one reason us housing did well is a worrying sign. a good read...

one reason us housing did well is a worrying sign. a good read into the insight of builders and speculators holding at the top of the market. the pressures on alright.

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bloomberg.


Homebuilders Offer Garages, Sod to Lure Buyers Amid U.S. Slump

By Kathleen M. Howley and Brian Louis

Sept. 27 (Bloomberg) -- Phyllis Whitaker needed more than a mortgage broker and an attorney to help buy a new house this year. She had to create a computer spreadsheet to sort through all the incentives that homebuilders offered before she agreed to purchase a three-bedroom Colonial in Novi, Michigan.

``It was hard to keep track of them all,'' says Whitaker, 47, who will take possession when construction is completed in December. She got $5,000 off the $299,990 list price and $5,000 in extras such as air conditioning, outdoor sprinklers and sod.

U.S. homebuilders including Pulte Homes Inc., Lennar Corp. and D.R. Horton Inc. are cutting prices and throwing in a lot more than the kitchen sink to stem a record build-up of unsold houses -- even as their profits and shares tumble. The median price of a new home this year may fall for the first time in 15 years as sales drop the most since 1990, says Doug Duncan, chief economist for the Mortgage Bankers Association in Washington.

Builders are paying closing costs and a year's worth of monthly mortgage bills to lure buyers, says Joshua Cohen, an agent with Wilkerson Real Estate and Investments in Las Vegas. More builders, such as closely held Pageantry Communities Inc. in Las Vegas, are offering incentives including $10,000 that buyers can allot for price reductions, equipment upgrades, closing costs or mortgage payments, he says.

``We've seen a huge upswing in supply and a huge decrease in demand,'' Cohen says. ``The builders will do whatever it takes to move a property.''

Free Fireplaces, Garages

About 44 percent of U.S. homebuilders have reduced prices, says Gopal Ahluwalia, director of research at the National Association of Home Builders in Washington, citing a survey he conducted this month. The median price of a new home dropped 11 percent to $230,000 in July from a 2006 high of $257,000 in April, according to the Commerce Department.

In a similar survey a year ago, Ahluwalia didn't even ask about price reductions. ``People were buying like crazy then and prices were only going in one direction: up,'' he says.

More than half of builders, 55 percent, are offering free upgrades such as marble countertops, fireplaces, hardwood floors, or garages, up from 37 percent a year earlier, he says. Four percent are giving away cars and another 4 percent are handing out vacations, Ahluwalia says.

The Commerce Department will probably report today that sales of newly constructed homes dropped to an annual rate of 1.04 million in August from 1.072 million in July, according to the median estimate in a Bloomberg survey. That would be the lowest since April 2003 when it was 1.012 million.

`Have to Sell'

Measured annually, new-home sales probably will slide to 1.07 million this year, the biggest decline in transactions since 1990, and the median U.S. new-home price may fall for the first time since the 1991 recession, when it dropped 2.4 percent, Duncan says.

``Builders have to sell their houses or pay the carrying costs,'' he says. ``There's more pressure to cut prices and offer incentives for new houses than in the existing-home market, where most people can wait if they don't like the offers they're getting.''

Centex Corp. is running newspaper ads in the Chicago area offering buyers $5,000 off -- or a gift card to retailer Best Buy to equip their homes with computers, home theaters or karaoke systems.

Officials at the five biggest homebuilders didn't discuss specifics of incentives. Miami-based Lennar Corp., Dallas-based Centex and Toll Brothers Inc. of Horsham, Pennsylvania, declined to comment on their offers, while Bloomfield Hills, Michigan- based Pulte Homes, and D.R. Horton, based in Fort Worth, Texas, didn't return messages.

Profits Plummet

``Each community decides whether or not to offer incentives as well as the appropriate level, if any,'' says Frederick Cooper, vice president of finance at Toll Brothers, the largest builder of luxury homes.

Profit at Toll Brothers in the quarter ended July 31 fell 19 percent from a year earlier, the first decline in four years, as revenue slid to $1.53 billion from $1.55 billion, the builder said Aug. 22. Hovnanian Enterprises Inc., New Jersey's largest homebuilder, said Sept. 6 that profit in the quarter ended July 31 tumbled 34 percent.

Lennar said yesterday that net income in the quarter ended Aug. 31 fell 39 percent to $206.7 million after it joined homebuilders including KB Home and Beazer Homes USA Inc. in reducing their profit forecasts this month as demand slumps.

Much of the decline stems from an exodus of investors from the new-home market, says Ahluwalia, of the builders association. About a quarter of new-home sales in 2004 and 2005 were made to buyers who bought to resell quickly at a profit, lured by record increases in home values, he says. Investors now represent 10 percent of buyers.

`Wrong Time'

Daniel Rosenfield, a real estate investor, agreed last year to pay $204,800 for a house under construction in Kissimmee, Florida, with the expectation that he would sell it quickly in ``the low $300,000s,'' he says.

Rosenfield, 32, closed the deal in June, just as the new- home market was cooling, and listed it for sale at $300,000, resigning himself to a more modest profit. Today, the house is vacant. He's reduced his asking price to $295,000 and still has no offers.

``I bought at the wrong time,'' Rosenfield says. ``My assumption was that I'd be able to sell within a month.''

The Standard and Poor's Supercomposite Homebuilding Index of 16 stocks slid 26 percent this year through Sept. 26, after averaging 49 percent gains in each of the past three years. Lennar and Centex are down 23 percent, Pulte 16 percent and D.R. Horton 30 percent.

There were 568,000 new homes for sale at the end of July, an all-time high, up from 464,000 in the year-earlier month. The time it would take to sell off the existing housing stock rose to 6.5 months, the highest since November 1995, according to Commerce Department data.

Fed Concern

Sales fall more often than prices. U.S. sales of new homes have dropped in seven of the past 20 years, including a three- year slide that ended in 1991. In data going back to 1963, the only new-home price declines in addition to 1991 was in 1970, when the median slid 8.6 percent to $23,400 as the U.S. was mired in recession, according to the National Association of Home Builders.

For existing-home sales, which represent 85 percent of U.S. transactions, the median price hasn't fallen since the Great Depression in the 1930s, says Lawrence Yun, an economist with National Association of Realtors.

Federal Reserve policy makers held the U.S. benchmark rate at 5.25 percent last week, citing their concern that declining home sales are slowing the economy.

``Moderation in economic growth appears to be continuing, partly reflecting a cooling of the housing market,'' the Federal Reserve said in the statement on Sept. 20 that kept the rate unchanged.

`See the Bottom'

Each time the Fed has stopped raising rates for more than one meeting in the past 25 years, the next move has been a cut, according to Mortgage Bankers Association data. Reduced rates would make some mortgages more affordable, Duncan says.

``We'll see a couple of quarters of negatives for new-home sales and prices, at which point we'll see the bottom,'' he says.

For now, builders will have to tempt buyers with sprinklers and microwave ovens.

``Without the incentives, I don't think I would have bought a new home,'' says Whitaker, who's buying from Winnick Homes LLC, based in Bingham Farms, Michigan. ``I couldn't pass it up.''

To contact the reporters on this story: Kathleen M. Howley in Boston at [email protected] or Brian Louis in Chicago at [email protected] .

Last Updated: September 27, 2006 07:39 EDT