Sunday, June 25, 2006

'It's Scary'

Sellers are getting burned as builders attempt to lure away the dwindling pool of buyers. From the Stockton Record:

There's a new kind of dropout showing up in the home-sales market within the last couple of months: Buyers who get a loan and open escrow only to drop the deal before the transaction closes so they can buy new. These buyers are lured by deals such as sales packages or incentives. Incentives can include decorating allowances, tens of thousands of dollars worth of upgrades and even backyard landscaping or model furniture - any or all added at no additional purchase cost.

"They're very aggressive," said Jerry Abbott, president and co-owner of the Coldwell Banker Grupe real estate firm. "They're more motivated than (existing-home) sellers. Every day costs them money because they've got money tied up in (a) vacant home." In the last two months, his firm, one of the largest real-estate agencies in the area, has lost eight existing-home purchases pulled out of escrow because the buyers decided that new-home purchases were sweeter, he said...

Builders say they intend to be competitive in the home-sales marketplace, if not through piling on incentives to lure buyers, then by holding prices down. Shane Hart, vice president in charge of acquisitions, development planning and marketing for the Stockton-based Grupe Co., said business is down by about half from a year ago. "It's scary," he said. "The quality of the buyer we're getting is better. The people walking through the sales office are much more inclined to buy, but there are just fewer of them."

In one Sacramento project, the company has offered up to $135,000 worth of incentives to sell homes in the $600,000 range, he said. In that slower market, Hart said, some builders are offering such purchase perks as buying down the interest rates for first three years of a loan, making mortgage payments for a buyer the first six months and even throwing in a swimming pool...

Hart said he had heard that the new-home market was competing strongly with the resale market, with some builders offering sales commissions to real-estate agents of up to 6 percent. "What we found is that resale home prices are much stickier going down than new home prices," he said. "Builders just want to sell off the inventory they have. We'll slash prices or offer incentives to do that. With homeowners, this is their life savings, and they are much less apt to decrease prices as quickly as we would."

That does have one repercussion for builders, Hart said: Some who sign to buy a new home may end up not being able to complete the deal because they're having trouble selling their existing home. "That has caused for us to have a lot of cancellations in the new-home projects," he said. Abbott said builders are barraging his office with e-mails about sales specials and commission offers...

For sellers - and the numbers have been jumping every month in San Joaquin County since last spring - this means added competition from new homes that typically sit in their own market niche and added pressure to keep prices down to try to lure buyers. For example, the number of existing houses for sale throughout the county has steadily jumped each month from 777 in February 2005 to 3,957 last month - a more than fivefold increase over 16 months...

Tom Doucette, president of Stockton-based Frontiers Community Builders, said builders are motivated to move their homes quickly while home owners have an emotional attachment to their own homes that make it more difficult for them to compete on pricing.

Also, builders react more quickly to market changes and change their products and pricing accordingly, Doucette said. Frontiers is nearing the opening of its 800-home development in the 680-acre Westlake Village, the second residential phase of Spanos Park West, at Interstate 5 and Eight Mile Road. "We know we have to include value to the nth degree and price it competitively," Doucette said. The company isn't planning to offer incentives to lure buyers to the new project, he said, but will adjust basic pricing instead...

Dale Gray, chief executive officer of the Central Valley Association of Realtors, said there are fewer buyers while there are lots of resale homes for sale and builders are still building. "The builders are committed to keeping their contractors busy and completing the projects on line," he said. "They may have another one on the books that they have to start."

4 comments:

tom stone said...

builders will continue to build until they can't break even,the long term nature of these projects means tha there is a dead loss if they walk away.in many cases it is cheaper for a builder to complete a project and sell at a 10% loss than it is to simply walk away...not good new for sellers of existing homes,to say the least.

Happy Renter said...

Lockwood has a new post that basically says the condo market is slipping.

Max said...

I think the builders have a lot of room on the down side to make money. A lot of the land options were bought up in 2001-2002 for low prices, and even with 20% reductions they're still in the green.

I do think is sucks what's happening to people who bought at the peak last year, but they thought it was worth that much then. Someone has to be left holding the bag.

drwende said...

Bulldozers are revving even as we speak... some developments will never be completed.

Having watched Bay Area speculators bid homes in my original suburban hometown out of reach of the local families with local jobs, yes, I am enjoying the prospect.