Home builders are dealin'

In-your-face ads, major price cuts, aggressive tactics reveal a dour market

Hovnanian Enterprises had the "Deal of the Century." Pulte hawked its "Monster" sale, and Comstock is peddling "Gold Rush Days."

Faced with weakening demand in the slowest housing market in years, builders are resorting to tactics more typical of car dealers and department stores -- big cash discounts and heavily promoted sales with glitzy names.

"It's the first time since the early 1990s that builders have bitten the bullet," said Thomas Lawler, a housing and mortgage consultant from Vienna, Va. "It's absolutely unusual."

It's not uncommon for builders to use year-end sales to clear inventories of unsold homes. But this year, the sales are earlier and bigger.

Companies usually are loath to lower prices, preferring to attract buyers with incentives such as stainless-steel appliances, fancier cabinets or granite countertops.

But as the glut of unsold homes grows, many builders are advertising discounts of tens of thousands of dollars.

Lawler said builders don't have much of a choice. "What's incredibly unusual is the intensity of the sales," he said. "Home builders' profit margins have gone down to less than half."

Raleigh residential broker Jill Flink agreed. "The cut is deeper, and they're bleeding more heavily than ever before," said Flink, a broker for York Simpson Underwood in Raleigh who has sold homes in the Triangle for 21 years.

Last weekend, Pulte advertised discounts of as much as $40,000 on some new homes. The company said it sold 48 houses in the Triangle during its three-day sale -- four times the number of contracts signed during a typical weekend. The biggest discounts were for homes purchased this year, but Pulte said half the sales were on home purchases that won't close until 2008; discounts ranged from $5,000 to $20,000.

Hovnanian sold 2,100 homes nationwide during its three-day event in September. Lennar, Standard Pacific, Centex and Beazer also have rolled out sales, offering special financing and thousands of dollars off home prices.

Comstock is offering $75,000 off its Courtyard townhouses in North Raleigh's Wakefield Plantation, a 16 percent discount from the original $463,900 price. Discounts of $35,000 are available at Comstock's Kelton II townhouses in Cary's Preston neighborhood, a 10.5 percent cut.

Drees Homes' biggest discount is $60,000 off a 4,400 square-foot home in Cary's Cold Creek development, normally $659,000.

About 59 percent of the nation's builders offered discounts in September, the most since surveys began in January 2006, said Gopal Ahluwalia, staff vice president for research at the National Association of Home Builders. Average discounts of 9 percent also were the highest on record, he said.

Housing experts caution buyers to read the fine print on contracts, because sales can come with conditions, such as requiring the use of the builder's lender.

Comstock, for example, offers financing at a 4.875 percent rate on contracts signed before Nov. 15, but the rate rises to 5.875 percent after the first of the year, and in the third year goes to 6.875 percent.

Lowering values?

The sales aren't helping homeowners who made recent purchases in the same subdivision, Flink said.

"They're not just bona fide reductions, they're lessening the value of the neighborhood," Flink said. "If you pay $250,000 and the next guy pays $225,000, what's your house worth?

"It's less than $225,000, because your house is older."

New home sales in August dropped nationally to their lowest level in seven years, the Commerce Department reported recently. Sales in the Triangle during the first six months of 2007 were down 9.3 percent.

"In the past, it was unclear if it was a real sale -- where the builder marked up the price and then lowered it. This time around, we're seeing an unbelievable tightening in mortgage credit after three years of the easiest credit in the U.S.," Lawler said. "Builders are finding [that] when they shift from an easy environment for loans ... the pool of buyers goes down."

Drees decided to chop prices because the company, based in Fort Mitchell, Ky., had 30 homes near completion that didn't have buyers, division President Dave Hausfeld said.

"I've got 44 homes at various stages of construction, and the vast majority are sitting there finished that we need to move," he said.

Lawler predicted that the coming months could bring deeper discounts.

"It's a buyer's market," he said. Builders "are more willing to negotiate than any time I can remember."