing]
I bet if it were a quarter of first time homebuyers with no money down, he’d have said the same thing.
Mr. Stevens, What is the threshold where you’d be concerned? Inquiring minds want to know.
Thanks GS, that is a great article. Many are thinking “crash” & it very well could be a slow grind down like Japan. In truth, none of us know! The leverage is so great that a crash could happen easy, but with the Fed ready to ease, it could turn into a grind down. TWT
For sure, only hyperinflation will send RE up from here and I don’t see that……………..yet.
Comments like that remind me of the SNL skit motif: “Deep Thoughts”….lol
Seventy one out of every 100 purchase deals we closed last year was 100% financed. (That’s 71% my daughter told me). And that’s with median sales prices in King County (Seattle Metro) at $400,000 & rising. And that’s with great employment: Boeing, MSFT, Starbucks, Amazon,Nordstrom, Costco, world class healthcare centers & research, US Navy, and so on….
That’s right S Crow…
I realtor acquaintance if mine told me that 86 % of all purchases (in the last 5 years!) in Santa Barbara city were A.R.M. or exotic loans!
That leaves a measly 14 % of homes were purchased on “standard” (safe) 30 year fixed or by CASH.
Won’t be long before we start hearing about the 86%.
Here is another great deal: A 50% off sale on Toll Bros undervalued shares:
(They’re not making any more land, ya know!)
http://tinyurl.com/s4j49
While Barron’s is a respected source, they are missing the obvious. The reason why TOL and other home builders are assigned a low p/e is because the industry they are in is cyclical. If profits fall 50% due to any slow down, you’re then looking at a p/e of 12.
Are there any developers who read this board? If so then what are the typical mark-ups for builders? I was looking at some up-scale homes yesterday. They were asking $910,000. I made some quick calculations on the land and cost to build the structure myself and came up with about $550,000. Is that a typical mark-up?
Not a builder but heavily involved in construction and foreclosure. Components of builder costs are base lot price, engineering and planning, materials and labor, and marketing. These are all heavily dependent on the location. Currently, there is a very large lot inventory for most builders (three years at current pace if I recall correctly - this would translate to five to seven years’ supply at pace prior to 2002). Engineering and planning is site specific. Most builders today insist on buying their lots in “finished” condition or fully engineered with roads, utilities, etc. in place so this is sometimes incorporated into the lot price. Materials and labor are site-specific as well, although raw materials have inflated by about 200% and I’m told that labor costs are about 300% up if you can even get subs and crews to commit to your project. Marketing is what it is, a massive tax dodge where companies have to decide whether to pay taxes or spend the money on tax-deductible advertising.
Short version: like some of the airlines that hedged their fuel costs against future rises, builders have acquired large volumes of land at pre-inflated prices. Their profits at this stage are largely windfall, but the increasing production costs are giving them reason to slow their building or to wait for a time until supply catches up with demand. Whether this slowing will ultimately prove to be a reversal remains to be seen, but the prudent builders who aren’t operating on credit will not really be hurt by a recession. It will merely be another opportunity for them to buy more land using the massive profits generated in the current boom.
Thanks for the reply. The reason I was asking the question is because I think that as long as profits are to be made then the building will continue. It looks like prices could fall anywhere from 20 to 40% in most markets and builders can still profit. The question is, when will the supply of new homes reach a point where the market will not support it (at a profit)? If I were a builder I would want at least a 10% profit for my effort.
There is an interesting blog post over at The Mess That Greenspan Made that addresses just this topic, the cost of building to the builder. They speculate that over the past few years, while sale prices have jumped exponentially, costs to build have only gone up 9% or so a year. Take a look at this, see how much profit is built into the price of a new house, and wonder how much builders can lower the cost of a house.
LA Homebuilder Calculus
2000 2002 2005
Sale Cost 199k 262k 490k
Bldg Cost 175k 204k 277k
Builder Net 24k 58k 213k
Also remember that builders are public companies and they always have to show GROWTH. Part of the reason TOL’s stock has tanked is because they can’t continue to grow. Doesn’t matter that they’re still raking in tons of money, if it’s not MORE money than last year then the stock price goes down. Poor, poor home builders.
sorry, the chart got formatted wrong. try this
LA Homebuilder Calculus
_ 2000 2002 2005
Sale Cost 199k 262k 490k
Bldg Cost 175k 204k 277k
Builder Net 24k 58k 213k
arghh!
