As new home sales slow to a crawl in cities like Phoenix, Sacramento, Las Vegas, and Orlando, home builders are luring potential buyers into their models with the promise of gifts worth tens of thousands of dollars.
Sometimes, the builder will offer to pay some or all of a buyer’s closing costs or to pitch in part of a customer’s down payment. Others have sealed deals with free countertop and floor upgrades, new appliances, window blinds or garage door openers.
And some are offering incentives as substantial as free swimming pools, which can cost upward of $20,000.
Two things builders don’t want to do: cut home prices and sit on unsold inventory.
Second time around
At the peak of the recession, home builders would promise almost anything to a serious potential buyer, who might be swayed to move into an undersold subdivision for just the right freebie.
But when the number of home sales and the price of new houses started to surge a couple of years ago—and in some places, those numbers were dramatic—the desperate gestures stopped, simply because builders didn’t need to pay for them anymore.
Over the past year, however, builders gradually have re-enlisted the selling power of perks like free TVs, car leases for newly suburban commuters and greater allowances for upgrades.
Last fall, for example, The Wall Street Journal reported that David Weekley Homes was offering Tampa, Fla., home shoppers who bought by the end of the year up to $20,000 in incentives.
Common practice
It’s a year later, and David Weekley Homes is still its sweetening its deals. Many more builders—especially those in areas where sales have come to a near-standstill—are doing the same.
In Orlando, for example, big builders Hovnanian Enterprises, Beazer Homes USA and Ryan Homes are reeling in sales with offers of free kitchen appliances and zero closing costs, Bloomberg reports. There, new homes sales fell nearly 19% in a year.
Across the country, some markets are doing better than others. Overall, new home sales rose slightly in July and August after dropping in June, but sales haven’t caught up with the inventory that many builders hurried to get on the market when business was booming.
In Phoenix, for example, optimistic builders grew the number of new-home communities by one third over the past year as sales prices soared by 7.5%. At the same time, sales plunged by 45%, Bloomberg reports. And prices, once again, are gradually falling in that market.
‘Cautionary tale’
One housing analyst called Phoenix “a cautionary tale about raising prices too aggressively and opening up communities too aggressively,” Bloomberg reports. “Homes are unaffordable now, and all of a sudden there’s a ton of supply.”
The Wall Street Journal article quotes several homeowners who admitted they bought where they did because of the incentives the builder offered.
And the executive of a Salt Lake City home building company told Bloomberg he has no choice but to get on board with giveaways: “Frankly, in a master plan with 10 other builders, and all offering concessions and you choose not to, then you need to make sure you buy your salesperson a high-quality TV set so they have something to do while they’re sitting alone,” said Joel Shine of Woodside Homes.
Hope for better days
In an interview with Bloomberg Radio, reporter Prashant Gopal said builders, even in struggling markets, are optimistic that home sales and prices will continue to recover and that they won’t be offering expensive incentives for long.
“There’s no sign of any improvement right now in the Phoenix market,” he noted, but added, “They hope by next spring, we’ll have a better market.”