New Home Insights Podcast Episode 15 Transcript | John Burns Real Estate Consulting


Episode 15: Pricing Clarity from Coast to Coast

Transcript:

Dean Wehrli:

Okay, welcome to New Home Insights podcast, the John Burns real estate podcast that brings you the latest trends and changes and insights into the new home world. By the way, if I sound weird it’s because I, like 800 million other Americans I have a cold now, so if I sound funky that’s why. It’s either a cold or I have a hint of the Ebola virus, I’m not completely sure which, like pre Ebola, I don’t know. And that’s a thing, trust me.

Pete Reeb:

Knowing you Dean, it could be about anything.

Dean Wehrli:

It could be, you don’t know. I seem under the weather, so I apologize. Today though, we have two guests, Lesley Deutch, who’s based in Florida and she does studies throughout the Southeast and really the whole East coast and beyond in the country. Lesley, how are you doing?

Lesley Deutch:

Good. Hi Dean.

Dean Wehrli:

She’s with us here at John Burns as is Pete Reeb who’s based in San Diego and he works throughout the Western U.S. and beyond as well. Pete, how you doing?

Pete Reeb:

Terrific. Thanks for having me on today Dean.

Dean Wehrli:

Absolutely. Today we are going to be talking about incentives, a four letter word to our builder listeners I’m sure for the most part, but something that we are seeing a lot more of and we are pretty sure we’ll be seeing a lot more of in the future. So the market is slowing here and in most markets throughout the country over these last few months, so we’re seeing more incentives in the market, so let’s talk about them. First things first though, let’s make sure we focus on and we all understand what we’re talking about and kind of speaking the same language. Pete, just really briefly give us a quick rundown on what we mean when we talk about buyer incentives.

Pete Reeb:

So an incentive would be a special offer that a home builder is making to a prospective home buyer in one of their new home tracks to try to help to sweeten the deal a little bit and entice buyers to go ahead and buy that home. And typically builders offer incentives to help control their pace of sales and to allow them to preserve values on the homes that have already been sold in the community. So it’s typically going to be some kind of a feature that allows a home buyer to save money in some way on the purchase of the house.

Dean Wehrli:

And just to be clear, we’re not necessarily talking about actual price decreases, those might be happening and we can talk about those in the same conversation but technically we don’t mean specifically price cuts, do we?

Pete Reeb:

No, we’re talking primarily just special enticements to get a buyer to purchase the house beyond just reducing the price of the house itself.

Dean Wehrli:

Right on. So let’s get into it. Let’s first just kind of lay the groundwork here in your markets and again Lesley is kind of covering the East coast, Pete kind of covering the West coast. I’ll interject as needed. So we try to make this as national as possible. There’s going to be a humongous variety of incentives out there when we talk nationwide, but from what you guys are seeing in the markets you’re working in, what are some of the most common incentives you’ve seen right now these last few months? Lesley, why don’t you start us off.

Lesley Deutch:

Okay, sure. So incentives in Florida and the Southeast and really across the East coast have been pretty consistent. Most of the incentives are in the form of certain amount of dollars off for your option spending or even closing costs. We are based here in Florida, so we do see some incentives from the builders offering some free country club memberships for a year or two. Also, some golf memberships as well, but generally the builders are looking to match their incentives from other communities around just to kind of remain competitive. So it’s a little bit of a competition here, but not necessarily a race. They’re not going up very high. We see a little bit of discounting on inventory homes. So if a home is already built and they’re trying to move it to sell it, there will be some of that happening. But overall, the incentives, they’ve remained pretty minor and pretty modest over the last year. They are starting to grow, but not tremendously.

Dean Wehrli:

So you really haven’t seen that surge in incentives that some markets are starting to experience?

