Homebuilders look to deal - East Valley Tribune: Business

Homebuilders look to deal

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Posted: Sunday, March 19, 2006 5:42 am | Updated: 4:14 pm, Fri Oct 7, 2011.

Engle Homes is offering $30,000 in upgrades including custom-built entertainment systems or landscaping.

As part of the grand opening of its Talavera community at Seville Golf and Country Club in Gilbert, Shea Homes uses a double-page splash to say it will include a swimming pool with every purchase.

KB Home is trying to attract local buyers with food, fun and a live radio broadcast.

Beazer Homes is reported to have advertised reductions of as much as $40,000 on selected homes in its inventory.

It only takes scanning the local newspaper advertisements to see how some new homebuilders are dealing with a softer market in 2006. For many, it’s the first time in years they’ve had to act more like car dealers by offering fat financial carrots.

Despite often putting down thousands of dollars in earnest money, more people are walking away from deals they signed during the whitehot market last year, leaving some builders with higher stocks of homes under construction.

Combine that with a strong push to meet sales projections and it’s clear buyers jumped from a fastpaced merry-go-round last summer to the driver’s seat when it comes to purchasing the American dream.

“The builders are back to marketing houses and marketing subdivisions, which they hadn’t been because they had waiting lists for every lot they released,” said R.L. Brown, publisher of the Phoenix Housing Market Letter. “Things are getting back to normal, not abnormal. That’s a positive sign.”

BUYER’S ADVANTAGE

There’s no doubt it’s a buyer’s market, says Dennis Herrig, vice president of sales and marketing at Randall Martin Homes, which is building two neighborhoods in Gilbert.

“I would honestly counsel someone looking for a new home to buy now because these incentives are . . . a temporary reaction by builders to meet their business plans,” he said. “They’re going to go away. We’re going to work through this extra supply in the market. . . . The one thing that almost everybody agrees on is — there’s no reason Phoenix won’t continue to see 100,000 people a year moving here.”

NUMBERS SHOW A SLOWDOWN

Typically there are 250,000 home listings in the Valley, Herrig said. Right now there are about 32,000.

A recent National Association of Home Builders survey found 20 percent of builders reported cancellation rates in January that were somewhat or significantly higher than six months earlier. Just 8 percent said they were somewhat or significantly lower.

Homebuilders’ confidence in business conditions fell to the lowest level in three years this month because of rising mortgage rates and a drop in buyer demand, Reuters reported this week. The National Association of Home Builders/Wells Fargo Housing Market index hit 55, down from 56 in February. It was at its lowest since April 2003.

Industry experts say large national builders that construct uniform homes have been most affected. According to a Wall Street Journal article earlier this month, Los Angles-based KB Home’s cancellations rose in December and January. KB executives did not return calls seeking comment.

CANCELLATIONS COMMON

Buyers who can’t sell their current homes in the cooling market are backing out of move-up home purchases. And investors who are worried they bought at the top of the market are also ripping up contracts.

Buddy Satterfield, president of Shea Homes’ Arizona division, said the company has a low cancellation rate because it did a good job of not selling to investors and second home buyers the last two years. Nonetheless, the company’s cancellations over the last month are double normal rates.

“We’re getting some homes that aren’t all the way through to completion because people haven’t sold their existing homes,” Satterfield said. “That’s the primary driver. Resale listings have increased, so people have a lot of options out there.”

The company has been advertising more and providing additional incentives, he said “Historically, we’ve done that anyway except for this last year or 18 months,” Satterfield said.

INCENTIVES ARE BACK

Hacienda Builders just opened two new neighborhoods in Gilbert. For the first time in a year, it is offering incentives valued at $7,500 and up, sweeteners that include pools and financing assistance. The inducements have helped to put sales ahead of last year, said Susan Paul, vice president of sales and marketing.

“Certainly, it’s a normalized market,” she said. “We’re not doing the lotteries or the drawings or anything like that.”

Like others, Hacienda did see cancellations of contracts, mostly from investors, Paul said, adding it can be more difficult to resell the house.

“If someone had selected something as far as purple carpet, if there’s a way to not install that so that the buyer has the best options available to them when they purchase, we will look at that,” she said.

