Home Builders offer Incentives versus Dropping Prices
With many major home builders clearly struggling, why aren’t new home prices falling as fast as we see in the pre-owned home sector? The answer is they are, but the discounts come in the form of incentives to purchase, rather than price cuts.
Home builders are relucant to slash prices in their own developments with good reason. Dropping prices creates panic among homeowners who have already purchased and encourages buyers, who are still under contract, to walk their deals and run for the hills.
For example, publically traded Lennar homes disclosed that their base sale price has remained stable, but their average incentive to new buyers is approximately $50,000 per home. This slight-of-hand discount allows Lennar, like other builders, to discreetly reduce their prices, instead of obviously reducing their prices.
Home builders choose to give away free appliances, vacations, cars, special financing or free swimming pools in order to keep peace in the neighborhood, while maintaining higher prices for the community and future build jobs. So, why does this appealing alternative only work for builders and new homes??
Incentives work for builders because they are in control of the inventory in a new home development. Individual sellers in existing neighborhoods have a difficult time “sweetening the pot”, as an option to slashing their asking price, because unlike the builders, they can not control what price their neighbor will sell for.
When making an offer for a new home, don’t expect your builder to accept an offer $50,000 less than the sales price, but do take them up on their offer for a new BMW.