Home Builders Turn to Discounts,
Promotions As Inventories Rise

As the nation's home builders struggle with big inventories, a surge in cancellations and a pullback in demand, many are aggressively offering discounts in high-profile promotion campaigns aimed at getting a dwindling number of home buyers into their sales centers.

How far will they go? Lennar Corp. placed a two-page advertisement in Florida's Orlando Sentinel earlier this month, announcing it would be giving away a home in the Orlando area next month to one home buyer who visits its sales community and enters the drawing.

"Turn the key, and the home is free," the ad read. Javier Santana, a Lennar salesman at one of the Orlando sales centers, said a drawing will take place Aug. 5, where 110 visitors will be given keys, and one will open the door to the free house.

Lennar isn't alone. Creative and even high-risk incentives have become the norm, not the exception, for many builders, especially in Florida. Part of the problem is that builders continue to put new homes into an oversupplied market, says JMP Securities analyst Alex Barron.

Mr. Barron predicts fundamentals will get worse before they get better, as the "flippers" -- or speculative investors -- will eventually be forced to slash prices below home builders' to sell their homes. "Six months ago, I thought this might last only two or three quarters, but now I think sales will continue to go down in 2007," Mr. Barron says.

In the same Orlando newspaper in which Lennar ran its advertisement, a slew of other home builders placed ads, each trying to outbid the other. Meritage Homes Corp. offered home buyers the chance to purchase a home with no money down with its ad: "Zero, Zip, Nada. No matter how you say it, it still means no money down." Levitt Corp., meanwhile, offered to help buyers who need to sell their existing home before purchasing a new one. Its ad promised a "guaranteed buyout program for your present home."

Several builders, including Technical Olympic USA Inc.'s Engle Homes and Lennar, offered "guaranteed pricing," where a home's price would be reduced if pricing has changed by the time the home closes. This incentive is aimed at jittery buyers who are reluctant to sign a contract while pricing is so volatile.

Lennar offered to pay a buyer's mortgage for the first six months, while closely held Prestige Builders Partners of Miami Lakes, Fla., raised the ante by promising, "Your first-year mortgage is on us."

Mr. Barron, who recently returned from a tour of the Florida housing market, says certain builders are slashing prices so much that it is making it difficult for rival builders to compete. He cites the South Fork community near Tampa, where Hovnanian Enterprises Inc. was selling homes in the low-$300,000 range while Lennar, 500 feet away, had slashed its prices for homes of a similar size to about $230,000.

Mr. Barron says he was particularly surprised by Lennar's steep cuts, given that the South Fork subdivision is currently under construction. In the past, many builders said that they were offering incentives only on select homes to finish off the sale of a particular subdivision and that they weren't building speculative homes. In South Fork, however, Lennar is just starting to build out the community. And many of the homes are being built on spec -- without a buyer. "They shouldn't be putting up supply when demand is going down," Mr. Barron says.

Hovnanian Treasurer Kevin Hake says the company's sales managers are always monitoring the competition and making adjustments depending on market conditions. While he said he couldn't comment on South Fork in particular, he says the company has been under competitive pressure to offer incentives in Florida. Executives from Lennar declined to comment.

The price cuts and incentives aren't unique to Florida. There are signs and ads for significant discounts in other previously hot markets such as Phoenix; Washington, D.C., and California. Some builders, such as Centex Corp., had been offering 12-hour sales at some of its sales centers in California, where buyers would be offered as much as $100,000 off the price of a multimillion-dollar home if they purchase a home during the sale hours.

There are also signs that home builders continue to sell homes to speculative investors, even though many say they aren't.

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