America’s homebuilders traditionally look forward to a new year.

First quarter purchases usually produce the majority of a homebuilder’s annual sales as homebuyers turn New Year’s resolutions into new-home reality.

But this year is likely to be different.

This year, homebuilders are holding back releases, scaling back expectations and moth-balling communities.

There are no new-year advertising blitzes or model grand openings. This year, builders are bracing themselves for another 12 months of sales torture, and they only have themselves to blame.

As new-home prices reached their inevitable peak in the fall of 2005, homebuilders had an opportunity to demonstrate their marketing and market-management skills.

Get it right and the soft landing they all hoped for could be achieved. Get it wrong and the industry faces disaster.

We now know the end result – the hardest landing in living memory – and some say, the worst housing market since the

Great Depression.
So where did America’s homebuilding industry go wrong? In a word – discounts.

America’s largest homebuilders all believed that the answer to slowing sales rates and price resistance lay not in creative marketing, but in price discounts. And so they began a process of undermining the value of a family’s most precious asset.

America’s homebuilders use sophisticated marketing techniques, lavishly furnished and decorated models, luxurious landscaping, audio visual presentations, websites and E-blasts, television and radio commercials, magazine and print advertisements, sign programs and creative financing.  

All of them were thrown out the window when the slow-down came in favor of discounting, a method that doomed them to failure.

Homebuilders forgot that the $50,000 discount they offered today would be matched or exceeded by a competitor tomorrow. They ignored the fact that as their discounts grew, consumer confidence would fade and disappear.  

Today, builders complain that they have traffic to their model homes from well-qualified prospects, many with the need and ability to buy, but they are keeping their checkbooks in their pockets and refusing to write the deal. Builders complain that there is no consumer confidence.  No kidding!

Consumers know that a builder, offering them a $50,000 discount today, could offer a $75,000 or a $100,000 discount on the same house to another buyer tomorrow and wipe out the equity they have just put into their dream home.  

America’s consumers are not in the habit of borrowing money to buy a depreciating asset. Who wants to own a product that isn’t worth the loan on it?

The French retailer, Louis Vuitton never discounts the price of its products - never.

The company makes handbags costing up to $4,000 each and has a waiting list for them. They put their faith in superior quality and design and they make sure that supply does not exceed demand. There are other companies that avoid discounts at all cost, preferring to dispose of excess merchandise rather than undermine the value of their brand by selling products at discounts.

After Shock
Resale prices have fallen as new homes have undercut established market prices.  

Land prices have suffered appreciably as bank appraisers calculate the impact of $50,000 to $100,000 discounts on new homes.

New land values have forced builders to take write-offs that we now call “impairments” so as to disguise the impact of the discounting folly. These impairments have led to spectacular losses reported by America’s large public homebuilders.  

Recently, KB Homes reported a $772 million quarterly loss; Lennar reported two quarters with losses exceeding $500 million each, and Pulte has reported a $700 million quarterly loss.

A Better Approach
The housing market will not recover until new homebuilders stop discounting.  Then, and only then, will consumers see that a bottom in the market has been reached.

In order to stop discounting, builders must cut back available inventory and to do that they need to stop building for a while.

Again, this would be another signal to consumers that builders do not intend to build themselves into oblivion.

Builders need to start using sales techniques that will help homebuyers achieve their goal, be it a first home, a larger home, or a luxury home.

Homebuyers are always looking to buy the biggest or the best home that they can. They may need help with a down payment or with selling their existing home, or even just affording the monthly payment.  

Builders should tackle each of these challenges by offering programs that will solve their customer’s problems.

Someone needing help with a down payment could be offered a lease option program. Moving someone into a brand new home, and letting them pay off the down payment through lease payments for a period of time is better than giving them a $50,000 discount.  You overcome the homebuyers challenge without destroying new home values.

Someone with a house to sell could be offered a trade-in program, whereby the builder will take the customer’s existing home in trade and allow them to move up to a brand new home. The integrity of the local market is protected and the customer is offered a valuable service which has a price tag. The builder takes the risk of being able to resell the existing home within a short time frame and at a reasonable price.

Or, the homebuyer who needs help with monthly payments could be offered a subsidy or buy-down to lower payments at an affordable level. Again, these subsidies will cost the homebuilder money without destabilizing market values.

For the homebuyer seeking a better deal, homebuilders would be better served offering upgrades and options to create extra value in the home. It is better for the builder to add value than to discount the price and destabilize the market.

Once Approved, Tough to Cut
Historically, builders have refused to challenge unwarranted fees, but now, they have to be responsible for turning back many of the costs that drove prices so high in the early part of the new century.  

In many parts of the country, the “good times” that existed a few years ago, saw builders turn a blind eye to cost increases that are painful to bear today.

Development-impact fees and housing regulations, in many parts of the country, are out of control.

In Dublin, California, development impact fees add $156,000 to the cost of a new home, and local politicians wonder why there is no affordable housing!

These impact fees alone may include everything from fees for public art, fees for local museums, fees for freeways or parks or police stations – or to protect endangered species. The list is endless and the cumulative effect is devastating.

Builders refused to challenge these unwarranted fees for fear of retribution. Stand up to a city council that wants to charge fees to build a local museum and you risk losing your permits.

We call that being held hostage! Give in to the unwarranted demand and hope you can build out your project before your decision catches up with you.  

A Fork in the Road
Will our nation’s builders change their course of action? Will they turn their back on the destructive forces that have ruined housing markets across the country and led to economic spill-over effects, which now prompts economists to speculate on the possibility of national recession?  

Let us hope they do because we all have an interest in this.

While new-home builders have demonstrated the scale of their suffering in their quarterly results, the fact is that many people throughout the country have lost equity in their homes – new and resales – over the past two years.

Today, a lot of bad decisions have caught up with builders, and as they seek ways to lower costs and restore some margin, they will have to take up this battle.

Let us hope our national homebuilders have made some New Year’s resolutions not to discount, not to overbuild and not to run way from the battles that need to be won in order to restore sanity to local markets.  

Will they do it?  Time and the value of our homes will tell. SLDT