Lesley Deutch:

No, but I think one of the most interesting things that I’ve seen is a lot of the builders will say, “Look, if I have a qualified buyer, I may not be advertising any incentives, but I’m going to close this deal.” So I call it a hidden incentive, right? So at the table when they are working on the final price of the home, the builder’s going to try to get them over the hump by offering some money off.

Dean Wehrli:

Yeah. I’m just curious, how do you usually find out about that? How do you discover that kind of thing is going on at builder X or project X?

Lesley Deutch:

Right. So what we’ve started to see are closing prices that are lower than advertised sales prices. So in the state of Florida, they record all the closings right after it’s done and so, we look back at the advertised sales prices and we can compare them, so we start to see that happen, a big differential. And builders are not really afraid to admit it either. If they get someone that’s qualified, they’re going to keep them.

Dean Wehrli:

Yeah. Sometimes they are there and sometimes I know I’ve found that asking the competition. Asking builder Y about builder X and sometimes they volunteer it, oh, yeah, I’ve heard they’re they’re shaving $20,000 bucks off that prize in real life, or they’re offering $20,000 bucks in upgrades that they’re not telling anybody publicly. Have you seen that? Pete have you seen that kind of a thing happen? Have you used that tool?

Pete Reeb:

Oh absolutely. Most good new home sales agents they’re tracking their competition and they know what’s going on, so yeah, they’re a good source of information.

Dean Wehrli:

And those buyers coming in and mentioning, hey, well what can you do for me? And who knows if they’re completely honest but certainly they’ll tell on the competition for sure. So how about you Pete? What are the most common incentive types you’re seeing in your markets in the West?

Pete Reeb:

Yeah, so it sounds like in contrast to what Lesley seeing on the East coast, on the West coast, I would say up until maybe 12 to 18 months ago, the most effective incentives were offering buyers design center credits, maybe $5,000 or $10,000 for the buyers to spend on options and upgrades, but as home prices have continued to escalate, now about half of the home builders that I’ve spoken to recently say the most effective incentive for them is to pay for closing costs. Given the high price of housing and markets like California, your closing costs can be a significant outlay of up front money and it’s hard enough for buyers to come up with their down payment money, particularly for an entry level buyer and so, anything that saves the prospective buyers that upfront out of pocket money is very effective. Now as interest rates have escalated, more and more builders are offering interest rate buy downs. I would say probably 75% of the builders I’ve spoken to are offering interest rate buy downs typically in the form of a two one buydown, although one is offering a three two one buydown.

Dean Wehrli:

Explain that real quick for our listeners, what we mean by the two one or three two one buydown.

Pete Reeb:

Yeah. So in essence, the builder can pay the lender to reduce the interest rate in the first two or three years of the life of the loan. So a two one buydown is going to buy down, say the current 30 year fixed rate is just for simplicity sake, 5% a two point buydown is going to get you down to 3%, the one buydown’s going to get you to four, so it reduces your monthly payments for those two years and then the loan reverts back to the longterm rate after that. So what a number of builders have told me though is that although they’re offering the rate buydown and some people are using it, it’s almost like a teaser that gets the buyers in the door and gets them interested in the project, but then they end up going for the closing cost incentive because it saves them more money up front.

Dean Wehrli:

Yeah. Okay. But I think what the buydown does though is it psychologically answers one of their biggest concerns right now is the rise in mortgage rates and at least with the first two years it’s back to what they were hoping it was going to be or even a little bit lower in some cases a year or two years ago.

Pete Reeb:

Yeah, and interestingly a number of sales agents have told me that today’s buyers are pretty savvy about finance and temporary interest rate deductions versus longterm reductions and a couple of builders instead of doing the two one or an addition to the two one are also doing an actual life of the loan rate buydown where they might buydown the loan a quarter point, in extreme cases a half point, but it’s much more expensive for the builder to do that and so, that kind of rate buydown isn’t prevalent in the market today.

