Aggressive incentives--including options, paying closing costs or points, and buying down interest--keep consumers in market.

By David F. Seiders

The U.S. economy officially sank into recession last March, and the terrorist attacks on Sept. 11 put additional downward pressure on our economic system. Even so, this recession is shaping up as a relatively mild setback, due largely to powerful monetary and fiscal policy responses. American businesses also have responded aggressively with respect to offering a wide range of incentives to keep consumers from pulling out of the markets. The automakers and major retailers became quite aggressive after Sept. 11, and home builders quickly rolled out sales incentives of their own.

A nationwide survey of nearly 400 builders, conducted by the NAHB in early November, sought to identify the degree to which the companies had increased sales incentives in the wake of Sept. 11.

We discovered, first of all, that use of special incentives had been scaled back quite a bit before the attacks, compared with builder practices at the start of 2000. But by early November, builder usage of sales incentives had rebounded from the pre-attack lows and had surpassed the frequency of usage at the beginning of 2000. Indeed, by November, nearly two-thirds of the companies said they were relying on incentives of some sort, compared with about one-third just prior to the attacks and 58 percent back in January.

No price cuts

As in previous periods of market stress, the upshift in sales incentives generally has not involved outright price cutting by builders; less than 3 percent of survey respondents cited price cuts. The most commonly used sales incentive involves the inclusion of options in homes at no charge; by early November, 37 percent of all companies were employing this inducement, up from 16 percent prior to Sept. 11. Builders also stepped up to pay their buyers' closing costs or fees (18 percent), to buy down the mortgage interest rate (15 percent), or to pay points on mortgage loans (11 percent). In addition, nearly onefourth of the builders increased their use of Realtors or brokers to assist in marketing efforts.

Builders of all sizes increased their usage of sales incentives after Sept. 11, but the larger companies (100+ starts per year) became particularly aggressive--paying closing costs or loan points or buying down mortgage interest rates. While many small companies (less than 25 starts per year) offered no-cost options and used Realtors/brokers to help in marketing, they still remained well behind the large builders in these areas.

Build-up buydowns

The interest-rate buydown is largely a big-company tool; 30 percent of the large companies were doing buydowns in November, compared to only 5 percent of the small builders. But builders of all sizes can profitably use buydowns to support sales as well as prices. In fact, the underwriting guidelines of FHA, VA, Fannie Mae, and Freddie Mac even allow the house price to be adjusted upward, within limits, to cover contributions made by home sellers, such as temporary 2-1 buydowns. For further information on such financing incentives, contact the NAHB's Mortgage Finance Department at 202-266-8555.