Interest Rate Roundup

Friday, December 08, 2006

More mega-deals on the new home front

I've said that in a number of previously hot markets, home prices could fall 20% to 30% ... or more ... depending on property type, location, etc. Here is just one case of a new home builder who's running a big sale in my neck of the woods this weekend. The sale is Dec. 9, so the link may not work after that. But to highlight just one offer, a 3BR unit that previously would have sold for $336,725 is being offered for $259,900 --more than $75,000 off, or 22.8%. Another previously listed for $253,790 is being promoted at $168,790. That's an $85,000 price cut, or 33.5%.

Some buyers are clearly responding at these price levels. The key question is, what happens when the mega-sales end? Will buyers continue to step up to the plate at higher prices? Or have they been conditioned, like many car buyers have, to expect even better deals the next day ... next week ... next month ... next quarter? Certainly there are some parallels between what the car makers faced a few years ago and what the builders face now:

Auto demand dropped after 9/11 when the economy slumped. But instead of drastically cutting production to match supply with reduced demand, the Big Three turned to super-aggressive incentives. That juiced sales for a time. But every time the car makers cut back on the offers, buyers cut back on their buying. Companies like GM and Ford are still struggling with this market dynamic.

This time around, housing demand started falling last year as the bubble burst. Builders didn't cut back on production quickly enough, and supply surged to the highest level in U.S. recorded history. The builders are cutting back on starts now, and slashing prices to move product. But if they can't resist the urge to bump production back up every time sales rise a bit, they'll end up in the same boat as the automakers -- consistently relying on new and more generous deals to attract customers.

It'll be extremely interesting to watch how the supply/demand picture evolves in the 2007 spring selling season. But I think both builders and home sellers will be surprised at just how many homes come to market after the holidays.


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