Dean Wehrli:

Okay. How about decreasing or eliminating premiums? In a lot of the markets, like in Northern California for instance, you had, let’s be honest, kind of fake premiums. You had really artificial premiums, not based on a legitimate preferred condition for the lot, oversized or adjacent to a park, whatever. Have you seen that start to go away or just flat out even premiums that were legitimate, were an oversized lot, are they decreasing those? Have you found that as an incentive effectively? And Lesley chime in here too please.

Pete Reeb:

Yeah, at this point, really only if the builders have gotten to the point where they have standing inventory and they really need to move that product. In my markets on the West coast, that’s really the main area where I’m seeing any kind of asking price reductions are on lots that might have very hefty premiums or on standing homes where the builder, because they didn’t sell the house during construction, had to put in preselected, builder selected options and upgrades that drive up the price of the house. So you might’ve had a $500,000 base price house with a $25,000 lot premium and $25,000 in builder pre-plots, so you’re asking price is $550,000 and maybe they’ve knocked 10 grand or 15 grand off that asking price. So it’s still a higher price than a base price house, but not the full price that the builder would have originally had been trying to achieve.

Dean Wehrli:

Gotcha. Lesley, have you seen any kind of tamping down in premiums as an effective form of incentive in your markets?

Lesley Deutch:

No, not yet. So it’s definitely a different market over here because I would say we don’t see the interest rate buydowns yet. And we also have more of a push because we have so many retirees and second home buyers. The options incentives, much more desirable than the closing costs. I mean, depending on where you are, but if you have a buyer that’s cashing in on their house in the Northeast or in the Midwest, they’re looking for those options incentives so they can spend more money on the inside of their house. So it’s very interesting to hear what Pete’s saying because it’s a different dynamic that happens in a lot of these markets in the East coast. The lot premiums I think Dean are a good point. They’ve been rising pretty rapidly and I agree with Pete that a lot of them aren’t really justified but they are being achieved. I would say that that’s probably the next incentive that we’ll see but not necessarily happening at all today in the East coast markets.

Dean Wehrli:

How about I know that they’re not technically buyer incentives, but how about higher broker co-op fees and broker co-op is where you give a little cut to a real estate agent who brings in their client into the new home environment and they buy a house, they get a little something, something, something like 2% let’s say or 2.5%. When the market was going nuts in a lot of these areas they didn’t really need that kind of activity as much as they did, so they saw broker co-op fees start to shrink. Have you guys seen that? Them come back or increase as a form of incentive yet?

Lesley Deutch:

I haven’t and I’ll tell you something interesting I learned today actually is we start to see a 5% broker fee and sometimes even higher percentage international broker fee because I’m based here in Florida, so to bring an international buyer you get an even higher fee. So that is certainly starting to come back not as advertised as other incentives but clearly in the market.

Dean Wehrli:

Wow. 5%, good Lord. How about you Pete? Have you seen any kind of increase yet in broker co-op?

Pete Reeb:

Yeah, so on the West coast, a typical broker co-op, and just to back up, I would say probably a good 90% of all new home subdivisions on the West coast are offering a broker co-op program, it’s most typically 2 to 3%. Today it’s probably closer to 3%, although I did talk to a builder just yesterday who has some million and a half dollar homes, they’ve got some standing units, they are currently offering a $100,000 broker incentive to move product, which has brought in some good broker interests.

Dean Wehrli:

That’s interesting.

Pete Reeb:

So you know for the most part it’s 3%ish. The highest we’ve seen is around 6% on high-end standing inventory. And typically on the projects that offer a broker co-op, the proportion of buyers that come in through the co-op program ranges anywhere from about 25 to 75% of all sales and averaging about 50%, so that’s a big number to the builders.

