Buyer Incentives Likely to Return Soon

New home buyers are likely to run into a perk this shopping season, a benefit that hasn’t been used to any great degree by home builders in quite a while. We’re talking incentives.

Studies show there is enough gas to make into 2020 before a slowdown takes shape.

Researcher and analyst Ivy Zellman of Zellman Associates say there’s enough steam to carry the new home sector for another 18 months or so, but she’s already seeing signs of a slowdown, and she thinks builders will respond to slower sales “with less aggressive price decreases and/or more incentives to reignite urgency.”

Incentives are akin to “builder freebees,” everything from help with closing costs to a gratis new car, a vacation or free upgrades and options. They go away when the market is roaring, as it has been for the last few years. “When things are going well, nobody needs the extra push,” commented Steve Melman, an economist with the National Association Home Builders.

But, giveaways almost always come back when things slow down.

It’s not possible to predict exactly when builders will jump in with both feet or which giveaways they will offer. In a recent post, John McManus, editorial and digital content director at trade publication Builder, warned his readers to “keep their ear(s) to the ground – with data that’s sensitive to market shifts, head-fakes (and) opportunity areas.”

Builders offer incentives for any number of reasons. Sometimes it’s to kick off a new project or sell off the last houses in an older subdivision. Other times, they put them out there to celebrate a holiday or other special occasion.

To observe its 30th anniversary, Darling Homes offered to pay up to $10,000 worth of its buyers’ closing costs at the Harvest Green property in Sugarland, Texas. To mark the end of 2017, CalAtlantic gave away a gourmet kitchen package worth $4,725. And in February, Beazer Homes offered buyers a 50 percent discount in its design studio, up to half off not to exceed $25,000 in the cost of the lot, options of up to $25,000, depending on the property, and $5,000 in closing cost help if the buyers used Beazer’s in-house mortgage company.

As the market continues to decelerate, builders can be expected to offer some sweet deals just to move product. “Incentives are always a good tool to use to create urgency in purchasing a home,” says Leah Turner, a sales coach with Melinda Brody & Co,

It’s impossible to say what builders might be offering this time around, but if the past is prologue, most will proffer options or upgrades at a reduced cost or no cost at all.
Four years ago, the last time the NAHB surveyed its builder-members about incentives, 38 percent were using options and upgrades to entice buyers, but when the housing market imploded in 2008, 61 percent offered incentives to help sell their houses. “Upgrades are always popular,” said the NAHB’s Melman.

Three other giveaways also were popular among builders: 30 percent discounted their house prices, 27 percent paid their buyers closing costs, and 26 percent offered energy-efficient or other green features at a reduced cost or no cost at all.

On the flip side, the survey found that 35 percent were not offering buyers anything. Many of them said the market was strong enough without bonuses, and some said they had tried incentives but they were not effective.

Home buyers should realize, though, that not all incentives are created equal, so pick and choose carefully between what’s offered. Builders tend to make their most money from options and upgrades, yet the general rule of thumb is it’s cheaper to add items while the house is under construction than after it’s completed.

Some come-ons may be terribly overvalued compared to what you can find on the open market from local contractors, so choose carefully. For example, hardwood flooring offered as a $25,000 option might cost just $10,000 from a local vendor. Even though it is usually cheaper for builders to buy the product and install it, you may be better off picking something else.

Also, be advised that some builders offer incentives only if you obtain your financing from their preferred lenders. There may be nothing wrong with that, but it’s best to shop around to see if you can beat the lender’s rate. A recent survey by LendingTree found that borrowers could save a median of $30,329 in interest over the life of a 30-year, $300,000 loan by shopping for the best rates.