Home for Sale, by Anxious Owner http://www.nytimes.com/2006/08/25/business/25home.html?ei=5087%0A&en=d3f c1c4f6a0fe72f&ex=1156737600&adxnnl=1&adxnnlx=1156638784-ijHDMmYqBELf6fmN ZH+z5A
By VIKAS BAJAJ and DAVID LEONHARDT Published: August 25, 2006 Home sales are falling rapidly, and the number of houses on the market is surging. Yet each new economic report offering evidence of a housing slowdown also shows that the national median home price has continued to rise over the last year. To understand how this could be happening, consider a three-bedroom house surrounded by oak and redwood trees, not far from the Golden Gate Bridge, in San Rafael, Calif. Reluctant to cut the price from its current listing of $1.54 million, its owners are instead offering a weeklong vacation time-share, every year for life, worth about $10,000, or an equal amount toward lease of a car. Location and value will give the buyers a reason this will give them a sense of urgency, said Tom Wessling, who owns the house with his wife, Brenda, and is being transferred to Atlanta. If nothing else, it will be the thing that calls attention to the house. In California, the Northeast, South Florida and parts of the Southwest, deal sweeteners like these are playing an increasingly important role in supporting home prices. From large national home builders to individual homeowners, many sellers are offering thousands of dollars in perks, including straight cash, so they do not have to slice deeply into asking prices. But these discounts are almost entirely missing from the statistics on new-home prices reported by the government and on existing-home prices reported by the National Association of Realtors. As a result, home prices may now be falling, despite what the official numbers show, many economists say. The use of rebates helps home builders and individual sellers by making the real estate market look healthier than it may truly be and by preventing a snowballing decline in home prices. It also keeps commissions for real estate agents higher than they would otherwise be. In July, the national median price half sold for more and half for less of a newly built home was $230,000, the Commerce Department said yesterday. That is 0.3 percent higher than the median price a year ago. The number of new-home sales fell 21.6 percent over the last year, with the sharpest drop occurring in the Northeast. On Wednesday, the Realtor group reported that the median price of existing homes was also $230,000 in July, up 0.9 percent from a year earlier. Mark Zandi, the chief economist of Moodys Economy.com, estimated that incentives might now be equal to as much as 3 percent of the effective prices of houses across the country, on average. But he and other economists said there was simply no way to know for certain. We dont have any house price indexes that get it right, said Todd Sinai, an associate professor of real estate at the Wharton School of the University of Pennsylvania. Sellers are pretty picky, he added. They are not willing to lower prices enough in downturns; they dont do it very quickly. Their reluctance delays sales, contributes to rising inventories and allows prices on the remaining transactions to show an annual increase. Incentives are most common in the new-home market, where builders are under financial pressure to sell empty homes and, as large businesses, have the ability to absorb the financial hit. Depending on the market, executives at the nations biggest builders say the giveaways can equal 3 percent to 8 percent of a homes sale price. If builders instead reduced asking prices by that much, it would be enough to wipe out the year-over-year price gains in many markets. Last year, by contrast, many builders were selling out new subdivisions and condominiums in hours or days, often in auctions. If you were going to sell the house exactly the way it was before, you would be looking at a price decline, said David Seiders, chief economist at the National Association of Home Builders. But in a sign of the housing markets deterioration, creative and expensive lures are also becoming more common in the existing-home market. With many houses languishing on the market for months, buyers often have the leverage to request a last-minute concession of a few thousand dollars, or more, as a prerequisite to a sale. The subsidy often comes in the form of a discount on the amount of cash a seller must pay at closing. Its using a little psychology, said Frank Borges LLosa , who owns Frankly Realty in northern Virginia, an agency that mainly represents buyers. It makes it sometimes appear like Im offering a higher price. Mr. LLosa recently analyzed records for condominiums in one Virginia ZIP code and found that the use of subsidies had soared since last year, when they were almost nonexistent. In Arlington, 14 condominiums had sold for $350,000 to $550,000 since June 1, and 10 of them included a subsidy from the seller to the buyer. The average subsidy was more than $7,000. The Wesslings of San Rafael have cut the price of their house twice, by a total of $160,000, since they put it on the market in May. Mr. Wessling, a marketing executive, believes the home is now competitively priced and hopes the perks, which also include a $10,000 reward for referring a qualified buyer, will be enough to clinch a deal. Mr. Zandi, the economist, said he believed that the use of perks was now approaching its peak and that sellers would soon be forced to cut list prices more heavily. He predicted that the home-price data released by the Realtors association would show a year-over-year decline, relative to the same month a year earlier, before the end of this year. If so, that would be the first such drop since 1993. The Realtors have never reported a drop in the annual average of national home prices, a fact frequently cited by real estate analysts. The reason the Realtors data has never showed an outright decline before, he said, might be that theyre not measuring the effective price. Lawrence Yun, a senior economist with the Realtors group, said that in markets where inventories had been rising rapidly like the Northeast and California incentives could well equal 3 percent of house values. But he estimated that the national number was smaller, because homes sales were continuing to rise in roughly a third of markets around the country. The typical incentive package from a home builder consists of upgrades to the house granite countertops instead of humdrum tiles, stainless-steel refrigerators and stoves instead of plain white models and wood blinds instead of plastic. At the extremes, some have thrown in $30,000 swimming pools. Buyers who demand discounts often get them in the form of excused closing costs or low interest rate loans made by builder-affiliated mortgage companies. On the west coast of Florida, builders are advertising incentives like upgraded countertops, interest rate promotions and cash rebates totaling $40,000, or 6.6 percent to 8 percent of the sales price, on homes that sell for $500,000 to $600,000, said John Dew, a real estate agent in Naples. Builders tend to choose discounts because they worry that reductions in the list price would send a clear signal that the market is in trouble, potentially angering previous buyers and emboldening future customers. They already sold the same product to the guy next door and if they reduce the price he is going to scream, Mr. Dew said. He added that many builders were also offering agents bonuses worth tens of thousands of dollars in finders fees for bringing in buyers. In effect, the incentives have become a quiet way to cut the price of houses without further damaging the market. Sellers dont want to create this environment of fear in the market that prices are going down, so you should wait to buy, said Dean Baker, co-director of the Center for Economic Policy Research in Washington, who believes that prices will fall in coming years. Incentives are often most substantial on homes built on speculation before a sales contract has been signed, or on properties that buyers have walked away from after signing a contract. Big builders report that cancellation rates are running as high as a third of new sales, compared with about 20 percent or less a year ago. Pulte Homes, for instance, was recently offering unspecified incentives totaling as much as $10,000 on homes in a Connecticut development to buyers who were willing to move in before school started. In the spring, Centex Homes ran a 24-hour sale in Southern California where buyers who agreed to purchase within the day could get a $100,000 discount. It ran a similar offer for a $60,000 discount in Atlanta. Lenders are also wary of incentives. Lenders do not want to finance transactions where the sales price exceeds the true value of the home. Fannie Mae, the large buyer of mortgages, requires disclosure of perks and it caps them on a sliding scale from 2 percent to 9 percent of selling prices, depending on whether buyers will live in the home and based on the size of the down payment. The concerns of lenders will eventually limit the size of incentives in home sales, said Anthony Hsieh, president of LendingTree.com, the Web loan site. Many buyers may also balk because their property taxes will be based on the sales price listed on the contract. Eventually, buyers will realize there is no free lunch, he said. There is a reason its being given away. ------------------- Jayson Funke Graduate School of Geography Clark University 950 Main Street Worcester, MA 01610