Dean Wehrli:

Yeah, it’s a big part of their buyer profile. It’s funny you say that because, same here. Yesterday I was in the market in a kind of a middle-income sort of market in terms of home prices and one or two builders felt like they’re going to have to start offering broker co-op where they hadn’t offered any, which is unusual. And another builder thought they’re going to have to go from the flat fee they had been offering because again the market was going great, they didn’t need it as much to some kind of percent, in this case, probably about two and a half percent to sort of match the market. So I’m definitely starting to see broker co-op increase. One more in terms of what the most common incentives are, just flat out, are you seeing any price cuts at all in your markets? Lesley, I think the answer is probably no for you.

Lesley Deutch:

Not in my markets, no. Unless it’s a poorly executed project that has to have a major repositioning and there’s not many of those but there are a few, but that would be in any type of market. But I have not seen price cuts.

Dean Wehrli:

Pete, any at all of those yet?

Pete Reeb:

Yes. In my markets it’s primarily on standing inventory homes and nearly completed homes that the builders, they just got to move, they’ve got to close those houses and move on to the next ones. So I would say typically you’re looking at maybe a 2 to 3% price reduction on standing inventory homes. And what happened was that in the first half of 2018 sales were really pretty strong in most of the West coast markets but then starting late summer, early fall sales activity really started to slow and particularly as interest rates started to rise and a number of the largest builders had started building a lot of spec product back in the end of the first quarter and through the second quarter that because of labor shortages and increased time to build and complete a house, they wanted to get ahead of their sales schedule so that they would have enough homes to close at year end and then as sales slowed, suddenly the builders found themselves with some standing inventory.

Pete Reeb:

So unfortunately that has driven some of those asking price reductions on those standing inventory homes because there are more homes available now than you typically might expect and you typically see seasonal slowing in sales activity at this time of year, which has happened. So you have the seasonal slowing on sales with more homes available and so, that’s created a little bit of a buyer’s market where as you had said at the beginning, Dean, a lot of savvy shoppers are just walking the front door and asking a sales agent, hey, what are you going to give me?

Dean Wehrli:

What you got for me today? Yeah, absolutely. It really is a catch 22 for builders in that everybody wants. Most buyers want something that’s fairly immediate as move in ready or close to it but to do that builders have to take a lot of risks by specking those homes. Let’s move on to the most effective. So in your markets what incentives do you believe so far have been the most effective in terms of getting actual purchases?

Lesley Deutch:

I can start. So, sure. The ones that I think that are the most effective are the ones that are clearly advertised. And I say that when you walk into a builder office and you get a sales office and you get a sheet that tells you exactly what your incentives are. In some of my older markets where I have a lot of older buyers, they tend to take that sheet around and shop it as a coupon. I won’t mention which markets those are, but you could probably guess in Florida there’s many of them.

Dean Wehrli:

I’d say Florida? From my perception.

Lesley Deutch:

Imagine that. But I think that the clearly advertised ones really do bring people in the door and they like to see that and understand he deal that they’re getting.

Dean Wehrli:

Okay. How about Pete in the West. What so far has been the most effective? You mentioned maybe the buydown is more of a getting in the door as opposed to being an effective sales tool, does that sound right?

Pete Reeb:

Yeah, so I would say it’s a combination of having a very strong broker co-op program, especially in the very competitive market areas to bring those real perspective buyers in the door. And right now the builders are telling me that more of them are saying it’s the closing costs that are helping to get people over the hump to save money up front. But of course buyers are going to take anything that you’re going to give them. And I would say in a lot of cases you end up getting a mix where the builder’s going to cover your closing costs as well as a design center credit. And between the two of those you get to kind of pick out your dream features and save some money up front, so it’s probably the combination of those three things that are getting most of the buyers to go ahead and sign on the dotted line.

Dean Wehrli:

Yeah, I’ve always felt something off on options is, it makes sense that they’d be the least effective because at the end of the day, what kind of options you buy are completely discretionary to that buyer and you don’t have to option up and really upgrade the heck out of your home. So getting a little something, something off the options to me just doesn’t seem to be as effective as something like a closing costs or even a rate buydown that’s actually effectively putting money in your pocket.

