Builders Cutting Home Prices to Step up Sales

Across the country, home builders are again cutting home prices to step up sales and reduce their inventory. After the federal tax credits ended on April 30, the pace of sales slowed, so builders started offering substantial enticements again to replace the lost tax credits.

Although the price cuts hurt, they work well in bringing more buyers to open houses and prompting them to pick up the phone and call realtors.

It has been a buyer’s market over the past months, and it’s still a buyer’s market.

In addition to cutting prices, home builders have also started offering adjustable-rate mortgage loans at rates more than one percent below the current mortgage rate, which is around 4.75 percent. Other builders are offering fixed-rate 30-year loans at 3.75 percent. They accomplish these by making cash payments to the mortgage banks providing the loans.

To cut costs to be able to offer these incentives, home builders have trimmed down their advertising programs. Gone are the days when builders run simultaneous advertising campaigns nationwide. They now tailor their marketing programs to specific communities, creating different schemes for different projects.

Home building analysts say that the biggest discounts are given to buyers of speculative homes, units constructed without signed purchase contracts. Since buyers are not able to exercise their options on upgrades, they typically are given bigger discounts. Builders are willing to cut their profits substantially, as maintenance costs for vacant homes can lead to further losses.

Nonetheless, the level of price discounts now is much lower than those given during the first months of the housing meltdown. Back then, the discounts for new homes were unprecedented as markets nationwide were overflowing with supersized houses, bargain foreclosures and existing homes.

Moreover, based on data from a major national home builder, average prices have already dropped further by four percent over the year, so there’s no longer room for deeper price cuts.

According to the Mortgage Bankers Association, its home purchase index declined by 3.3 percent in the week of June 21 to 25, the second lowest since 1997. In contrast, its refinancing index climbed up by 13 percent, the highest since May 2009. These changes meant that the end of the federal tax credit incentives had a significant effect on house sales and that the 26-year high unemployment rate and record-low mortgage rates are pushing homeowners to seek refinancing.

The percentage of borrowers who applied for refinancing in the week of June 21 to 25 to 76.8 percent, the highest since April last year, as the average mortgage rate for a fixed-rate 30-year loan dropped again to 4.67 percent from the previous week’s rate of 4.75 percent.

Indeed, the still low mortgage rates and low home prices are strong reasons for buying a home now even without the federal tax credits.

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