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Homebuilders reconsider price cuts

By Times wires
Published November 17, 2007

NEW YORK - When freebies like granite countertops and no-cost closings didn't woo back buyers, homebuilders began trying to outdo one another with bigger and better price cuts.

But now, the tactic may have backfired.

The reductions, builders complain, have sliced into already thin margins. And buyers, fearful their houses will depreciate faster than a new car, won't make purchases until prices stabilize.

"If people stop cutting prices, that's actually good," said David Goldberg, an analyst with UBS Investment Bank. "If everybody does it, it works. If one builder does it, it doesn't."

With the market not expected to improve anytime soon and cash-starved builders saddled with inventory, few are willing to take any chances. Plus, they reason, buyers will just go to competitors - including new, existing and foreclosed homes - with better offers. And there are plenty of them: Last month, nearly 60 percent of builders cut prices.

But some may be losing faith. About half labeled the cuts at least "somewhat effective" in bolstering sales or limiting cancellations, down from a high of 72 percent in May, according to the National Association of Home Builders.

"The reason some companies say 'enough is enough' on the price cuts is because price cuts often generate expectations of further reductions," said Dave Seiders, the Washington group's chief economist.

After seeing its average order price fall 16 percent in the latest quarter, Pulte Homes Inc., the nation's third-largest builder, said it is holding off on reductions and incentives, except in "limited cases."

At the time, a spokesman said the Bloomfield Hills, Mich., company didn't want to "contribute to a downward spiral in pricing."

Industry watchers think that will likely hurt sales.

"Pulte's eventually going to have to back off that strategy," said Michael Rehaut, a JPMorgan Chase and Co. analyst.

Pulte, which offers properties in the Tampa Bay area, didn't comment for this article.

Some analysts have criticized Toll Brothers Inc., a luxury builder with a Tampa Bay area presence, for resisting cuts. And Lennar Corp., the nation's second-largest builder by 2006 closings, has even paused on sales of some Orange County, Calif., homes.

But empty homes carry costs, including insurance and maintenance. And after a year or so, there can be significant additional costs, such as repainting and redoing landscaping.

"It doesn't get better with age," said Jim Dietz, chief financial officer of WCI Communities Inc., a condominium and traditional homebuilder in Florida that has sold some completed units for minimal profit.

Reduction-aversion, he said, is a risky play.

"Their risk is that, okay, sales drop 80 percent and now you don't have enough cash come in to pay the bills and your debt sours. How long can you do that?" he said. "I agree that discounting is bad, but I also believe that the market needs to reset. The inventory needs to be cleared through before we can get to a more normal selling environment."

[Last modified November 16, 2007, 23:12:40]