Grayhawk Homes of Columbus, Ga., is scheduled to close 38 homes in June, about three-quarters of which were purchased by first-time home buyers to take advantage of the extended federal tax credit. About half of those purchases were spec homes that went into contract, but Grayhawk also accepted a limited number of “build from scratch” contracts, most of them signed by the second week of April, which gave the builder enough time to complete construction and close the houses before the tax credit’s June 30 settlement deadline.
“I took two contracts on April 29 and met with those buyers personally, which I normally wouldn’t do,” recalls Grayhawk’s president David Erickson. “I told them I was confident that we could complete their homes, but I couldn’t guarantee it and said so in their contracts.”
As it turns out, Grayhawk expects to finish and close those late-signing contracts on time for their buyers to benefit from the $8,000 tax credit. Calls last week to several other builders around the country found them working briskly to be able to close homes by the end of the month. And the weather, for the most part, has cooperated. But one snag that could prevent a small number of buyers from closing is their inability to secure mortgage financing before the cutoff date.
“Some of our buyers still haven’t qualified for loans,” notes a source at D.R. Horton’s Fort Worth, Texas, division, who requested anonymity because he isn’t authorized to speak on behalf of the company. Until a buyer negotiates a mortgage, Horton can’t schedule a closing date. And if the buyer ultimately can’t get financing, that house will go into the builder’s spec bin. This source, though, says only a handful of the 280 homes that Horton's Fort Worth division is scheduled to close in June fall into this category. As for finishing these houses on time, he says that between 5% and 10% “will be tight, but our division has been really good at meeting deadlines.”
The difficulties that buyers have had getting mortgages have been well publicized. Erickson noticed that the Veterans Administration, which underwrites between 40% and 50% of Grayhawk’s buyers, last week started conducting audits on brokerage companies. “It looks like they’re tightening up a bit,” he observes.
(Erickson adds that his company has 12 contracts scheduled to close on June 28-30, and he’s been trying to move those closing dates up to June 23, just in case something goes wrong on the mortgage side that delays the process. “My fear is the mortgage industry is broken, and I don’t want to be playing chicken with the 30th.")
Other builders contacted say that obtaining mortgage financing has proven to be less an impediment for their buyers to close than they might have anticipated. “We have relationships with four or five lenders, and when we pay [a buyer’s] closing costs, they agree to work with our lenders,” says Jan Astani, marketing director for Home Creations in Oklahoma City, which closed 50 homes in May and is scheduled to close 80 in June. Nearly all of Home Creations’ customers go through its preferred lenders. “We can close 10 deals with participating lenders in the time it takes to close one with a non-participating lender,” she says.
In Austin, Texas, many of Streetman Homes’ first-time buyers are people with two incomes and no children who had been renting. “They aren’t having any trouble getting loans,” says Ryan Jackson, Streetman's director of sales and marketing.
Most of Streetman’s buyers took advantage of the tax credit early and ordered homes in January and February (when the company’s sales rose by 40% over the same time frame in the previous year). “A lot of people bought to-be-built homes,” says Jackson. “Our construction cycle is about 60 days, and from contract to closing is about 90 days, so we’ve already finished a lot of the homes that were ordered.”
Unfortunately, Jackson doesn’t think many of his customers or his company will benefit from Texas's passage of Bond 77, a state-funded $500 million program that targets low- and middle-income home buyers by allowing them to either lock in a 5% mortgage interest rate or lower their down payments by as much as 10%. “It has some strenuous qualifications, like the household’s income and the sales price on the house,” says Jackson. Streetman’s houses range from $250,000 to $350,000.
Texas is among a handful of states that have either supplemented the federal home buyer tax credit or replaced it. Last year, for example, Utah’s Gov. Jon Huntsman signed a mortgage assistance program for all buyers called The Home Run Grant, which offered $6,000 to buyers who earn up to $75,000 per year (if single) or $150,000 (if married). They had to purchase a newly constructed home with a fixed-rate mortgage. A total of 1,600 grants were available.
That stimulus, coupled with the federal tax credit, did the trick for local builders. Even Ence Homes, based in St. George, Utah, which gets most of its sales from second-time and vacation-home buyers, received a boost. But when the Home Run program ran out of grant money around November, “our business with first-time buyers fell off,” says Jon Ence, the builder’s marketing manager. And the extension of the federal tax credit to April 30 “didn’t help us as much as we thought it would.” Ence Homes will close between 10 and 12 homes in June, he says.
Conversely, the federal tax credit extension “was a pretty big deal for our customers” most of whom are first-time buyers, says Casey Masterson, marketing director for Brookstone Homes in Oconomowoc, Wis., whose average selling price is $220,000. Brookstone closed eight homes in May and is scheduled to close 16 in June.
Despite the tax credit’s relative effectiveness in his market, Masterson says that his HBA, the Metro Builders Association of Greater Milwaukee, did not lobby the state for a state-funded credit program. Masterson admits that a continuation of tax credits isn’t necessarily the best thing for home builders in the long run. “We’re looking for the market to normalize,” he says.
Erickson of Grayhawk Homes says the federal tax credit’s extension drew out more customers than that credit’s first go-round in 2009, “when there was much more of a pall hanging around.” He thought that his business would drop off by as much as 50% on May 1 when the tax credit expired. But he’s been pleasantly surprised at the traffic his sales offices are still getting. “There are a lot fewer buyers in the market, but the ones out there are serious.” He says Grayhawk’s contract activity is about two-thirds of what it was in April.
John Caulfield is senior editor for BUILDER magazine.