As the spring selling season gets into gear, the use of incentives is clearly on the rise, forcing builders to make some agonizing choices. A new home sales survey by Wells Fargo that came out today, for instance, noted that 31% of sales managers surveyed in March said they increased their use of sales incentives, compared to 23% the month before.
A whole new type of website has emerged in many markets. It offers to search databases and find consumers the best incentives and discounts on new homes. It's getting harder and harder to get noticed in the marketplace without offering incentives, especially since buyers seem so reluctant to pull the trigger on a new home purchase.
Many home builders, particularly the private ones, refuse to play the discounting game, or at least they say they do. They argue that the practice is unfair to the people who have already bought homes from them in communities. They make a strong point. But virtually every builder we talk with these days who is having any success says it's because the company cut prices to compete effectively.
The problem, of course, is that once you start down the slippery incentives slope, it's difficult to stop. Witness a conversation that I overheard recently on a consumer chat board. Someone who was offered $45,000 in incentives on a $379,000 house in Houston asked if this was "enough." No, it's not, someone predictably and anonymously replied. You won't know how much you can get until you ask for more.
The chat then turned into a discussion of what kinds of incentives are best. One poster advised buyers to beware of pricing on upgrades used as incentives; a "free" upgrade priced at $6,000 may only cost the builder $3,000. Thankfully, another commenter criticized this approach, saying that you are better off getting the builder to add things to the house for free, period.
Most builders, if they have to offer incentives, would prefer this approach. Even mortgage lender Lending Tree, a seeming advocate for the consumer, says that some of the most favorable incentives are ones designed to add value to the home, things like free hardwood or countertop upgrades, or free landscaping. "As long as there are no strings attached, these incentives can be a great opportunity," Lending Tree says on its website.
Some other relatively benign incentives might be discounts on options and upgrades that customers want to buy, rolling back premiums on certain lots, or incentives for using a certain mortgage lender, as long as the rates are good and everything else is aboveboard. Those kinds of offers may not have much impact on the value of other homes in the community. And they can protect appraisals.
The most predictable piece of advice in consumer forums is to beware of discounts off home prices, which may have been jacked up in order to leave room for a discount. Okay, that may happen, as it does in virtually every other retail business. I can't imagine paying full retail price at a department store these days.
But the key to all of this is that the builder and buyer need to agree on a fair value for the home. If they can't do that, then they should walk away from the deal. The problem is that today, with sales so hard to come by, the consumer clearly has the upper hand