If you’re the kind of person who buys a car off the dealer’s lot to save money instead of ordering it with the exact bells and whistles you want, a rare housing opportunity may be waiting.
The inventory of unsold new homes is rising again to “dangerous” proportions in some parts of the country, the National Association of Home Builders reports. That’s bad news for builders who misread the tea leaves and are now stuck with a backlog that’s costly to carry. But it’s good news for buyers who are not terribly choosy.
“It’s a great time to be a home buyer,” according to analyst Ivy Schneider, who follows the housing industry for the Salomon Brothers securities firm in New York and says some builders are being “very aggressive” in selling off inventory houses.
You may not be able to pick the exact colors you like best or upgrade to a better line of appliances. But you can save big money. Exactly how much depends only on your ability to dicker and the builder’s willingness to cut a deal.
The number of unsold new houses nationally hit 375,000 in November. That’s a 7.2-month supply at November’s sales rate–six months is considered a normal inventory–but it’s a big jump from 344,000 units, or a 5.5-month supply, in July.
Most of the unsold inventory is made up of houses under construction, which gives builders some leeway. But the number of completed but unsold houses is rising at a much faster pace.
Between November 1993 and November 1995, the unsold inventory has risen 29 percent overall. On the other hand, the number of completed but unsold houses has skyrocketed by 48 percent, and “that’s staggering,” says research analyst Dean Crist. “That’s exactly the category you don’t want to see going up.”
There are valid reasons to build homes on speculation — that is, before landing a buyer. Some builders use them as samples, for example. And sometimes, it is more economical to build, say, the last 15 houses in a subdivision all at once rather than one by one.
Additionally, builders like to have houses ready for relocating families who need a house right away. They’ve sold the old house, the wife and kids are on the way, and they can’t wait to have a place built to their specifications.
But the current buildup is being fueled largely by lenders with money to burn. Many, in fact, are more than willing to finance unsold spec houses, a definite no-no only a few short years ago.
“Lending standards at banks and thrift institutions have eased and loan officers are once again chasing builders,” NAHB’s chief economist, David Seiders, explains. “Unfortunately, an awful lot of builders are yielding to the temptation, even when demand is uncertain at best.”
Indeed, the economist says, many builders seem to have “convinced themselves” that while the backlog may be a serious problem in their markets, their own inventories are in better shape.
That kind of thinking can be expensive. Builders generally pay 2 percentage points above prime, currently 8 percent, in interest on their construction loans. And until the house is sold, there are other carrying costs, too. Property taxes, insurance and security all come to mind.
Collectively, those costs are a big drain on builders’ bottom lines. And if they hold their inventory for too long, the red ink starts to flow. Consequently, they’re more willing to do whatever it takes to land a buyer.
Although some builders may cut their base prices, depending on how desperate they are, most won’t, at least not yet. “The situation is not that severe,” says analyst Schneider. “But other than that, they are doing anything they can to keep a prospect from going across the street to the competition.”
“Builders tend to be very reluctant to give discounts because it upsets the people who paid higher prices earlier,” adds Michael Carliner, another NAHB economist. “They’re much more likely to throw in extras or help out with the financing.”
The most popular incentive is help with closing costs, either some or all. Settlement fees vary from place to place, but where I live they run about 7 percent of the sales price.
Builders are also prone to “buy down” your mortgage rate; that is, to give your lender cash up front in exchange for a lower rate, perhaps 3 percentage points lower in the first year, two points lower in the second, and one point in the third.
With a deal like that, your savings could be substantial. On a 30-year, $125,000 loan at 9 percent, your monthly payment for principal and interest would be $1,006, or a total of $36,216 during the first three years. But with the buy-down described above, your first 36 payments would total roughly $20,081, a difference of $16,135.
Options and upgrades are another common lure. Profit margins are as low as 5 percent on the base house, but they are 50 percent and higher for the extras, so builders are more likely to throw in a free fireplace, a garage or better cabinets.
Some builders offer their buyers a cash allowance and allow them to use it however they like. To make a quick sale, a few have even been known to go back into a completed house and switch the carpeting and cabinets to the color the buyer wants.
How do you find builders who are willing to negotiate? That’s the easy part. You’ll see their ads in the local paper, trumpeting, among other things, “Quick Delivery Homes,” “Immediate Delivery,” “Immediate Occupancy,” “Savings on Homes Ready Now,” and my personal favorite, “We’ll Make It Worth Your While.”
While the “unsold bubble” seems to be most severe in the Northeast, where there’s practically a year’s supply of new homes on hand, you’ll find them everywhere. Also, while the financing of speculative construction is most heavily reported by builders producing fewer than 25 houses a year, big builders aren’t immune to the overbuilding syndrome, either.
But big builder or small, it doesn’t seem to matter. Both are ready to deal.
The little guys don’t have the financial wherewithal the bigger ones have to carry inventory, economist Carliner points out. But the big guys are “more inclined” to dump their unsold houses and “can offer more ruthless discounting.”
Schneider concurs, noting that one industry giant she follows “would rather give their houses away than leave them sitting.”
