HOUSING AFFORDABILITY CONTINUED TO weaken through the middle of 2006, falling to the lowest level since the late 1980s, and many of the investors/speculators that entered the market in 2004–2005 were canceling sales contracts and reselling units they had closed on earlier. In this environment, growing numbers of builders have been trimming prices, increasing nonprice sales incentives, and intensifying marketing campaigns. These patterns bear some resemblance to the recessionary period of the early 1990s, and builders may very well need to intensify their efforts over the balance of the year.

DRAGS ON THE MARKET A national survey of nearly 500 single-family builders conducted by the NAHB in July asked about the effects of rising interest rates and record-high house prices on home sales. The majority of builders said higher interest rates had caused sales to decline from a year earlier, and we found the largest negative impact in price ranges below $500,000. In those ranges, half of the respondents said higher rates had reduced sales to some degree, and another 20 percent called the impact “substantial.”

With respect to the effect of house prices, 83 percent of the respondents said they had noticed buyer resistance to pricing in their market areas, and 25 percent characterized the resistance as “substantial.” This response pattern was common to all size classes of builders.

PRICE CUTS We asked builders encountering buyer resistance to interest rates and/or house prices if they had reduced prices to maintain sales volume. Thirty-seven percent said yes, similar to survey findings back in January and the highest proportion since the recession of the early 1990s. We also found that price-cutting was most common for larger companies (those producing more than 100 homes per year).

For those reducing prices to maintain sales volume, the median cut was 5 percent (the same as in surveys earlier this year), and the median for the larger builders was 6 percent. However, about one-fourth of all companies, and nearly 30 percent of the larger companies, said they had cut prices by more than 10 percent.

NONPRICE INCENTIVES Our July survey asked builders about the incentives (other than price reductions) they were using to bolster sales. We found that 75 percent of builders were including optional items in their homes at no cost, up from 50 percent a year earlier; 55 percent were paying closing costs for their buyers; and 34 percent were absorbing upfront points on mortgage loans—similar to what happened in the early 1990s. Nearly 20 percent of builders were buying down mortgage interest rates in July, and some were offering trade-in programs, guaranteeing buybacks at original purchase prices, or delaying monthly mortgage payments for their buyers.

A lot has been reported in the media about builders throwing in cars or sending their buyers on vacation—the types of sales incentives that can clash with lenders' limits on seller contributions. However, we found that only 3 percent of builders in our survey were offering free trips, and less than 1 percent were including cars with their homes.

MARKETING EFFORTS Our July survey showed that nearly 50 percent of builders were using Realtors/brokers to market at least some of their homes, an even higher proportion than in the early 1990s. This measure can bolster sales without price cuts or nonprice incentives, although many builders have employed combinations of tools in declining markets.

Chief Economist, NAHB Washington, D.C.