As Demand Slows, Home Builders
Sweeten Incentives for Buyers

As the housing market's red-hot sales pace shifts to a slow burn, some home builders and developers are beginning to offer buyers a richer array of incentives.

Faced with rising inventories of unsold homes and reluctant buyers in many markets, a number of builders and developers are ratcheting up their promotional efforts. One developer is offering as much as $10,000 toward closing costs, while a home builder is throwing in golf-club memberships. Some incentives are available to any buyer, while others are tied to the buyer making use of a builder's preferred mortgage lender. Builders also are pitching higher commissions or special bonuses to real-estate agents.

Other deals are more creative: A Miami developer is offering to buy back its condo-hotel units at a premium after 18 months. Another builder, taking a cue from last summer's auto makers' deals, is offering "employee pricing" discounts in certain markets.

The moves come as Toll Brothers Inc., a luxury-home builder based in Horsham, Pa., this week lowered its forecast for how many houses it expects to sell in 2006. It cited, among other things, softening demand in a number of its markets, including Chicago, Las Vegas, and Washington, D.C., and certain parts of Northern California, Maryland and Florida.

Builders often use various types of incentives to help sell homes, even during the strong market in recent years. This practice typically picks up late in the year as companies become eager to close sales and get properties off their books before the end of the year.

But some analysts say incentives have gotten more generous, as rising mortgage rates and elevated home prices have slowed sales. Traffic to new-home communities is down, waiting lists are disappearing, and inventories are inching up, analysts say. Ivy Zelman, a housing analyst at Credit Suisse First Boston, says builders' incentives typically work out to be 2% to 3% of the sales price. In some markets, incentives currently are running as high as 5%.

When Brian Widic, a 34-year-old systems engineer, bought his new home in Leesburg, Va., a year ago from Winchester Homes, Mr. Widic says he felt lucky to receive about 1% of the home's value, or about $10,000, toward the closing costs. Now Mr. Widic says he is being bombarded with mailings from various home builders offering a slew of incentives that range from a finished basement to Redskins season tickets. "I would certainly have a little bit more bargaining power today," he says.

A September survey of 488 single-family home builders by the National Association of Home Builders found that 58% were offering nonprice sales incentives, compared with 51% six months earlier.

For home buyers, you might have to ask if a builder is offering any special deals, as not all builders publicize their offerings. When it comes time to dicker, buyers are likely to have more success if they ask for upgrades rather than for a price cut, says Rhonda Duffy, broker-owner of Duffy Realty in Atlanta.

Offers of reduced closing costs or other incentives tied to using the builder's preferred lender should be examined closely and compared with what may be available from other mortgage lenders.

In Las Vegas, the number of builders offering incentives is increasing as the market slows, says Larry Murphy, president of SalesTraq, which tracks the Las Vegas housing market. Among the recent offerings: granite countertops, a $30,000 swimming pool and a one-year pass to a local public golf course valued at roughly $3,000.

Waverton Homes, a builder in Portsmouth, Va., recently increased the amount it will pay toward closing costs to $4,000 from $2,500 if buyers in its Estates at Creekside Landing development use the builder's preferred lender and close before year-end. The builder is also offering agents a $1,500 bonus. "There's no question that it has slowed down," says Penny Boyd, the selling agent for the projects, where homes are priced from $433,000 to $530,000.

In Phoenix, Los Angeles builder KB Home is paying agents 3% commissions on the entire sales price on homes. KB also is offering home buyers an average of $1,500 off the closing costs on homes priced at an average of $283,000. The catch? Buyers have to finance their homes through Countrywide KB Home Loans, a joint venture between Countrywide Financial Corp. and KB Home.

In Miami Beach, The Mitchell Companies recently rolled out a special offer for buyers who purchase condo-hotel units in its Melia Royal Palm project before the sales office opens. The company is offering units at 10% below the list price and then promising to repurchase them for 12% above that price in 18 months. Buyers who want to keep the units must repay the 10% discount.

And Elad Group Florida, a unit of Elad Group Ltd., recently advertised "Sizzling Savings" of up to $10,000 toward closing costs to some buyers who purchase units in its new condominium development in Miramar, Fla.

Many builders are reluctant to admit that their current incentives are any different than their typical offerings at this time of year. Any appearance of a decline in home prices or profits can spook investors and send stock prices lower.

Centex Corp., a big Dallas-based builder, announced last month that it was rolling out an "employee pricing" promotion, in which buyers at one Atlanta development will be offered a 5% discount and up to $20,000 in additional incentives on select homes if they financed through the company's mortgage unit. Normally offered to Centex employees, the discounts are being offered to the general public for a limited time. Centex offers similar programs in St. Louis, Port St. Lucie, Fla., and San Antonio. A Centex spokesman says the incentive program is a limited offer and is not a "big deal."

Pulte Homes Inc., based in Bloomfield Hills, Mich., recently offered a free gas fireplace, free hardwood floors on the main level, free upgraded cabinets and free washer/dryer at one of its Maryland developments. It also offered a choice of free heat for six months, a free 42-inch plasma television set or free window coverings in the amount of $5,000. "I know this is unbelievable, but it is true!" reads one emailed advertisement.

Sue Ko, a realtor in Arlington, Va., who received the email, says the Pulte offer "was one of the most incentive-heavy ones" she has ever seen. But Jim Zeumer`, Pulte's vice president of investor and corporate communications, says, "In terms of price, you're getting a plasma TV, but the rest of the 'free' listings are all standard in the house."

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