This month, CBH Homes in Meridian, Idaho, has been running a promotion called “Corey’s Picks,” featuring the builder’s owner, Corey Barton, who is offering $8,000—which buyers can apply to upgrades or closing costs—on all homes 1,500 square feet or larger; $5,000 for homes under 1,500 square feet, and $10,000 off the more expensive homes the builder is selling in its Chesterfield community.
Holly Haener, CBH Homes’ director of sales and marketing, says the company doesn’t have another incentive program scheduled to begin in September. And it’s hard to gauge the effectiveness of incentives and promos right now because, she says, “even if we’re not running any, people are asking for them. We’d prefer not to have to offer incentives, but buyers want to deal.”
The recession has turned the housing industry into a bazaar in the minds of many buyers, who have come to expect discounts and other goodies as though they were buying a car. An NAHB survey of nearly 300 builders in June found that 73% were currently using some form of sales incentive. Another 15% started offering incentives after the federal home buyer tax credit expired at the end of April. But fewer than one-fifth of those polled said they were marketing special incentives specifically as a substitute for the tax credit.
“We tacked on this question to our monthly [NAHB/Wells Fargo Housing] survey because we were calls from reporters who had assumed that everyone was going to change [their incentives or promotions] after the tax credit expired,” says Paul Emrath, NAHB’s vice president for Survey and Housing Policy Research. “But that really didn’t happen.”
Calls to several builders around the country confirm NAHB’s findings, as builders say they haven’t tried to present alternatives to the tax credit to buyers, with a few exceptions. After the credit expired, Centerline Homes in Coral Springs, Fla., ran a 30-day “Missed The Tax Credit?” promotion, which essentially gave new buyers the same dollar amount. “We got a little bit of interest from that,” says Jeff Auchter, Centerline’s director of marketing.
Other builders, though, contend the tax credit didn’t really work as intended. “In the final analysis, it accelerated sales rather than created sales,” observes Greg Yakim, CEO of Houston-based Castlerock Communities. However, the tax credit did perpetuate the perception among consumers that the listed price of a house is never the final price.
“Affordability relative to income is not a major issue in our market the way credit is,” says Yakim. Nevertheless, his company has been offering price discounts in the $20,000 to $30,000 range “simply to compete,” he explains, because other builders are discounting, too. “The customer doesn’t even look at the price as much as he does the discount.” But his 30-plus communities each has its own pricing and marketing strategy, depending on the aggressiveness of their competition.
David Gordon, who co-owns Poirier Homes in Farmington, Conn., with his wife, says that one negative aspect of the tax credit was that “it gave people the idea that they could beat up the builder on price.” So this custom builder continues to offer breaks on upgrades. For example, Poirier might bump up its standard 2 ¼-inch flooring to 3 ¼-inch white oak. “We’re also doing things with our allowances,” such as increasing the $30,000 allowance for kitchen cabinets to $35,000. Recently, his company has offered to pay HERS raters to test its houses and letting the homeowner keep the rebate, which reinforces Poirier Homes’ energy-efficient reputation.
Gordon concedes these incentives contributed to the sale of the two houses his company has built so far this year. “But we’re making less money on the houses we’re building. We have a good reputation for quality, but we cannot get beyond the reality that everyone is looking for a deal.”
In the first two weeks in August, Ideal Homes in Oklahoma offered to pay the homeowner’s utility bills for a year if he or she closed on the home they bought by the end of the month. It’s been running this promotion during the first half of months because “we were noticing that a lot of traffic and sales are heavily weighted towards the last two weeks of the month,” says Steve Shoemaker, Ideal’s vice president of marketing.
Shoemaker says incentives like these give Ideal’s salespeople more ammunition when they recall on prospects. However, in a still-soft economy, when consumer confidence remains shaky, incentives and promotions can only go so far to generate business. During the first three months of 2010, Ideal had been averaging 50 to 60 sales per month; its spring and summer volume has been more like 30 to 40 per month.
One positive development, though, has been the effectiveness of the Internet as a lead generator. This year, 24% of Ideal’s sales started with an online lead, compared to 15% in 2009 and 8% in 2006. “I love this,” says Shoemaker, “because everything is trackable, and it helps you to be nimble.” On its website, Ideal is offering $1,000 to anyone who refers a customer who turns into a buyer.
In Florida, Centerline now confines its incentives to paying buyers’ closing costs “and other things that will get them into the house quicker,” says Auchter. But he worries that builders are leaning too heavily on incentives as a crutch. He notes that Centerline recently sold through a community of 168 single-family homes in a year without resorting to discounting once.
“The challenge for builders will be to come up with something more compelling than discounts, which customers are becoming immune to,” he says.
John Caulfield is senior editor for BUILDER magazine.