Waiting Game

ON JUNE 1, HOLIDAY BUILDERS launched a monthlong sales promotion covering virtually all of its houses, built or presold, in Florida, where buyers who plunked down a deposit received a card entitling them to free gasoline for a year, a $2,000 value. Within the first eight days of the campaign, Holiday's Web site got its highest number of hits ever.

Kris Ellis, Holiday's director of marketing, notes that customer traffic at Holiday's sales offices had been “very slow” before the promotion and says this incentive would have been a success had it increased traffic by 25 percent, which it did, according to company spokeswoman Jennifer Youngblood.

Compared with what builders in other markets have been giving away this year, Holiday's incentive was decidedly modest. Still, like many builders, Ellis hopes that incentives in general are needed only as stopgaps, a shot of adrenaline for a lethargic market. But as inventories for new and existing homes pile up, as foreclosures rise, and as buyer demand levels off, builders are not only raising their antes by offering more generous mortgage buy-downs, discounts on options and upgrades, and lower prices; some are making incentives permanent arrows in their promotional quivers.

“The industry is in a period of adjustment right now, caused partly by the pull-back of investors, and I don't know anyone who knows where all this is going to land, or when,” says Jon Jaffe, COO for Aliso Viejo, Calif.–based Lennar, which has reduced prices on unsold inventory in certain markets nationwide.

Incentives invariably invite buyers to wonder about a home's real worth versus its price. And some builders fear that they're conditioning buyers to expect these sales inducements, as they do when they're purchasing a car. That might explain why so many builders are framing their incentive packages in terms of adding “customer value.”

What constitutes “value” depends on whom you're selling to. In Orlando, Fla., Hovnanian Enterprises' Cambridge Homes division ran a promotion in May that offered buyers their choice of a 5 percent fixed-rate 30-year mortgage (if they went through Hovnanian's mortgage and title companies), options and upgrades worth tens of thousands of dollars, or a Mini Cooper automobile, which retails for around $20,000.

“We're seeing things that we haven't seen in years, maybe even ever,” says Rosemary Messina, vice president of sales and marketing for Daytona Beach, Fla.–based ICI Homes, which so far has used incentives sparingly. “Where do you draw the line?”

Builders in Denver—where incentives have been common for a decade—must be asking themselves that question too. In June, Concert American Homes launched a “Sweet 16” promotion with savings of up to $30,000 on 16 condominiums in Aurora, Colo., that ranged from $154,146 to $229,221 before the sweeteners, which included stainless steel appliances and larger windows. A mile from Concert's communities, Centex offered up to $40,000 in incentives on its homes.

“Recent [incentive] activity is far more aggressive,” observes David Bubes, Concert's director of sales and marketing. “It might even be described as a war.”

During his 25 years in the business, Adam Lubow, president of Pleasanton, Calif.–based sales and marketing consultancy Praedium, has seen every variation on incentives, from car giveaways to lavish Hawaiian cruises. Historically, incentives rarely become part of a builder's regular marketing program, he says. Nevertheless, builders are apprehensive about the current trend.

“The decision to purchase a new home is much larger than incentives,” says Caroline Shaw, a spokesperson for KB Home. “If buyers love the home you're offering—the floor plan, the neighborhood, the price, etc.—they'll buy it regardless of whether the offer includes incentives.” Nonetheless, the Las Vegas Sun reported in May that KB had reduced prices up to $30,000 at 16 of its 38 subdivisions in the Las Vegas area. The newspaper quoted divisional president Don DelGiorno, who explained that the price cuts were KB's response to “the amount of competition out there, especially in resales.”

Some builders sneer at incentives as evidence of panic among competitors who haven't experienced market downturns before. Others, though, say that, given the direction the market is heading, what choice do they have? The backlog of unsold new homes nationwide hit 556,000 units in April, a record, according to Commerce Department estimates. Several public builders, including Technical Olympic USA and Standard Pacific Corp., reported steep declines in second-quarter orders, citing decreased demand and higher cancellations. “The situation isn't over,” cautions Barbara Allen, Avondale Partners' housing analyst, in a report she published in early June.

