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Phoenix a Homebuyers’ Market

Phoenix a Homebuyers’ Market

3/30/2006

Builders offering customers more incentives

Home builders are wheeling and dealing like county-fair carnies trying to win over nervous buyers.

They’re offering incentives like free cars or thousands of dollars to knock down closing fees or to put toward flooring, cabinets and other decorative touches for anyone who will buy an unsold house or sign a contract to have one built.

Steep incentives are a stealthy way to cut prices in a cooling market without actually chopping the base cost of the house.

Builders who had to turn away buyers during last year’s housing frenzy now must offer bigger and bigger freebies to keep shoppers coming to the sales office. The biggest discounts are on standing inventory of homes called “spec,” or speculative, houses.

There’s even more pressure right now for publicly held builders to book sales. The end of March marks the close of the fiscal year for some of them, and they want their annual numbers to look good to Wall Street.

“This is proof that the market has turned from a sellers’ market to a buyers’ market,” said RL Brown, a home-building analyst and publisher of the Phoenix Housing Market Letter.

Incentives are not new to the sales toolbox of most local home builders. Many have offered some form of them for years, even during last year’s buying frenzy.

What’s different now is the size of the carrot they are using to lure new buyers.

In February, Scott Communities began offering a Honda Civic, Honda Element or $15,000 off the base price of a home.

Another home builder was selling a completed spec home with such upgrades as granite counter tops, for $386,000, while the base price of the home in the builder’s brochure was $415,000.

In another case, a builder offered only a $3,000 discount on a home with a base price of $276,000. And that was eaten up by a $7,000 lot premium.

“It varies by community,” said Roger Lewis, vice president of Scott Communities, a local home builder. “At (one local community) we’ve never offered them. But at most communities, we offer 2 or 3 percent off base price.”

So far, only one person has opted for the car, with most choosing to apply the discount to the final price tag, Lewis said. That particular incentive was offered only on completed spec homes, Lewis pointed out.

Builders have more spec homes on their hands as buyers back out of contracts, many because they can’t sell their existing homes.

The median new-home price rose from $262,759 in January to $268,232 last month, Brown said. The average new-home price rose from $306,821 to $323,449 in the same period.

Incentives give builders a way to cut prices without actually reducing the base cost of their homes. Earlier customers could be upset to learn that the base price of the model they bought months ago now has fallen several thousand dollars because the builder miscalculated the market.

That happened to Tim Perez when he bought a KB Home at Dobbins Creek in South Mountain Village a few months before the Sept. 11 terrorist attacks. When home prices dipped the following year, he and other residents circulated a petition to protest the lower prices and sent it to the home builder.

“A neighbor basically bought my model for $16,000 less than I paid,” he recalled. “For the first year and a half, it was real touchy.”

That has since changed with the price appreciation of the last couple of years. His house has doubled in value.

Offering incentives is “better than having a crisis of dramatic oversupply,” said John Foltz, president of Phoenix-based Realty Executives. “It helps to protect neighborhoods pricewise by making adjustments gradually. . . . The worst thing they could do is not recognize a change in the market and let gross oversupply produce a fire sale later on.”

At Standard Pacific Homes, incentives are averaging between $7,000 and $10,000. That’s up from about $5,000 to $6,000 offered a year ago, said Pat Moroney, the company’s Arizona division president. But home buyers get it only if they are willing to use Standard Pacific’s mortgage-lending company.

At three of Standard Pacific’s subdivisions, completed spec homes come with an incentive between $20,000 and $25,000, Moroney said.

Even with incentives, consumers are being very cautious, said Margie O’Campo de Castillo, a broker and owner of Arizona Dream Realty, which represents buyers seeking new and existing homes.

“The incentives help, but I don’t see people jumping up and saying, ‘Let’s go buy,’ ” she said. “Right now, there’s a lot of gun-shy buyers.”

Analysts don’t see the incentives as a sign of panic.

“I have looked at real estate busts in the past,” said Ben Sage of the consulting group Metrostudy. “They usually are preceded by a very severe economic downtown. The Phoenix economy is just too strong now.”

By Glen Creno & Jonathan J. Higuera, Arizona Republic, March 30, 2006

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