Most builders using sales incentives heat up sales

by WOHe

August 9, 2010 — From the NAHB — A majority of the nation’s home builders have been offering incentives this summer to boost their sales in a generally cool marketplace, according to a recent NAHB survey.

The polling — which was conducted in June 2010 in conjunction with the monthly Builders’ Economic Council survey for the NAHB/Wells Fargo Housing Market Index — also found that some builders are using incentives to fill the void now that the May 1 deadline for signing a sales contract to qualify for the home buyer tax credit has come and gone.

“Some builders have, in fact, introduced new incentives in response to the expiring tax credit, but only a relatively small number compared to the number that historically advertise some type of special sales incentive,” said Paul Emrath, author of the special NAHB Housing Economics study, “Builders’ Use of Incentives After the Tax Credit.”

“Moreover, a relatively small share of the builders who currently advertise one of these incentives is explicitly marketing the incentive as a replacement for the tax credit,” he said.

Emrath noted that the uptick in single-family activity over the past year or so has been largely attributable to the enactment and extension of the credit, so it would be only natural for builders to devise new strategies in its absence.

Historically low mortgage interest rates and affordable housing prices remain major positives for housing, but economic growth and improvements on the employment scene have been slower than expected, according to economists at NAHB, putting housing this year on a decidedly more gradual upward path than usually occurs following a recession.

Nearly three-fourths of the builders surveyed by NAHB in June — 73% — reported that they were currently using and planned to continue to use at least one incentive unchanged.

Many builders, but far from a majority, said that they were adjusting their incentives programs — by changing existing incentives or initiating new ones — to compensate for not having the tax credit. Fifteen percent of the builders indicated that they were altering at least one of the incentives they had been using and 12% said they were adopting at least one new incentive, with some overlap between the two responses.

In addition, 15% of builders told NAHB researchers that they were initiating at least one new sales incentive, but for reasons unrelated to the fading tax credit.

Seventy-six percent of builders said they were currently using some sales incentive in June, which is down some from last year’s peak rates. In February 2009, 85% of builders were using incentives to bolster their sales; by June of last year that share had dropped to 79%.

Among the common types of incentives that builders have been using and will continue to provide, reducing the price of the home is the most popular, cited by 54% of the survey respondents. That was followed by offering options or upgrades at no reduced cost (50%) and paying closing costs (44%).

Reducing home prices became increasingly prevalent as the housing downturn deepened, rising from 18% of builders in January 2006 to 45% one year later, 52% in February 2008 and 72% in February 2009.

Offering green features at no cost or a reduced cost is the fourth commonest sales incentive, reported by 32% of the builders, followed by helping buyers sell existing homes, 25%, and absorbing financing points for buyers, 23%.

The NAHB study found that one-fifth of all builders are adopting a new incentive and/or modifying one they have already been offering to compensate for losing the tax credit as a marketing tool. Of all the builders surveyed, the most common incentives for filling the gap include:

Options or upgrades at no or reduced cost, 10%

Discount home prices/reducing margins, 9%

Paying closing costs or fees, 6%

Green features at no or reduced cost, 6%

Absorbing financing points for buyers, 5%

Mortgage rate buy-downs, 4%

Among incentives being adopted for reasons unrelated to the tax credit, offering green features at no cost or a reduced cost was the most common, cited by 8% of all the builders surveyed.

“Given recent experience with volatile energy prices and the public attention focused on possible climate change, it is probably not surprising that a significant share of builders are now adopting low-cost green features as a marketing device, nor that they are doing so for reasons unrelated to the expired home buyer tax credit,” Emrath said.

When the builders who reported using special sales incentives were asked if they were advertising or marketing those incentives as a replacement for the home buyer tax credit, 19% said yes and 81% said no.

Among the builders who have chosen not to offer sales incentives, the reasons for that decision include:

Cannot afford incentives due to rising construction costs, 50%

Have tried incentives, but they were ineffective, 41%

Don’t think incentives work in market area, 18%

Market now strong enough, incentives not needed, 6%

Nineteen percent of the builders gave other reasons for not relying on incentives. Most commonly, these were builders who only build custom homes to contract or otherwise operate in an environment where they don’t typically advertise, making incentives irrelevant.

“Other builders feel that advertising incentives is not an effective way to negotiate with customers,” Emrath said. “Some believe, for example, that so many customers will ask for incentives or concessions irrespective of any builder’s marketing campaign that it is more efficient to let the customer make the first offer.”

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