Photo (cc) by ArmchairBuilder.com
After a spring and summer of fast-rising home prices, the housing market is starting to slow down. You can tell because homebuilders are pulling out incentives to lure buyers in.
“New contracts for home sales in September were 9 percent fewer than in August and 9 percent fewer than in September 2012,” The Wall Street Journal reports.
No more bidding wars
Bidding wars – common in spring – aren’t common anymore. “The bidding wars have given way to a more subdued market in September,” writes HousingWire.
Buyers are pulling back for several reasons:
- Rising home prices. Home prices in August, compared with the same time a year ago, rose 12.8 percent. That’s faster than at any time since 2006, according to the Standard & Poor’s/Case-Shiller 20-city home price index. All 20 cities showed gains, although the speed of home price increases appears to be slowing.
- Rising interest rates. While some would-be homebuyers are scrambling to make a purchase before interest rates start rising again and new mortgage rules take effect early next year, others lost interest when rates rose last summer. Rates fell back to just above 4 percent, but buyers aren’t responding as they did earlier this year.
- The economy. Experts say the sluggish economic recovery is making potential homebuyers cautious. Unemployment was at 7.2 percent in September, says the latest report from the Bureau of Labor Statistics. That’s a big improvement from 10 percent four years ago, but it was 6 percent in October 2003.
- Less house for the money. Rising home prices mean buyers don’t get as much for their money as they would have at this time last year, contributing to a sense that the best days for bargain hunting are over.
Bring on the incentives
To pique buyers’ attention, builders of new homes are reviving their use of freebies and incentives, sales techniques not used since sales started going crazy earlier this year.
You may have missed the era of bargain-basement home prices, but you can make up for some of that by doing plenty of comparison shopping and bargaining aggressively with lenders, brokers and builders to get some of the incentives now in play.
Credit toward closing costs
Select mortgage lenders and brokers are offering to help with buyers’ closing costs, the Los Angeles Times says. “Some mortgage brokerage firms have begun advertising that they offer substantial credits to their customers — often in the $2,000 to $5,000 range per loan but sometimes more than $10,000 — that can be used to defray borrowers’ closing costs.”
If you’re shopping for a mortgage, get multiple mortgage quotes. (It’s getting harder to find a lender who’ll preapprove your mortgage but you can ask to be pre-qualified.) Ask each lender or broker for help with closing costs. If they agree, go over all the costs and details of the loan you’re considering slowly and carefully with each salesperson until you are sure you understand what you would be buying.
Help with closing credits can make a big difference. The Times relates one buyer’s experience:
To illustrate: Charles W. Berryman, a departmental chairman at Louisiana State University, closed on a $295,900 mortgage to purchase a home this year. It carried a 3 percent fixed rate for 15 years. Essential Mortgage Co., a large brokerage firm in his area, credited him $3,500 to defray his closing costs. Berryman said he had shopped at two competing banks before making his choice. They offered the same attractive 3 percent fixed rate, he said, but no credits.
Interest rate buy-downs
Some homebuilders are kicking in money to buy down purchasers’ mortgage interest rates, The Wall Street Journal reports. You may be required to use the builder’s preferred lender in order to claim the discount.
When a builder or mortgage originator buys down a rate, it pays the lender money up front to charge a lower interest rate in the loan’s first year or two. The reduction is usually a percentage point or less. Such buy-downs often are used to entice homebuyers who are concerned about high interest rates.
But buyers aren’t snapping up the buy-downs, the Journal says. Maybe they’re holding out for freebies and upgrades.
Freebies and upgrades
In another article, The Wall Street Journal says builders are dangling cash incentives and upgrades to interest buyers.
The incentives, which can run into the tens of thousands of dollars, are intended to soften the sticker shock that has put the cost of buying a newly built home out of reach for some families.
Upgrades can include free appliances, blinds, premium flooring or garage-door openers. Also growing in popularity are financial carrots such as paying buyers’ closing costs, covering some of their down payment or paying to reduce their mortgage’s interest rate for a year or two.
Lori March, a homebuyer in Wake Forest, N.C., told the Journal that she received free upgraded floors — hardwood and ceramic tile in place of vinyl and carpet – when she bought a five-bedroom, $295,000 home. And that wasn’t all. The builder, ForeverHome, also kicked in $4,000 toward March’s closing costs.
The incentives “were a huge factor in my decision,” said Ms. March, who lives with her 12-year-old daughter and 10-year-old son. “I didn’t really have a lot [of money] to put down, so it made up for what I didn’t have.”
Here’s a tip to help with your shopping: Weigh the value of any builder freebies or upgrades against the value of getting a discount off the home price, a Trulia agent counsels readers. If a builder is offering, say, $5,000 worth of upgrades and you think you could get a contractor to do them for much less, try saying “No thanks” and requesting the $5,000 discounted from the home price instead.