Instead of sitting back and waiting for government intervention to stem the wave of foreclosures hitting the market, some home builders are reworking their product and refining their marketing strategy in order to better compete.

Historically, the main competition for new-home construction were resales, which normally logged about 80% of home sales, with new homes comprising the remaining 20%. However, following the subprime market collapse, foreclosures have taken a big chunk of home sales.

"When I saw that 42% of home sales in October were foreclosures, I thought, 'That is where the ducks are flying. Let me pull my boat into their pond,'" said Doug Fulton, CEO of Fulton Homes.

Last month, Fulton Homes introduced a unique marketing strategy that hits foreclosures head on. The builder began airing radio commercials that caution buyers against the pitfalls they can run into when purchasing a foreclosure property. Additionally, Fulton launched an online tool that details the financial benefits of a new-home purchase compared to a foreclosed property. The company promises that if a prospective buyer shops one of its models and decides to purchase a foreclosure instead, Fulton sales staff will assist them with the process.

"All of our sales staff are agents, so they can get the paperwork in order," said Fulton, explaining that he still draws revenue, because he has a trade staff to assist the buyer if they decide to remodel the property; if they want a kitchen upgrade, he has a design center from which to choose options; and if they need financing, it can be obtained through Fulton Homes Mortgage.

From a marketing standpoint, Fulton said one of the marketing strategy's primary goals is being met: The promotion has increased foot traffic among the company's model homes.

The next step is to actively attempt to become part of the foreclosure solution. "I am trying to become the listing agent for the REOs instead of the banks," Fulton said, adding that such a tactic helps the builder turn foreclosure inventory while still gaining some financial return.

"This definitely is an innovative approach," said John Sims, president of Builder Marketing Services and chairman of Builder Marketing Society.

Sims pointed to a trend of builders placing a strong marketing emphasis on the upgrades and warranties available with a new home, as well as the return to a focus on workforce housing, referencing the original Sears Roebuck mail-order Modern Home.

Sears began manufacturing its mail-order home in 1908, and sold between 70,000 and 75,000 homes up until 1940.

"Workforce housing is coming back," Sims said. "This country will come back to smaller, more affordable workforce housing. There are a lot of builders working on this now."

A recent survey by and RealtyTrac showed that potential buyers are beginning to shift away from foreclosures.

Pete Flint, Truila CEO, and Rick Sharga, senior vice president of RealtyTrac, said the overall forecast of foreclosure activity will continue to increase in 2009, but buyers are becoming more hesitant to buy the properties.

Flint stated that 47% of U.S. adults say they would consider buying a foreclosed property, down from 54% six months ago--with the majority noting a concern over hidden costs, risky prospects, and depreciating property values.

"[The numbers] are wonderful, but on the supply side, [foreclosures] have to come down," Fulton said.

While the statistics come as a positive for new-home builders, the reality is that as long as foreclosures continue to come on the market, builders will have to continue to lower prices and scale back on product offerings.

"We made the strategic decision that the price points on resale are down so much now and there's so much inventory out there, you can't sit and wait for the market to come back to you," said KB Home CEO Jeffery Mezger during the company's third quarter conference call.

KB's has already begun scaling back its product, according to Mezger. In California's Inland Empire, the company introduced a new line of 1,230-square-foot, three-bedroom homes, selling for just over $200,000. Historically, KB would sell a 3,400-square-foot home for $450,000.

"As we sharpen our focus on the first-time home buyer, we recognized that many of our product offerings were not aligned with their current needs and affordability levels," Mezger said. "Our houses were too big, included too many features, and as a result, were too expensive."

He added that the strategy is working well thus far; home sales are at two homes a week in the Inland Empire, where the new product has been introduced. Mezger said KB will continue this strategy in other markets in the near future.