Residential Real Estate and Home Sales and Housing Starts and Real Estate & Retail

To weather downturn, housing industry rolls out incentives

October 1, 2007

For most of this decade, the Indianapolis residential real estate market enjoyed a very good run. But now it's muddling through the doldrums just like the rest of the country, and builders are pulling out all the stops to avoid getting stuck with inventory.

"There are just not a lot of people out there looking," said Jeff Kontor, vice president of sales, Indianapolis-based Brenwick Development. "So far as numbers are concerned, whether it's for lots or homes, it's definitely down right now."

Today's slow times came about thanks both to national trends (tighter mortgage money) and local ones (sudden, steep property tax hikes). Those and other factors combined to slice off about a third of the city's home-building activity.

From 2000 to 2005, the number of building permits for the Indianapolis metro area hovered around a stellar 12,000 per year. But in 2006, according to statistics supplied by Permits Plus, the number plunged to 8,481. Through August of this year, 5,224 have been issued.

To no surprise, selling new homes in Indianapolis has suddenly become a dicier proposition. Especially since so many builders have chosen to crowd into one price point.

"Seventy-five percent of this market is for homes between $100,000 and $200,000," said Dax Meredith, who directs the Indianapolis office of American Metrostudy Corp., a Houston-based housing research firm. "So that makes for a very, very crowded field."

Too crowded for some. In July, Los Angeles-based KB Home Inc. abandoned the Indiana market. But that still left a large field of local and national builders to battle over a greatly diminished, much more hesitant pool of potential buyers--buyers they're going to increasing lengths to court.

To attract customers, many builders are using a number of deal sweeteners, including free basements, finished basements, screened-in porches--sometimes all three. Some are even beginning to address the biggest stumbling block to new home ownership in a down market by assisting potential buyers with the sometimes-onerous task of disposing of their previous residence.

"Part of the problem is that people cannot sell their existing homes," Kontor said. "They may want to move, but they can't sell. A couple of production builders are trying to do guaranteed buyouts. If you buy one of their specs, they will put a price on your home, and if it doesn't sell in a certain number of days, they'll buy it back from you. That's the most attractive thing I see going on. Because you can offer a free basement or porch, but if the client can't sell his old house, what good is it?"

Not that every (or even very many) potential buyers will be able to avail themselves of such terms. Alan Goldsticker, president of Ryland Homes of Indiana, said the bottom line is that pretty much everyone who wants to drive a hard bargain for a new home must first endure the trials of selling the old one. In other words, before buyers can benefit from the down market, they must first put themselves at its mercy.

Kontor's firm, which is developing the Hamilton County communities of Lochaven and The Village of WestClay, has taken a proactive approach to filling its lots. This year, for the first time in the company's history, it offered three heavily promoted open-house tours of all the spec homes in the two neighborhoods.

"It's been very expensive on our end," Kontor said, "but we've had great success doing that."

On an even larger scale, the company elected to add new amenities to its developments in hopes of setting them apart from the competition.

"There's so few customers out there, you have to capture the ones that are interested and have the means to purchase at this time," Kontor said. "For example, we decided to build a secondary clubhouse at Lochaven, even though we'd already built a main clubhouse. And that helped draw more attention and interest."

Meredith said builders are particularly keen to attract such attention and interest in fall, as the end of the fiscal year--or at the very least the quarter--approaches. They may suddenly become much more willing to make sweeter deals on spec homes, just to bump them into the accounts-receivable column.

"We saw this even when times were still good," he said. "They'll have a 24-hour sale or a one-week-only type sale. Buyers who are savvy and smart will keep an eye out for those deals. But usually these types of sales are mostly on spec inventory--standing inventory that they've built out and are trying to move off the books before year end."

The problem with striking hot deals in a down market is that it can incense clients who climbed aboard earlier and were granted less-favorable terms. The trick is to draw in new customers without alienating--and, perhaps, driving away--those who've already signed on the bottom line.

"That's going to be one of the tough issues in this downturn market where builders are wanting to get rid of inventory but fear losing their backlog of [home orders]," Meredith said. "It's a tightrope that they will have to walk."

Goldsticker said that while the current bust may signal the end of the recent banner years for builders, it's not the end of the world. No slump ever is.

"I'm in my twenty-fifth year with Ryland and this is my third downturn," he said.

"Hopefully, during the good times, you're operating efficiently and effectively, so that when you have the downturns they're not as bad. If you get too fat during the upturns, that means you have to take off a lot more weight during the slow times. And I don't like that."

"Over time, it almost always works out," he said. "If we're at a low and you need to sell, but then turn around and buy a new home during the same low, it all works out. On the other hand, if you sold your house at the high and bought a new one at the high, it all works out, too."

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