Pete Reeb:

Yeah, and I would say there’s a big difference by price range as well, that in the level segment of the market probably 50% of buyers in a project aren’t going to spend more than a couple $1,000. Whereas in the million and a half dollar price range, you might get people spending $100, $200, $300,000 on options and upgrades, so it really varies by price point.

Dean Wehrli:

Yep, definitely. How about are you seeing any, I think I know the answer, but let’s go over it briefly here on this. Are you seeing any markets at all that have absolutely been completely stable over these last few months in terms of incentives? Lesley I’ll start with you again because I think the answer is probably yes in quite a few, is that fair to say?

Lesley Deutch:

Yes, except for the sort of events that builders will have or sales, but it’s been pretty stable here on the East coast, but like I said earlier, I think that hidden incentive is really starting to come in where the builder will make a deal at the table, at the bargaining table right before the home is closed. So there is clearly been a slow down in traffic and sales recently and I think that’s where the incentives are coming. And not to say we’re not going to start seeing more and more incentives and I do expect that, but right now I think it’s been relatively stable.

Dean Wehrli:

Yeah. For you, let’s flip it before we go to Pete. Have you seen a handful of markets where you have in the Eastern part of the country were you have seen a fairly dramatic increase in incentives already?

Lesley Deutch:

For me?

Dean Wehrli:

Yeah.

Lesley Deutch:

No.

Dean Wehrli:

Okay.

Lesley Deutch:

I have not. Not dramatic increase. I’ve seen competitive increases just a little bit here and there, but it’s been relatively flat.

Dean Wehrli:

Okay. How about you Pete? Are you seeing any, well again, I’ll flip it back for you because I think here in the West we have definitely seen incentives become more ubiquitous in almost every market. Have you seen any that have kind of weathered that storm better than others and the incentives are still pretty modest?

Pete Reeb:

No.

Dean Wehrli:

It’s pretty universal.

Pete Reeb:

Bottom line. Yeah, the markets that I work in, and I’ve talked to about a dozen builders in the last day or two, most of them are telling me their incentives today are about double of what they were at the same time a year ago. But that may not be as bad as it sounds. A year ago a typical incentive in a lot of market areas was maybe $5,000 maybe $10,000. So today instead of five grand, it’s 10 grand. And yeah, that’s 1% on a $500,000 house and every dollar of incentive that you have to give cuts into your bottom line, but for the most part most of the builders I’ve been talking to, they’re not really panicked at this point in time. They’re saying, yeah, inventory’s up but the underlying fundamentals of the market with job growth is still really strong and unemployment is low and wage growth is good and we think we got a little ahead of schedule on construction, so maybe we have a few more standing units than we would typically expect to have.

Pete Reeb:

But I’m not seeing a lot of sort of panic incentives where you’re giving away the farm with the exception of maybe one or two pockets of really high-end housing where you have a lot of competition and a pull back in foreign buyers and there’s definitely been a pullback and foreign buyers in some Southern California markets and that’s where you are hearing some of the $100 to $200,000 on a $2 million house. But it’s still pretty rare to hear about that. The vast majority of incentives in my markets are in the $10 to $30,000 price range on $500,000 to a million plus value homes, maybe up to $50,000 at the most, at the million and a half to $2 million range. Although like Lesley said, I think there is also the kind of wheeling and dealing that will go on that is not advertised that a builder might be willing to do to get that year end sale.

Dean Wehrli:

Yeah. And let’s remember when we’re talking a million, $2 million, that’s the ethos fair for the vast majority of the country. But unfortunately we only have so much time here, so we didn’t have a whole bunch of folks. John Burns has folks all throughout the country who can talk about the middle of the country as well. Lesley, have you done anything in some of those other markets outside these East coast? Are you familiar with how they’re doing, say, in the Midwest or South central or Texas or so? Can you speak to that at all?