Paul said the cancellations don’t hurt the company because the homes are turned around and sold to people with an emotional attachment to them. And she said the company doesn’t lose any money in the deals.

“We are not reducing the price of homes in any way,” she said. “It still takes us a long time to build our homes. The cost of how we build our homes has not gone down. We still have to build the home.”

TARGET INCENTIVES NOT BLANKET DISCOUNTS

At Scottsdale’s Meritage Homes, the only publicly held homebuilder headquartered in the Valley, incentives are being offered at certain locations for homes under construction.

“The closer it gets to completion, the more interested we are in getting it sold so it can close once it’s finished, because we don’t want to have a bunch of finished unsold homes standing around,” said Larry Seay, chief financial officer. “Unless the subdivision is particularly slow, most of the builders are avoiding doing blanket discounts.”

Seay said customers need a really good reason — “like somebody died” — for backing out on a pre-sold home.

“We keep their deposit money and we usually get anywhere from 3 or 4 percent up to 10 percent. So on a $300,000 house, lets just say it’s 4 percent, somebody is walking away from $12,000,” he said. “If they ordered some nonstandard options, we usually get a pretty substantial down payment on those, like maybe 25 to 50 percent.”

The extra money can make up for having to resell the home in a slower market, Seay said. The deposits can be enough to make some money on the deal, and sometimes the home has to be discounted to sell it, he said.

“That deposit money we keep winds up kind of covering our discount,” he said. “The last couple of years the prices were going up, so if somebody canceled, we could resell the house for more than the old sales price. But now that the prices aren’t going up so much, we can probably sell the house for the same price or maybe a little bit more.”

WHAT’S AHEAD?

It’s still too early to say if fewer new homes will be sold, Brown said. New home permits issued in the Valley in January, the latest numbers available, were down just 2 percent from those the month before when there were 4,500 permits.

“Anecdotally, I don’t think any panic has set in,” he said. “In a sense, there’s some relief because they’ll be able to work the backlog down to where it’s an appropriate backlog.”

The average price of a new home rose 1.2 percent in February from the previous month to about $356,000, according to Brown’s research.

“We haven’t yet seen statistical evidence the price increase business has slowed,” he said. “We’ll know more within the next couple of months whether the permit velocities are down or about the same. There’s some anecdotal conversations the builders are actually seeing a reasonable business.”

Jay Butler, a professor and director of Arizona Real Estate center at Arizona State University Polytechnic, said some local land brokers feel the slower market is turning. While sales did increase in February, it remains to be seen if it will hold because permit activity is slowing, he said.

“One month does not make a trend,” he said. “Sometimes you’ll get aberrations. For example, it could well be that . . . it is simply the push they had on spec homes, that they sold a lot of homes but they were just clearing their existing inventory.”

LUXURY BUILDERS UNAFFECTED

Some companies, mostly those who deal in semicustom or custom homes, haven’t noticed a downturn. At Toll Brothers regional office in Scottsdale, the company is advertising, but it’s not offering extra goodies to buyers.

“Even though the market is slowing down, we are still at waiting lists at some of our communities,” said Linda Hanford, senior marketing manager. “There’s certainly more buyers than we have homes to build.”

The company recently opened a new master-planned community called Windgate Ranch in Scottsdale. It has 2,500 people on a waiting list, and the company plans to do a lottery for homes that start at $1 million.

Its the same story at Tempe-based T.W. Lewis.

“At this point, we are still holding drawings at some of our communities because we are still experiencing demand over our supply of homes,” said Tracy Rubenstein, marketing director. “We are definitely seeing a trend of ‘back to a normal sales environment’ and we’re kind of taking it one month at a time. But we typically only release three or four homes per community per month. That’s what we’ve done for the past two years. We just sell what we can build.”

BULLISH BUILDERS

Homebuilders remain bullish on the future. Herrig said large realty companies have experienced a resurgence in the market the last two weeks as listings have increased. What happens in the resale market is almost always indicative of what’s to come in new homes, he said.

“We’re not going to see the 40 percent appreciation that we saw last year, not at all,” Herrig said. “It’s going to get back to reasonable 10 or 15 percent levels, but incentives are going to go away and you’re going to start seeing price increases again. People are going to be kicking themselves for not buying now.”

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