With buyers suddenly scarce or hesitant, the carrots builders are dangling are even more enticing:

Private builders say large public companies, driven by their quarterly sales goals, are escalating the incentives arms race and point specifically to Centex Homes for the aggressiveness of its promotions. In Sacramento, Calif., for example, Centex has held a series of sales events over the past several months that offer savings of up to $100,000 off on preselected options for homes in six communities there, as well as a fixed-rate mortgage similar to what Beazer was promoting.

But Centex and these other builders are hardly alone in their embrace of sales promotions. In Tampa, Fla., incentives “have been all over the place,” says Bill Parachini, director of sales and marketing for locally based Premier Design Homes. One competitor offered a package valued at $99,000, and U.S. Home was paying a $9,999 broker bonus, contingent on the deal closing. Premier's recent promotions have been more modest: an options package valued at $5,000, plus up to $2,000 toward closing costs, on 15 condos in inventory priced at $160,000 to $170,000.

All these promotions are beginning to “muddy the waters,” says Tracy Yeadon, vice president of sales and marketing for Indianapolis-based C.P. Morgan Communities, because “it looks like builders are yelling at each other. I've seen free basements, $30,000 off on options, low interest rates if you use a builder's lender on Tuesday between 8 and 10 in the morning.”

Yeadon is convinced that her company's strongest selling point remains its reputation—defined by its slogan, “More square footage, less money”—for providing large, economically priced homes, which in its two markets range from 2,400 to 3,600 square feet and $135,000 to $165,000. But what about that sweepstakes Morgan ran from February through July offering winners $10,000 in furniture? That promotion, says Yeadon, gave the builder access to buyers “who [visit] our Web site and are willing to give us contact information.”

Whatever their objections, builders concede that incentives nudge some buyers into the church, if not always to the altar. “They drive traffic to our [home]sites,” says Ralph Goldman, marketing director for Arbor Custom Homes in Beaverton, Ore., which this year has offered its “Arbor Advantage”: zero down payment, zero closing costs (capped at $5,000), a zero rate lock, and zero deposits on upgrades. Arbor also offers seasonal incentives, such as free air conditioning for homes purchased during summer months.

In the first quarter of this year, Dallas-based Grand Homes sold 100 of its 157 homes in inventory through a combination of incentives that included its “home with a pool” promotion, which Grand has offered for five years. Mar'Sue Haffner, Grand's vice president of sales and marketing, says about 25 percent of buyers accept that option and the rest swap it for $15,000 in options upgrades or other goodies such as bigger lots. Grand has also trimmed up to $25,000 from the price of its homes (which average $329,000), but Haffner says the price usually appreciates by at least that much between contract signing and closing, so customers are getting that much more in value when they close.

Other builders say price cutting is their incentive of last resort. Minden, Nev.–based Syncon Homes recently reduced the $450,000 price of a few homes in one of its golf course communities by 5 percent through mortgage buy-downs, free landscaping, and so forth. “We're careful about offering discounts as credits instead of [as] price reductions,” says Syncon director of sales and marketing Carol Kiel, in order to preserve the value of the home itself. Even ICI Homes, which gives its salespeople a lot of negotiating latitude, avoids price reductions when it can. As an alternative, for its 25th anniversary last year ICI matched buyers when they spent $25,000 on options, says ICI's Messina.

“Incentives are about enhancing value for customers, especially in markets where builders have been selling for a while,” says Praedium's Lubow. But some builders wonder whether they're creating a Frankenstein monster by instilling a sense of entitlement in buyers and giving them the impression that greater savings are ahead if they just wait out the market.

Plagued by cancellations during the first half of the year, Lexington Homes in Port Richey, Fla., dropped its prices by around 12 percent on a dozen homes in inventory. In June, Lexington also lowered its fixed mortgage rate for a $650,000 product to 5.875 percent and paid 100 percent of the closing costs. The builder calculates that the latter deal would save buyers $123,000 over 30 years. Yet company marketing coordinator Eric Boyer frets that incentives ultimately can lead buyers “to wait for the next big thing.”

