Forget the flat-screens, builders are slashing prices

Remember back in the day, when builders were refusing to lower prices and were instead offering "incentives"? The flat-screen TVs, the granite counter upgrades? Those days are over, Peter Hong reports in the L.A. Times, and builders in the Inland Empire are resorting to old-fashioned price cuts:

"Stuck with excess inventory, builders throughout California are beginning to offer steep discounts on new homes, sometimes at a loss. Centex Corp. is touting the 'greatest prices in years' in its ads. In San Bernardino County, builder Van Daele Homes is advertising 35% discounts.Until recently, most builders resisted outright price cuts in California so as not to undermine the value of their holdings. Instead, many offered incentives such as big-screen televisions or interior upgrades."

"'Builders don't have the luxury of waiting another year for the market to turn -- they need the cash flow now,' said Patrick S. Duffy, principal of Metrointelligence Real Estate Advisors, a consultant to home builders. 'It's better for them to take 90 cents on the dollar today than to risk no cash flow at all because they're not selling any houses,' he added."

The price cuts on new homes are squeezing sellers of existing homes: "Jack Lloyd, 51, has been trying to sell his Palmdale house for nearly a year. He's cut the asking price several times, and he's now seeking $285,000 -- down from $425,000 originally.  But Lloyd isn't hopeful, noting that new houses in nearby developments are $240,000.  'Who's going to buy mine?' he asked.

Good question, Jack.

Thoughts? Comments? E-mail story tips to peter.viles@latimes.com.
Photo Credit: L.A. Times

Comments

[SJ]

They'll need to keep on slashing for a while.

Prices on homes are coming down but the unwinding of the housing market will not be completed this year.

Prices of homes are still very inflated. This is why it is important for the government to BUTT OUT and let the market work.

[Cal]

I think in the heirarchy of motivated sellers it goes like:
Foreclosures
New Home Builders
Short Sales
Vacant home
Resale Homes

The least likely people to liquidate their holding are joe six pack. The banks and big corporations have no emotion or irrational expectations and are willing to mark to market to sell. But for LA county the new homes are relegated to the outer areas or smaller infill locations so its effect on the market is much smaller than someplace like Sacramento or Central California (or Arizona or Florida).

If the logic is the market has further to fall those who get out soonest get the most. It will be those who ignore reality (or listen to realtors, which is the same thing) who will get the least.

[Truth2Pwr]

I've got inlaws in the Inland Empire. What a hot steaming slab of hell. How anyone under any circumstances EVER thought anything out there was worth $500K is total utter LUNACY! I'd gladly pay $240K just to never have to go out there again. Unfortunately that's not an option for me, but it's no surprise that the rest of you are staying away in droves. You could tell me that the median out in Riverside will bottom around $80K and I wouldn't bet against you.

[IToldu2CashOut]

Downtown developers are still in big time denial, although some owners who are underwater are starting to wake up and slash prices. Not enough, but some sucker will probably bite if you move quick and cut deep enough. People who counted their chicken before they hatched just need to get over it. IT WAS NOT REAL, your greed or wishful thinking got you duped. It was all an illusion created by fraud. In a normal real estate market houses keep up with inflation and thats about it. If you made any profit at all be happy. If you lost, its only money after all.

To sum it up, do yourself a favor and erase those imaginary riches from your memory. Embrace the new reality, very similiar to the old reality from 5 years ago.

[Sam]

You are still better off just leaving SoCal. You could not give me a home in this polluted, gang infested future slum.

[Figgins]

If you haven't been able to sell your home in a year, take it off the market. You're obviously able to make the payments, or you'd be in foreclosure already.

If you absolutely have to move, your gonna get screwed no matter what.

[blackbox]

"People there couldn't afford a $400,000 home, no matter how big it was," he said. "We're back to what people can afford."

And that is the jest of the housing problem right now. You can offer low interest rates. you can freeze interest rates. you can re-work current mortgages. You can bailout all you want. New buyers will not enter the market until they can afford the house. The last 8 to 10 years have been pure fantasy. A ponzi of epic dimensions. Those housing comps no longer count. Who cares what prices were a couple of years ago. Take into account the prices in 1998 and add inflation plus 2 to 3%, and that is the value of the house. End of Story

[BigD]

Peter says "Remember back in the day, when builders were refusing to lower prices"

I especially remember builders slashing prices in the first half of 2007. How quick he forgets that the housing market price declines during that period were for newly built homes, not resale. Come on Peter, try to be accurate.

[SReno]

I WANNA BUY YOUR HOUSE, I WANNA BUY YOUR HOUSE!!! I'm writing my "I'm a good person with a great family" letter right now, oh and I'm baking those cookies for you. Now how about if I give you $40,000 over your asking price would you ever consider selling to me, please, please, please... I don't even want to be part of this human race thing any longer, I'd rather be algae, it's a step up.

