Home Builders Boost Incentives Designed to Soften Sticker Shock as Prices, Mortgage Rates Rise

Home Builders Boost Incentives Designed to Soften Sticker Shock as Prices, Mortgage Rates Rise

Home builders have boosted cash incentives and upgrades to lure buyers, as sales flag in some markets due to rising prices and higher mortgage rates.

The incentives, which can run into the tens of thousands of dollars, are intended to soften the sticker shock that has put the cost of buying a newly built home out of reach for some families.

Upgrades can include free appliances, blinds, premium flooring or garage-door openers. Also growing in popularity are financial carrots such as paying buyers’ closing costs, covering some of their down payment or paying to reduce their mortgage’s interest rate for a year or two.

“I think there is a weakness in the market right now,” said Mark Ward, managing partner of ForeverHome LLC, a closely held home builder in Raleigh, N.C., set to construct roughly 400 homes this year. “Everybody’s giving more incentives today than they were in the summer.”

The increasing use of incentives underscores the fickle nature of the housing market, which has been gaining steam over the past two years but remains well below the precrash peak and often is buffeted by economic shifts. Some analysts predict that sales of new homes will rise only minimally in the fourth quarter because of higher prices and economic uncertainty from federal budget negotiations and the impending easing of the Federal Reserve’s efforts to stimulate the economy.

ForeverHome used incentives to attract Lori March, a 47-year-old billing analyst who in August bought a five-bedroom house for $295,000 in Wake Forest, N.C., after the builder agreed to cover $4,000 of closing costs and throw in free ceramic tile and hardwood floors in place of the standard carpet and vinyl flooring.

The incentives “were a huge factor in my decision,” said Ms. March, who lives with her 12-year-old daughter and 10-year-old son. “I didn’t really have a lot [of money] to put down, so it made up for what I didn’t have.”

This past spring, when home sales were strong and there was a shortage of new supply, builders scaled back incentives and raised prices by double-digit percentages. But in the summer, buyers balked at the continued price increases and mortgage rates rose.

The rate on a 30-year fixed-rate mortgage, as low as 3.31% in November 2012, was 4.57% last month, a full percentage point above where it was in May, after the Federal Reserve hinted it would soon start tapering its efforts to stimulate the economy. While low by historical standards, the rapid rise spooked some buyers, as a rule of thumb holds that a percentage-point increase in rates translates to a roughly 10% rise in monthly principal and interest payment.

In Wells Fargo Securities’ monthly survey of 150 home-builder sales managers across the U.S., 29% of respondents said they increased their use of incentives in September, up from 17% in August and from 14% in September 2012.

Sales of new homes, meanwhile, have been volatile. Sales declined more than 14% in July from a month earlier to a seasonally adjusted annual rate of 390,000 units, according to the U.S. Census Bureau. The average price in July was $318,500. But sales rebounded in August, rising 7.9% to 421,000 units while the average price stayed flat. Analysts say incentives may have played a role in the month-over-month rebound.

David Weekley Homes, a midsize builder based in Houston, is offering up to $20,000 in incentives on homes purchased by the end of the year in its 14 communities in and around Tampa, Fla. In Houston, Weekley is offering a 7% price cut on most homes bought before year-end.

In Texas, CastleRock Communities LP saw sales slow over the summer after it raised prices 12% earlier this year. The builder boosted incentives in some communities, covering closing costs of as much as 6% of an entry-level home’s price and offering buyers of pricier homes free upgrades or a price discount, partner Lance Wright said.

Kendra Cooke, a real-estate agent at Bob Parks Realty LLC in Brentwood, Tenn., said builders aren’t waiting for customers to ask for incentives and instead are offering and advertising their giveaways. “A lot of builders are just offering the incentives upfront, saying that with a full-price offer they’ll pay $2,500” toward closing costs, she said.

The biggest builders are also offering incentives. Lennar Corp. LEN -0.48% , the nation’s third-largest home builder by 2012 closings, said in a call with investors last month it had boosted incentives in “select” communities to spur sales, though it didn’t identify those markets. While incentives can generate sales, they also eat into builders’ profit margins, and when big builders like Lennar start offering incentives, it can lead to pressure on all builders’ prices.

“As the market goes through minor gyrations and corrections on a road to a broader recovery, we think that we will have to use incentives on a select basis,” Lennar Chief Executive Stuart Miller said. The company’s use of incentives declined on a national basis to 6% of its average sales price in its latest quarter from 6.7% in the previous quarter and from 9.2% a year earlier.

Kathy Givens, a 49-year-old customer-service representative for the city of Houston, is an example of a cash-strapped, first-time buyer who received incentives to help her close her purchase of a new, three-bedroom home in Humble, Texas, for $113,000 last month. Builder CastleRock Communities covered $7,000 of closing costs for Ms. Givens and gave her a stove and a dishwasher.

“It was a big help,” she said of the incentives. “I went to closing and paid no more than $1,000 out of my own pocket.”

Read the original article written by Kris Hudson of the Wall Street Journal.



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