Lesley Deutch:

Those incentives are increasing. I think the way Pete put it is very, very similar to what we’ve seen. They have not gotten so large. I judge it by when they start offering the free pools, then you started to see it in the car that comes with the house, that was back in 2008 we saw those. And Pete, I can even attest to a lot of markets in Texas and Florida as well, that that see that $10 to $20,000 range, which is off of a $300,000 to $500,000 home. So very similar in percentages wise to what you were talking about and I think it’s very similar across the country but you’re right. The lots are probably next to common and the cars and pools, that’s the indicator that there’s a problem.

Dean Wehrli:

Okay. Let’s segue that, where do you see incentives heading here in the near future? Up, down, stable? Just kind of appear quantitatively, where do you see incentives going here?

Lesley Deutch:

I think it’s going to be a mix. I think some markets will stay about flat from where they are. It depends on the supply in the market and the demand obviously but overall I would say an increase but probably in different forms, some options, some closing costs. I think that you’ll start to see a little bit of an increase over the next year, especially with our interest rates going up like we saw today.

Dean Wehrli:

Yeah. How about you Pete? Where do you think it’s going? I mean here in the West we’ve already experienced a lot of it, do you see it still going up more?

Pete Reeb:

Yeah, I would say it’s kind of a good news, bad news story. I think the good news is that we’re already more than halfway through December and shopper traffic levels and sales activity typically starts to rise starting the end of January and particularly by the time we hit February and March you should see a rising interest in housing purchases, so that should take some of the pressure off of the builders need to incentivize to increase sales activity. The bad news is that incentives are very prevalent today and it is somewhat difficult once the incentive train gets rolling to slow that down. So I think today’s incentive levels are going to carry over into the January, February period but once the builders are able to burn off some of their standing inventory, that’s going to help the supply situation some.

Pete Reeb:

Plus, I know a lot of builders have slowed down their speculative building, so that’s going to decrease the supply. And the other good news is that as things have slowed, we’re starting to hear that the labor issues are being alleviated a little bit and so, more normal construction cycle times might start to come back to the West coast markets and all of those things will help take some of the pressure off the need to offer incentives. So I don’t think incentives are going to rise in the first six months and next year, but I think we still have a couple of months ahead of us at current levels.

Dean Wehrli:

That’s a great point by the way, about the incentive train gets going. I mean it becomes kind of a self fulfilling prophecy because buyers think I’ll wait for the next increase in incentives or decrease in actual pricing and it’ll kind of zap any urgency they might’ve had.

Pete Reeb:

Yeah, for sure because they’ll look at the incentive being offered on a standing inventory house and say, well, I don’t want that house, I want this one over here in your next phase, but I want the same incentive. So a lot of builders are going to capitulate and say, yeah, okay, we’ll do that for you.

Dean Wehrli:

Yeah, definitely. So that’s incentives to just kind of give a quick recap. Looks like there’s a pretty clear West coast, East coast divide in that West coast has faced more severe incentive, more incentivizing both degree and commonality. And the East coast is still fairly normal in terms of perspective of the last few years. But Lesley does see a possibly edging up a little bit. Pete sees the West coast maybe edging up a little bit, but it’s not sort of panic time or at least it hasn’t been panic time yet and that we’ll see. Again, it’s a situation where it can get slippery real quick if things do start to get out of hand. And buyers have never been more savvy, they’ve never had more information, they’ve never had a quicker and more complete access to information, so we’ll have to keep that in mind going forward. Thanks guys. Say bye.

Lesley Deutch:

Thanks Dean.

Pete Reeb:

Thank you, Dean. Appreciate it.

Dean Wehrli:

Absolutely. Thanks again, guys. This is Dean Wehrli for the New Home Insights Podcast. We will get you next time. Bye.

 

 

If there are any other podcast platforms that you used where you have trouble finding our podcast please send us an email with your recommendation.

 





 

View All Available Episodes >>>