Wheeling and dealing on home prices is back as housing market softens.

By Daniel Walker Guido

Psst! Hey buddy, wanna buy a new house? When the going gets tough, builders get creative. As the economic slowdown that began before the events of Sept. 11 worsens, builders are working with increasingly skittish buyers who are demanding further incentives to complete closings. From affordable housing to million dollar mansions, buyers concerned with job security or reeling from stock market losses often are waiting through the current economic uncertainty.

"If the recession drags on longer than the two quarters most economists now foresee, we will see innovative incentives throughout the price categories of housing," to keep inventory moving, says NAHB chief economist David Seiders. Advertising price cuts for new homes in occupied developments could hurt builders' reputations with those who already moved in, but offering half-priced decks or upgraded appliances and landscaping in the base price could spur sales without the negative fallout, Seiders says.

Buyers' reluctance to commit is mirrored in the declining Consumer Confidence Index, which dropped for the fourth consecutive month in October. The index plunged 11.5 points to 85.5, down from 97.0 in September, its lowest reading since February 1994. The upcoming holiday season is not expected to provide sufficient stimulus to the economy to help consumers feel good about big-ticket purchases, according to Lynn Franco, director of the Conference Board's Consumer Research Center. "Widespread layoffs and rising unemployment do not signal a rebound in confidence anytime soon."

Their confidence shaken, high-end buyers of $600,000 to $2 million homes, who were planning to cash in securities for down payments, are putting off home purchases and hoping the stock market rallies. "People at the high end are saying, 'I am not going to buy this, I don't need to,' because the price has peaked while their personal wealth has decreased with the [stock] market decline," says John Markley, CEO of Pacific Bay Homes of Newport Beach, Calif. "People are freaking out and worried about further terrorist strikes. We find we often have to be flexible on pricing to keep moving inventory."

Negotiations over price have returned to the closing table in many parts of the country for the first time in a decade. In the Santa Clarita Valley just outside Los Angeles, Dick Hamm, division manager for Pacific Bay Homes, had to discount a $1.25 million home by $75,000 to keep the nervous buyers from backing out of the deal. "Price negotiations are back for the first time since Southern California's economy rebounded in the early 1990s," Hamm says.

In the roaring good times of the past decade, a lost sale at any price point often was quickly closed with another buyer. Now, builders of affordable housing are reporting that would-be buyers are putting off buying while they fret about layoffs. In bustling Atlanta, where every close-in community seems to have new subdivisions being built, sales of homes in the $150,000 and under price category are off by about 30 percent, says Tim McReynolds, regional sales manager of John Wieland Homes and Neighborhoods.

"One big production home builder has cut prices in a nearby subdivision by 5 percent to 7 percent across the board to spur sales," McReynolds says. "And the market for homes priced in mid- to high-$200,000 range has just gone away." With Lockheed Martin's 7,000 jobs in nearby Marietta, Ga., secured by the recently awarded $200 billion Joint Strike Fighter contract, McReynolds and other builders are hoping the market there will quickly rebound. Meanwhile, some pricey million-dollar homes in the exclusive enclave of Buckhead were sitting vacant as of late October.

[Source: The Conference Board and NFO Worldgroup]