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BusinessWeek’s cover story this week is all about the national housing market. Specifically, the reporters look at new housing developments where homebuilders have slashed prices, offered outrageous incentives or sent unsold units straight to auction. It’s a fascinating article, a look at the future of the housing market viewed through the lens of dramatic reductions in new houses.
Take, for example, a local angle mentioned in the piece (bottom of this paragraph):
For the first time, big builders are offering massive, often six-figure, price cuts in overbuilt developments nationwide, giving the industry a kind of shock treatment designed to move inventory off the books fast. It remains to be seen whether these radical measures will revive the market or deepen the slump, but it’s certainly having an impact on the local communities. On Sept. 14, Hovnanian Enterprises Inc. kicked off a 72-hour Deal of the Century, in which it slashed prices by as much as $100,000 in 19 states. That same day, Standard Pacific Corp. launched its Mission: Possible campaign in 49 communities across Southern California, promising $20 million in total discounts. And on Sept. 29, D.R. Horton Inc. auctioned off 53 homes in San Diego with bids starting at $150,000, half off the list price. “We wanted to get the message across louder,” says Hovnanian CEO Ara K. Hovnanian. “Customers needed a stimulus.”
And here’s a bit of the rationale behind the dramatic reductions:
Margins, which ran as high as 35% at the peak of the housing boom, are close to nil when builders sell at fire-sale prices. If by doing so the builders can force the market to accept the reality that housing values have fallen—and accept it fast—there’s at least the possibility of emerging from the current bust sooner than in earlier down cycles.
What effect does the phenomenon have on individuals selling their homes on the resale market? A $50,000 cut on a new home makes a $10,000 reduction in a resale home that’s been on the market for 124 days pale in comparison, the piece hypothesizes.