Thursday, August 9, 2007

Credit Market Fall-Out #18 - Builders and Incentives – Good News for the Consumer

Another fall out of the problems in the credit markets is that builders have to move the homes that they have. Below are excerpts from a WSJ article that discuss some of the incentives builders are offering and also things you can do to strengthen your hand when buying.

With the housing market looking increasingly frail, home builders and real-estate agents are going to new extremes to attract buyers, dangling lavish incentives and slashing prices.

Across the country, the theme is the same: Home builders and home sellers are juicing their efforts to unload single-family homes. Among other things, they are offering buyers cash discounts of as much as 20%, throwing in a pool and agreeing to finish basements, garages and other spaces at a cost of several thousand dollars -- incentives much richer than builders were offering as recently as six months ago, when the downturn didn't look as bleak.

Since then, home builders have been hit hard as rising mortgage delinquency rates have made lenders much more reluctant to issue new loans, causing home prices to fall and inventories of unsold homes to rise. In June, new-home sales had fallen more than 40% from their peak two years ago, and more than half a million new houses -- nearly eight months of supply -- sit in inventory, according to the most recent report from the National Association of Home Builders. Contract cancellations, meanwhile, have hit nearly 30% for some builders.

Many builders never expected the housing market to fall this far. As asked in a previous post where is the risk department for the builders. Now they're struggling with empty land, too few buyers and an inventory of finished homes that have been sitting empty for months -- and some are growing desperate to free the cash locked up in their real estate by enticing the dwindling number of buyers. The latest survey taken by the National Association of Home Builders indicates that 56% of builders are now offering incentives, up from about 45% a year ago.

I suspect these value understate the number of builders giving incentives.

This trend toward more-generous incentives is "likely to intensify," says Mark Zandi, chief economist at Moody's, citing a growing inventory of new homes, an oversupply of pre-owned homes on the market and "a glut of homes that are a year or two old that investors bought as rental property that have never been lived in, and those investors are now trying to sell, too."

Builders generally try to avoid outright price markdowns, in part because it angers prior home buyers who don't want prices in their subdivisions forced down. These days, though, builders increasingly resort to price cuts "because it's all about avoiding bankruptcy for some," says Gene Rivers, a Keller Williams agent in Tallahassee, Fla.

Why wouldn’t the buyer demand a lower price for their house. It is proof of the value of the home, which it turn should lower their property taxes.

It is a buyer’s market. Below are some things to keep in mind when buying a new or existing home. It helps your negotiating position when you can show the seller you are the “real deal”.

• Buy a finished home: Builders want these off their books.
• Get a preapproval letter: This shows a builder you have financing already in place.
• Close quickly: Wrap up a purchase within 30 days; builders want to sell before the next bank payment is due.
• Avoid contingencies: Don't make your purchase contingent on selling a home or finding financing.

The last issue concerning contingencies is in my mind is mandatory. When I was selling my house I would not even look at a contingency offer unless the closing date was already set.

Also do not be afraid to negotiate hard deals. Don't be afraid to make offers to find the bottom possible price. You know when you are close when they throw you out of the office. By the way, I went back and was able to get the price they threw me out over.

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