Market conditions suggest that the recent pace of the housing sector was unsustainable. Home appreciation reached an unexpected rate in the summer months, as the recovery appeared to be in full force. However, with the transition into fall, similar price increases and higher mortgage rates forced prospective buyers to temper their search expectations. More specifically, house hunters are reluctant to pursue the acquisition of a home. In desperate need for buyers to actively participate in the market, homebuilders have boosted cash incentives and upgrades.
The recent use of incentive programs may be directly correlated to the rate of appreciation. Potential owners are simply intimidated by the rate in which housing prices persisted to increase in the wake of the housing sector decline. As a result, some homebuilders are offering tens of thousands of dollars in incentives to soften the sticker shock that has accompanied the increases. The intent of the incentives is to bring the purchase price of a newly built home back into perspective for a potential buyer.
Homebuilders are offering a variety of incentives that range from free appliances to the addition of premium flooring. Upgrading amenities appears to be commonplace for the majority of homebuilders. Of particular interest to potential buyers, however, may be incentive programs that go beyond physical additions. Appealing to the financial side of a deal, homebuilders have begun to offer to pay for buyers’ closing costs, covering some of their down payment or even paying to reduce their mortgage’s interest rate for a year or two.
“I think there is a weakness in the market right now,” said Mark Ward, managing partner of ForeverHome LLC, a homebuilder in Raleigh, N.C., set to construct roughly 400 homes this year. “Everybody’s giving more incentives today than they were in the summer.”
As one of the most recent beneficiaries of the incentive push, Lori March was awarded the opportunity to receive ceramic tile and hardwood floors at no additional cost in her $295,000 Wake Forrest, N.C. house. ForeverHome, the builder of March’s home, also proceeded to cover $4,000 in closing costs.
The incentives “were a huge factor in my decision,” said Ms. March, who lives with her 12-year-old daughter and 10-year-old son. “I didn’t really have a lot [of money] to put down, so it made up for what I didn’t have.”
Contradictory to current plans, homebuilders actually scaled back incentives in the first half of 2013. The appreciation of homes, in association with low inventory levels and strong sales, allowed them the luxury to do so. However, as homes continued to increase in price, buyers became more reluctant to buy, making the sale difficult for homebuilders. Further convoluting any prospects of purchasing a home were higher mortgage rates. These factors were damaging to the bottom line for homebuilders on a national level.
The rate on a 30-year fixed-rate mortgage, as low as 3.31% in November 2012, was 4.57% last month, a full percentage point above where it was in May. This is most likely attributed to the Federal Reserve’s plan to start tapering efforts to stimulate the economy. Subsequently, the fear of higher interest rates scared off buyers that were already looking to move into a new home.
To weather the storm of high interest rates and home prices, homebuilders took a preemptive stance before things got worse. According to a Wells Fargo Securities’ survey, 29% of the 150 homebuilder sales manager participants increased their use of incentives in September.
“As the market goes through minor gyrations and corrections on a road to a broader recovery, we think that we will have to use incentives on a select basis,” Lennar Chief Executive Stuart Miller said. The company’s use of incentives declined on a national basis to 6% of its average sales price in its latest quarter from 6.7% in the previous quarter and from 9.2% a year earlier.