Irresistible incentives entice home buyers

The Star-Ledger, September 28th, 2006

The Star-Ledger Archive COPYRIGHT © The Star-Ledger 2006

Date: 2006/09/28 Thursday Page: 047 Section: BUSINESS Edition: FINAL Size: 935 words

Builders find paying down mortgages, throwing in other perks translates into sales

By SAM ALI STAR-LEDGER STAFF

When Ken Baris, president of West Orange-based Jordan Baris Realtors, logged onto his computer yesterday morning, he found himself on the receiving end of an e-mail blast from Beazer Homes, a developer building 96 new condominium units in Passaic County.

The message to brokers and agents was crystal clear: Sell a condo and pocket a meaty 4 percent commission, instead of the standard 3.

It's a theme that is playing out across the country. Home builders, who have more wiggle room than private homeowners when it comes to reducing their prices, are offering prospective buyers a lot of sweeteners to stimulate the lethargic housing market.

Apparently, it's working.

Sales of new homes, which account for typically about 15 percent of real estate transactions, rose in August by a surprising 4.1 percent, to an annual pace of 1.05 million units, the Commerce Department reported yesterday. The increase was due in large part to declining mortgage rates and the bevy of incentives being offered by home builders.

The August spike in new home sales was the biggest increase in nearly five months, and raised hopes that maybe, just maybe, the worst may be over for the housing market.

"Developers, more so than a lot of private homeowners, are being practical and addressing the issue of the changing market," Baris said. "We're seeing strong sales in new construction."

By region, the numbers seem to suggest builders in the Northeast are doing a pretty good job of enticing home buyers back into the market, with new home sales in August soaring 21.7 percent, according to the Commerce Department.

Sales of new homes were up in every region except the West – which is dominated by California – where they dropped a sharp 17.7 percent. Sales rose 12.2 percent in the Midwest and 11.1 percent in the South.

"I think the worst may be behind us, and this might be a positive, clear sign that we will see some slight improvement," said Richard Yamarone, the chief economist at Argus Research.

Yamarone is one of a handful of contrarians on Wall Street who believe the main culprit behind the housing market's malaise is the media.

"No doubt about it, there is some softening in the housing market. You can't break records forever," he said. "But I really believe this has been fed by the left-wing press looking for a good story right before the elections."

Yamarone said the nation's unemployment rate remains low at 4.7 percent. And mortgage rates have been falling lately, which tends to increase consumers' buying power.

Freddie Mac, the big mortgage buyer, says the national average rate for 30-year fixed-rate loans fell about a quarter-point in August, to 6.52 percent, from 6.7 percent in July. And they've fallen more since, to 6.40 percent last week.

"The bottom line," Yamarone said, "is mortgage rates are falling and people in those quirky, adjustable-rate mortgages are refinancing into fixed-rate products, so that's a positive thing. As long as mortgage rates remain low, we should have some bottoming in this slump. I think there is more to be optimistic about than pessimistic."

Another hopeful glimmer in the Commerce Department's report yesterday: The number of unsold homes fell to a 6.6-month supply at the August sales pace from a seven-month supply the prior month. That was the first drop in housing inventory since March.

In addition, the median sales price of a new home in August managed to climb to $237,000, from $236,200 in July, but was below the $240,100 median price a year earlier, the government reported.

Still, skeptics abound.

A number of economists insist the surprising rise in new home sales in August should not be taken as a sign the housing market has bottomed.

Mark Zandi, the chief economist at Moody's Economy.com, recognizes builders have had some success sweetening the pot to move their unsold inventory. However, he predicts the government will ultimately end up revising the August numbers downward – just as they revised the July numbers measurably lower yesterday.

Indeed, the Commerce Department adjusted new home sales for July to 1.009 million – 63,000 less than the 1.072 million figure originally reported. The revised July rate was the lowest since a March 2003 rate of 999,000, the Commerce Department said.

"Of all the economic statistics, new home sales is one of the most heavily revised reports," Zandi said. "The building industry is very fragmented and so the government continues to get more information as the month progresses."

Zandi notes it wouldn't take much of a revision to send August's new home sales numbers back down into negative territory – a mere 41,000 units annualized, he said.

Joel Naroff, an economist, with Naroff Economic Advisors, said that given how ugly the July numbers turned out to be, "no one should assume the worst is behind us."

"The sales pace in August was 17.4 percent below the July 2005 level, and that shows how far the market has already fallen," said Naroff, who expects to see at least three to six more months of declines before the market hits a bottom.

"All the reports we are getting point to further declines in home sales, and one month does not make a trend."

Indeed, the National Association of Homebuilders' index, which is based on a survey of home builders' perceptions of home sales and buyer traffic, has plunged this year to levels last seen back in 1991, when the nation was in recession.

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