For new-home buyers, it’s time to be wooed:
– Up to seven months before first payments are due.
– A mortgage-rate program promising to save “up to $83,000 over 30 years.”
– Up to $10,000 in free upgrades.
– $20,000 off the price of a home.
These kinds of incentives long have been used to drum up business during the winter doldrums or to jump-start activity at a moribund development. But the frenzy of deals, which some national builders rolled out in late 2005, is snowballing into summer.
It’s another sign of how residential real estate sales are slowing and inventories of unsold homes are mounting.
After a half-dozen years of record growth and torrid levels of construction, builders are finding their orders dropping sharply. And as the business plummets, buyers, aware that they are in the driver’s seat, are demanding–and getting–price breaks or special financing.
Many local and regional builders have joined the major players to offer incentives right through the industry’s key spring sales months, into the beginning of summer.
“This is probably the first time we’ve seen them through the peak selling season. It’s unusual that the incentives have continued all year,” said housing consultant Tracy Cross, president of Schaumburg-based Tracy Cross & Associates.
According to Cross the relatively even-keel Chicago market has become more important to major builders as sales have slowed or plunged off a cliff in other parts of the country.
“National builders look to Chicago as a stable market. They look to Chicago for help to bolster sales. You can’t milk a cow that’s dead in California or reduce homes by $200,000 in Washington,” Cross said.
In Washington, D.C., Dallas-based Centex Corp. offered $100,000 off the sales price to those who bought a house within a 12-hour period. And Miami-based Lennar Corp. is giving Tampa buyers a lowest-price guarantee.
Traffic in suburban Chicago sales centers is off as much as 30 percent from a year ago, according to Jim Colella, general manager in Chicago for Garrison Partners, a sales and marketing consulting firm for builders and developers.
Slow sales forced Lennar to drop the tax assessment for a special service area at the Summerfield development in southwest suburban Minooka.
Deer Point Homes has dropped prices by $20,000 for a limited time on all its homes at The Ponds of Bull Valley in northwest suburban Woodstock.
Buyers haggling
Wiseman-Hughes Homes has advertised a “savings spectacular up to $35,000” and advised buyers to check the company’s Web site for deals. The Wheaton-based builder is one of several offering gas cards to visit sales offices, while Lennar is offering a $700 gas card to consumers who sign a contract by June 30.
Prospective buyers are increasingly haggling for deals.
“I think everyone shows up at the sales office with a quizzical nature about what the deal might be,” said Tom Tylutki, regional president for Rolling Meadows-based Kimball Hill Homes. “A certain amount of negotiation will go on with home builders as it does in the existing [homes] market.”
When John Berteau and his wife, of Raleigh, N.C., shopped earlier this month for a new home in the far northern suburbs, he negotiated with sales agents at two developments for the best deal.
Berteau eventually bought a speculative house in Antioch for $360,000, down from the listed price of $373,000.
“I do know [Chicago] is a buyer’s market, so I expected to negotiate,” Berteau said. In the Raleigh area, it is still a seller’s market, he said. “We sold our house in 12 days for $5,000 more than listed.”
Wheeling and dealing is less common in downtown Chicago. The suburban sales strategies reflect “the slow shift to a buyer’s market,” said consultant Steve Hovany of Strategy Planning Associates in Schaumburg.
“Nobody ever lowers their price in new homes, but an incentive, in effect, lowers the price,” said Hovany, whose firm advises builders and developers.
With shareholders and Wall Street weighing on them, builders–especially publicly owned national companies–have “to grow or die,” said Hovany. They “are fighting the market share game.”
Publicly traded builders including Lennar, Pulte and D.R. Horton, which owns Cambridge Homes, saw their stocks plummet after new-home orders failed to keep pace with record 2005 sales, and the firms began scrambling to lure buyers.
After falling by nearly 50 percent, shares of the builders recovered a bit last week, as some analysts said the sell-off was overdone.
Feeling the heat of national competitors, several local builders, big and small, are hustling to match the special offers. Warrenville-based Neumann Homes has been advertising incentives competitive with some of the larger companies.
But not all builders are playing the incentives game.
Local giant Lakewood Homes, which is privately owned, is among those on the sidelines.
Colella, of Garrison Partners, said using incentives to keep or grab more market share is a desperate, risky game.
“Discounting is a last-case resort,” he said. “It is a slippery slope. … It’s pretty tough to start discounting and then stop. Once you open it up, it’s hard to close. Look at the automakers. They started discounting. It has diminished the product.”
70 homes unsold
Leigh Nevers, vice president of marketing for Lennar’s Chicago division based in Hoffman Estates, said her firm’s aggressive June promotional package–offering buyers a gas card, $7,000 off an inventory home and no payment until January on any contract signed during the month–is aimed at trimming the company’s unsold inventory of nearly 70 homes and keeping the builder near the No. 1 position in the market.
“We stumbled a little bit in April,” she said. “We want to get as close to No. 1 as possible, and we don’t want to slip to No. 3.”
“It is a cutthroat industry right now,” she said. “We project starts and closings to Wall Street,” she noted. “We need to stay on track in this market.”
How much these inducements are squeezing profit margins is still unclear.
Nevers conceded that the costly incentives are affecting margins, and expressed uncertainty about how long Lennar’s strategy will last.
“The market will tell us how long this will continue,” she said. “We can’t afford not to be doing some kind of program.”
Neumann Homes is considering curbing its sales incentives. The builder is conducting focus groups this week to find out if consumers “really want to see these promotions,” said Jean Neumann, chief marketing officer.
“We are looking to shift away from [incentives]. It does not give you the best margins. Not selling does not give you any margins either,” she said.
Housing consultant Cross doubts builders will see the profit levels of the 2003-05 boom years, but “the margins today are normal by traditional years,” he said.
As for how long the incentives will continue, Cross said, “It is really, really competitive. I really, really don’t know.”
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sstangenes@tribune.com