LA Homebuilder Calculus
……………………2000 2002 2005
Sale Cost 199k 262k 490k
Bldg Cost 175k 204k 277k
Builder Net 24k 58k 213k
No Prob Bellevue,
We get what you are trying to say, and you have MADE A VERY GOOD POINT!!
Thanks for the link bellevue blogger that was a clear and concise answer to my question. I too live in the Pacific Northwest. What are your thoughts on the local market?
deflation guy : I’m certainly not going to say “It’s different here.” But Seattle is definitely behind the curve when it comes to inventory buildup. Plus, there hasn’t been a lot of new home construction here over the last several years. Most of the suburbs were already built up. A tightening of credit will definitely have a negative impact on house prices (positive impact from my perspective). But on the other side of the equation, the housing supply, there just isn’t as much, relatively speaking, as PHX or other places.
Yeah, I hate to give into the “it’s different here” thinking. But the economy really is firing on all cylinders right now. However, you can still rent a place for much less than purchasing right now, particularily in King County. That is a major red flag to me so I am holding back for now.
i love how people say the economy is firing on all cylinders, yet I (MS organic chemist) have been underemployed for the last 14 months and unemployed for 5 of those 14 (including now). Somebody give ME a job!!
But you’re right. WIth Microsoft set to expand significantly, and Boeing and everybody else doing quite well, there’s a lot of money sloshing around King County. My townhouse, bought for $250k in 2004, I’m renting for $1150. (HOA fees $138). Killer deal. But back to you. Continue holding back…our time will come.
Is it true that incentives never go down, they always go up?
buyers expecting a deal is bad, bad bad bad.
Rooms to Go Furniture for a Rooms to Go House, both will be in need of major repairs, if not disposal within five years.
Hello
I live in a small town/ city in NC. Looked at a new house this weekend for 150k and it has been on the market(DOM) for 580 days (no kidding). It has a slab floor and tile and hardwoood flooring. It also has a fireplace and a/c comfort machine. City water and sewage. What is the true value and what do you thing i should bid. This town/ city has experienced a lot of lay-oof and job closing. Walmart and county government is the biggest employers. I work for the state and make 35K a year. I was thinking of bidding between 70k and 75k (max). I could afford that amount, but I will not pay 150k because this development only has three house so far and the developer tried last year to sell some lots and no one would buy. Can some help me and give me some good advice on what I need to do. I do not want to rent and I can continue to live with my parents, but I am geting older(32 years old) and would like a place to call my own. I have a good job and it permenent. I plan to live here fro the rest of my life, but I cannot pay 150k for a house that I could not resale in future for what I paid due the economy of the area. I am not a flipper and also the house is 3 bdr and two full bath, garage, and a living room area. Also, I have no kids.
thank for the help,
Buyer beware
Save up cash for a down payment, when you can afford a house with 20% down and a fixed 30 year mortgage, then you can buy your home.
How many sqft? Any idea of lot cost? I’d go with no more than $60/sqft and see how that compares with your 75K bid idea. Building costs have gone up considerably since this the builder built this house however market conditions being what they are, or will soon be, you definitely are in the drivers seat. Make sure you have the 20% down and a solid job. Get a fixed rate loan. Don’t be in a hurry to buy. Don’t spend more than 25% of your income on housing. That’s my advice. You know what they say about the value of free advice, right?
hello,
the sqft is 1200 if that would help. The lot cost is 30k, but he was selling some lots for as little as 10k.
thank
I don’t know how small your town is but it’s quite likely that others have looked at this house and walked away. See if you can find out *why* they walked away…it may be more going on than the high asking price. Talk to people, neighbors ….someone knows. 580 days is a LONG time to be on the market and not move. Who is the developer, by the way? Are they local? Since it’s long in the tooth, it could be that the developer/builder can afford to hang on to it and reject past offers. You may find some negotiation power. But you won’t know until you do a little homework.
Once you get that down payment together, unless the developer has deep pockets, 20% of $75K (and a sale) would be better than 0% of $150k(and no sale). At least, it sounds good to me.
BayQT~
The lot cost is 30k, but he was selling some lots for as little as 10k.
In that case do your numbers on a lot cost of 10k. Also, spend the money and get a serious structural engineer’s report.
If all OK, and you feel you would be happy to live there for a long time, then buy. Seems to me you should be able to get a fairly short (15 years or less) fixed-rate mortgage, and only pay about 20% of your income, even with a small deposit. That’s a great position to be in :).