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New Homes May Be a Good Deal

Sheree Curry

With home prices sagging and builders often eager to reduce inventory, a newly built home might offer more for the buck than an existing home.

Some builders are offering buyers free finished basements -- a $30,000 to $35,000 value -- on some upper-end homes. Builders are also offering to pay closing costs and giving financing incentives, such as interest rate buy-downs, which can equal 4% to 6% of a home's purchase price. And those purchase prices are discounted up to 7% to 8%, say some builders.

"Builders are offering incentives to buyers that existing homes can't," says Stephen Holben of Holben Building in Denver. "If [buyers] deal directly with the builder, they can get the built-in broker sales commission deducted, or have it used to buy down their mortgage rate, or both."

Also, builders are often more willing to negotiate their prices than homeowners, because a vacant house is only costing the builder money, whereas home sellers can be sentimentally attached to their homes.

Dealing directly with the builder without a broker or realtor in the middle can save money, too. Virtually every builder has a commission built into the price of a new or remodeled home to pay a broker. Usually, that is about 2.5% to 3% of the price of the home. But if you're not working with a real estate agent or broker, that fee can be deducted from the sale price.

"All buyers have to do is ask that that cost be deducted from the price, as it is a cost the builder will not incur," says Holben. "Most [builders] certainly are happy to do it."

In addition to the value at the time of the sale, "we find that subdivisions with new homes go up in value [at a faster rate] than existing ones," says Mike Evans, a real estate appraiser who operates Evans Appraisal Service in Chico, Calif.

"From a value standpoint, new homes are in newer neighborhoods and are more modern [than existing homes] and they have the amenities most people want," says Evans, who is certified through the American Society of Appraisers. Brand-new homes tend to be more energy-efficient than their counterparts. They also have modernized equipment installed and often come with at least a one-year warranty.

But, amid the housing-market slowdown, even those benefits haven't been able to prop up sales. The national median new-home price is projected to drop 3.0% to $239,100 for 2007, and then decline another 0.2% to $236,600 in 2008, according to the National Association of Realtors, and many people consider even those projections optimistic. New home prices overall are expected to be down 9.9% this quarter from the same period last year.

"At this point, many builders are bracing themselves for the winter months when home buying traditionally slows," says NAHB Chief Economist David Seiders. Builders are scaling down their inventories and repositioning themselves for the time when market conditions can support an upswing in building activity. "Most likely by the second half of 2008," he says.

For now, excessive inventory issues persist, as indicated by the latest monthly builder confidence survey the National Association of Home Builders conducts in conjunction with Wells Fargo to gauge builder perceptions of current single-family home sales and sales expectations for the next six months. Their housing market index held at 19 for December, one of its lowest readings since the study began in January 1985.

There are some signs of a turnaround, though.

"We are selling homes at a faster pace than we are replacing them, [so] the supply will get back in balance faster, and this will lead to improved market conditions," says David Clough, president of Waterford Homes in Norcross, Ga. "The best deals on new homes are happening now and will decrease as the supply aligns itself more closely with demand."

And "after a very slow period for new sales contracts in October and November, we have experienced an improvement in sales pace during the first three weeks of December," says Ara K. Hovnanian, president and CEO of Hovnanian Enterprises(HOV - Cramer's Take - Stockpickr), a giant builder based in Red Bank, N.J. "This is encouraging given that December is historically a slower sales month."

Still, year over year, the number of net contracts at Hovnanian for fiscal 2007, excluding unconsolidated joint ventures, declined 20% to 11,006 contracts. For the fourth quarter, the company recorded a decline of 10.3% from the fourth quarter of 2006. Other homebuilders have experienced similar drops.

New-home prices could start to ease back up after construction on homes stops its decline. But that might not happen for months, or even a year or more.

An indicator of when homebuilding will pick up pace would be to look at the activity of companies that research due diligence for developers and homebuilders about the value of their land acquisitions. Companies such as Developers Research, a national real estate consulting firm based in Southern California, but with specialists working on assignments in 25 states, have seen a significant drop in their business in recent months.

"We previously reviewed [over the last nine years] about 60 to 80 projects every month. During the last two quarters, we have looked at less than 10 projects per month," says Developers' Research founder and president Barry Gross. "Whereas we previously reviewed projects for many of the national homebuilders, during the past six months we have looked at less than 10 projects total for the national homebuilders."

This indicates that national builders are not purchasing finished lots for construction of homes, he says. "Since our work is generally completed three to six months before a building permit is obtained, we believe the reduction in our due diligence work indicates that most homebuilders will not be commencing new tracts until a least the third quarter of 2008."