It's amazing what buyers can get in today's new home and resale market. Consider some of these recent promotions:
- $8,000 to closing credit to purchaser
- Special pre-construction price with 2.5 percent financing incentive makes this a stunning value
- 5 percent closing cost credit (on $500,000 price = $25,000)
- Free rec room, full bath and $10,000 in closing
These are just a few samples of the available buyer assistance, upgrades, and financing options available to buyers who get into the game now and start negotiating. With 100 percent financing also available, it's almost to the level of where an auto dealer says, "Sign and Drive." A buyer who can qualify for the mortgage amounts, can get in for nearly $0 out of pocket with such incentives offered above.
Why is this available now? Builders are on a drop till you shop campaign, waging a battle against swollen inventories and dropping sales numbers. If you have a community of 100+ houses, inventory standing at 3 to 6 months and sales are down 15 to 25 percent -- you would be wheeling and dealing as well.
In addition, while a single family homeowner can make the payment on his own primary residence while he's trying to sell, imagine if you have to try to make payments on 100+ houses that aren't selling. You want to move the inventory to maximize profits (or minimize losses). The ones that will win will be the buyers who hear opportunity slamming his huge fist on the door and opens up for savings.
Handley-Woods Market Intelligence reports on scores of housing markets across the country for the building industry. At this point in the year, the industry as a whole has a mixed report card:
- Prices: B- (Avg. $217,100)
- Sales Volume: F (-14.2 percent)
- New Home Inventory: C (6.4 months)
- Supply under construction: D+ (3.6 months).
The problem for new home developers is that once ground breaks on a new project, you have to start delivering on the product -- even if the buyers aren't standing in line to buy, yet. What's even more threatening are condos. At least with a single family development, you can stop building several sections until demand increases. With a condo building, once the building starts going up, you're pretty much committed to finish the whole development.
BusinessWeek.com headlined a story last week, "An Awful October for Housing Starts," subheading the story: "With new-home construction dropping to its lowest level in over six years, markets are betting the Fed could start cutting rates by June."
So should buyers wait for the fed to cut rates in seven months? Sure -- if you want to miss out on the $25,000 closing costs, 2.5 percent special financing, and free rec rooms. Builders aren't stupid (just wanted to mention that at this point in the column).
Once the inventory is reduced to an acceptable level, the incentives will evaporate. The BusinessWeek.com article bemoaned the fact that "housing starts plunged in October 14.6 percent in October." Thus the "housing slump appears to be deepening," it says. However, what's really happening is that these builders are beginning to move the market to a more level playing field -- for them.
If you have too much gas and you need prices to move upward, what do you do? Cut production. The same is true in the housing industry -- if prices are falling, you're giving away cash and free upgrades, how do you keep from having to do that? You cut housing starts.
In the Washington, D.C. area, some builders aren't just dropping their housing starts, they're even getting out of land deals and postponing developments altogether. What does that mean for the future? Shortages in the future housing pool and higher prices. The basic structure of this local economy is still in tact: job growth, economic growth, etc. If you keep cutting the housing pool, where will the jobs go at night? To a higher priced bedroom community.
Buyers waiting for prices to hit bottom and incentives to top out may have that situation right in front of them. Opportunity's knocking. Would someone get the door?