Builders are of two minds about how long incentives might be needed. Syncon Homes, says Kiel, plans which incentives to offer on homes “right out of the chute,” before the units become unsold inventory. Lennar's Jaffe points out that incentives have been the norm in Texas since 2001, “and it doesn't seem to bother anyone.” Other builders dread that prospect, and Yeadon of C.P. Morgan adds that, unlike large national builders that can accept lower margins on sales in certain markets, private builders serving one or two markets don't have that luxury and can bend only so far.

Where incentives might be running amok, the best survival tactic, say builders large and small, remains learning what buyers need to pull the trigger at a given moment and being flexible enough to supply the bullets. “If [an incentive is] targeted to the right customer and the right demographic, it can work fine,” says Chris D'Amico, director of corporate marketing for Alpharetta, Ga.–based McCar Homes, which offers first-time buyers gift cards in different denominations for purchases at furniture retailer Rooms to Go.

“Each purchase is a little different,” adds Patricia Leader, executive vice president, sales and marketing, for Burke, Va.–based Van Metre Homes. “Some [buyers] want no closing costs; others want more options.” In March, the builder started offering an incentive package valued at $80,000 that included 3.879 percent interest on a seven-year ARM. Van Metre sold 70 homes through that promotion and was still offering the lower rate in June because, says Leader, buyers were “in a negotiating mode.”

Until the urgency to buy a house is rekindled in consumers, such negotiations may continue to be necessary. It looks like incentives are going to be around for a while.

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With so many homes for sale, brokers struggle to find buyers, no matter what commissions builders pay.

In June, Port Richey, Fla.–based Lex-ington Homes raised its broker commissions a percentage point, to 5 percent, as an incentive for Realtors to deliver buyers in markets that are “swamped” with excess resale inventory, says Eric Boyer, Lexington's marketing coordinator.

As builders scramble for business, broker commissions in some markets have more than doubled above the 3 percent that real estate agents typically fetch. But brokers can only be so effective in markets rife with unsold inventory. In April, there were 3.38 million existing homes for sale nationwide. In the first quarter of 2006, resale inventory hit a five-year high in metropolitan Denver, at 15,872 units, according to The Genesis Group, a market research firm headquartered in Englewood, Colo. Meanwhile, Van Metre Homes in Burke, Va., has reduced the price of its homes by $10,000 for buyers having trouble selling their old home, “so they have that in their pocket” to negotiate with, says Patricia Leader, Van Metre's executive vice president, sales and marketing.

In some markets, builders are competing with themselves. ICI Homes' community in Port Orange, Fla., which when built out will have 1,400 homes, usually has 20 active listings. In early June, it had 60, says Rosemary Messina, ICI's vice president of sales and marketing.

More builders are placing new homes on multiple listing services alongside resales. “About 18 months ago, we started noticing that our data for existing-home sales were being polluted by new homes,” says Walt Molony, a spokesperson for the National Association of Realtors. “This is symptomatic of what's going on in the market.”

Still, builders keep turning to brokers for help. Carol Kiel, director of sales and marketing for Syncon Homes in Minden, Nev., was thinking about partnering with agents in the Lake Tahoe area and paying them a specific commission if they sold a Syncon home in the valley 20 miles from Tahoe. She's not sure, though, whether this would work, because “brokers have told us before that ‘we'd love to bring in customers, if we had them.' ”

ADDING “VALUE”: Among the more popular incentives have been mortgage buydowns and free upgrades. Builders say these are preferable to price reductions, which don't sit well with past buyers and raise questions in new buyers' minds about the real value of those homes.

BUBBLING DOWN: To spur sales, Mid-City Urban, the developer of the Maryland-based community Parkside at Germantown, dropped its closing and down-payment requirements and offered below-market financing. Buyers even received a free TV if they acted quickly enough.