When all else fails, builders cut prices
As the housing slump worsened last fall, Don Dale struggled to find buyers for the $900,000 houses he was selling for Shea Homes in the hills of Aliso Viejo. Then in January, Shea slashed prices to about $750,000. Dale sold nine in one day.
“If there is value, there are buyers,” Dale said.
Stuck with excess inventory, builders throughout California are beginning to offer steep discounts on new homes, sometimes at a loss. Centex Corp. is touting the “greatest prices in years” in its ads. In San Bernardino County, builder Van Daele Homes is advertising 35% discounts.
Until recently, most builders resisted outright price cuts in California to avoid undermining the value of their holdings. Instead, many offered incentives such as big-screen televisions or interior upgrades.
But the incentives weren’t working, builders now concede, forcing them to carry the debt on empty, unsold houses.
“Builders don’t have the luxury of waiting another year for the market to turn -- they need the cash flow now,” said Patrick S. Duffy, principal of Metrointelligence Real Estate Advisors, a consultant to home builders.
“It’s better for them to take 90 cents on the dollar today than to risk no cash flow at all because they’re not selling any houses,” he added.
The price cuts appear to be luring buyers out of hiding. Carlos Vega, 40, spent an afternoon last week driving his BMW to sales offices for newly built subdivisions in the hills of Rancho Cucamonga, where five builders have projects.
Vega said he had made several offers but hadn’t yet committed to anything because the rival builders keep topping one another’s deals.
One builder, he said, offered to sell him a model home -- complete with landscaping and designer furnishings -- at a price Vega estimated was about 20% below what the property would have fetched a few months ago.
“They’re throwing me offers left and right,” said Vega, a salesman for a logistics firm.
Home builders concede that they have little choice but to slash prices, given the sharp downturn in sales and the credit crunch, which has made it harder for many borrowers to get home loans.
KB Home of Los Angeles posted a loss of $773 million in its most recent quarter, and its shares have plunged 50% in the last year. Lennar Corp., the biggest home builder in California, reported a $1.3-billion quarterly loss Jan. 24. Its stock price has fallen 63% from its level of a year ago.
As home sales slowed last year, builders began offering incentives. The results were lackluster. Southern California builders sold 44,234 new homes last year, down from 66,911 in 2006, according to DataQuick Information Systems.
Centex, another major builder, said it resorted to price cuts because incentives weren’t working and many borrowers had trouble getting the jumbo mortgages they needed for higher-priced homes.
“We really adjusted prices down where they need to get to,” Centex Chief Financial Officer Catherine R. Smith recently told Wall Street analysts in a conference call.
In addition to slashing prices, some builders are scaling down the size of their homes to make them more affordable.
In Victorville, for example, new houses built by KB Home are selling for about 33% less than they did two years ago because of the combination of price cuts and size reductions, Chief Executive Jeffrey Mezger said at a conference last week.
Builders are pursuing different strategies on price cutting, and some are still trying to hold the line.
In the Riverside County suburb of Lake Elsinore last week, a saleswoman at one housing development that had cut prices recalled getting a visit from a field representative from a rival firm that had kept prices level.
The saleswoman, who declined to give her name because she was not authorized to speak for the company, said her counterpart asked for a price list. The reason: The rival hoped to persuade her corporate headquarters to make similar trims.
If there is any grumbling about price cuts, it’s from people selling their own homes.
In Lake Elsinore, for instance, more than 100 resale homes are listed in the $300,000-to-$400,000 range. For that price, buyers can get a brand-new model that has been freshly discounted.
Jack Lloyd, 51, has been trying to sell his Palmdale house for nearly a year. He’s cut the asking price several times, and he’s now seeking $285,000 -- down from the original $425,000.
But Lloyd isn’t hopeful, noting that new houses in nearby developments are $240,000.
“Who’s going to buy mine?” he asked. “Sure, you have to put in carpet, put in the lawn in those, but is that going to cost you 40 grand? I don’t think so.”
Lancaster real estate agent James Baker said existing-home sellers must now lower their prices if they wanted to compete.
“Many of the home sellers are having trouble facing the facts,” he said. “The best prices are not on the privately owned houses, they’re from the builders and the banks.”
Even with the discounts, however, many buyers remain on the sidelines, thinking the market has yet to bottom. To help persuade them, some builders are offering price guarantees.
KB Home, for example, recently agreed to give buyers in some developments a lower base price if the selling price of similar homes in their developments falls in the time between the contract signing and the purchase closing.
Tom DiPrima, president of KB’s north Los Angeles division, said the policy had helped persuade reluctant buyers to make the leap and purchase. “They’ve said it really gave them the peace of mind to jump into the market,” DiPrima said.
DiPrima, however, also credits the role of lower price points.
In one Antelope Valley development, KB Home had been offering 3,200-square-foot houses for more than $400,000. By cutting the size of the houses to 1,500 square feet, the company was able to sell them in the high-$200,000 range, DiPrima said.
“People there couldn’t afford a $400,000 home, no matter how big it was,” he said. “We’re back to what people can afford.”