[Laker]

Flat screens, plasmas, and even cars were not enough and it's good. Since by doing so, the builders hoped to fake the market by artificially propping up the prices. When they sold a house for $500,000 it got recorded as sale at $500,000 though, the builder, paid closing cost, new landscape, furnished the house, and even gave brand new cars...in such case the actual sale should have been recorded as $400,000-450,000...That is how you artificially prop the market by 10-20%.
Now, the true effect of slashing is turning on...Though it will have less force in LA, it will kill riverside, lancaster, and some parts of OC.

[amir]

Hey BigD,

I think Peter means 2005-2006, the hight of the bubble.

This bubble burst around summer 2007.

[Laker]

ahhh, completely forgot about Jack Lloyd
so Jack, THERE IS NO WAY YOU WILL SELL YOU PLACE AT $285,000. (when brand new is $240,000)
Send in the keys, it's only $0.41 cents.

[Tim K.]

BigD wrote: "I especially remember builders slashing prices in the first half of 2007."

You call first of half of 2007 SLASHING prices?! Those were cheap, gimmes on overpriced homes. Not significant by any stretch of the imagination to deserve the word "slash".

Peter's spot on - this is the first *real* discounting that has been going on. But like others have mentioned, this is just the beginning. The current discounts are not enough.

[Truth2Pwr]

builders in the IE should forget the price cuts and just flee for their lives. In five years the IE will look like a scene out of the MadMax movies with hapless "foreclosure sale tourists" used for battering rams strapped to the front of sand toys bought with HELOCs back in 2005.

[sfvrealestate]

Price slashing is also happening with many condo-conversion developments in the SFValley. No surprise...

[lurker]

From the Article;
Tom DiPrima, president of KB's north Los Angeles division, said the policy had helped persuade reluctant buyers to make the leap and purchase. "They've said it really gave them the peace of mind to jump into the market," DiPrima said.

DiPrima, however, also credits the role of lower price points.

In one Antelope Valley development, KB Home had been offering 3,200-square-foot houses for more than $400,000. By cutting the size of the houses to 1,500 square feet, the company was able to sell them in the high-$200,000 range, DiPrima said.

"People there couldn't afford a $400,000 home, no matter how big it was," he said. "We're back to what people can afford."

3200 sq-ft @ $400,000 is $125/sq-ft
1500 sq-ft @ $250,000 is $166/sq-ft
So KB Homes is making 30% more per square foot on these smaller homes. Does the price per square foot change when building different size homes. Construction cost are down because demand for construction material is down. Can assume the lot price and size to be the same between these two homes.

So DiPrima, is saying anyone who buys now is a fool. Buy now at a price that is 45% lower for a house that is 60% smaller.

[campechano]

Discounts are moving East to West. San Bernardino and Riverside Co's...East OC and San Diego....in six more months we should see even steeper discounts within city limits.

[the problemwithcaring]

Frome the article:

"Even with the discounts, however, many buyers remain on the sidelines, thinking the market has yet to bottom. To help persuade them, some builders are offering price guarantees.

KB Home, for example, recently agreed to give buyers in some developments a lower base price if the selling price of similar homes in their developments falls in the time between the contract signing and the purchase closing."

Why would anyone buy AT ALL under such circumstances? Why not rent a nearby home until prices start to edge upwards?

[toby]

90 cents to the dollar?

Call me when it's 50 cents to the dollar.

[Bubbleboy]

You know why we are nowhere near the bottom of the RE market? People still refuse to lower the price to market price.

Sellers know the current market price is now $240k, but yet, he still list his house at $285k.

And there are millions of house sellers like this guy that still think they can get 2005, 2006 price or try to break even.

That's like buying the NASDAQ at 5,000.00 and holding it praying it will get back to that level.

You know that story

[campechano]

IN response to:
"Why would anyone buy AT ALL under such circumstances? Why not rent a nearby home until prices start to edge upwards?"

Well....for some people it can get kind of techincal...imagine for example a young couple (both young professionals) with 200+K income and enough for a 20 % downpayment on a 500k home....they're getting eaten alive with taxes...so depending on their particular situation they may be looking to buy now instaead of later

And then there are people whose families are growing and need a bigger place to live..so there are many reasons....still...it's oretty scary out there.... Prices are going to have to correct downwrds a lot further for people to once again be able to afford to buy a home to live in (yes..live in not speculate with)....

[Joseph]

I have no sympathy for people in CA. They watched to much "flip this house" or house hunters". In the latter Wong would say how hot the market was and you better put in an offer. Then the buyer got an interest only loan.

They deserve a depression there. Unfortunately due to Ponzi scheme of brokers, investment houses, they put our entire banking system at risk.

For those that bought with interest only or 100% financing - find a nice bridge to live under.

[brennie]

It is absolutely darling that folks seem to think this won't (hasn't) hit L.A. because there is no place to build new homes. The existing homes are mostly post WWII construction or 70's era quick-builds. Minimum of 30 and some up to 60 years old. Most in terrible shape and about to fall down. And yet the owners think their value cannot drop. Adorable. See you in two years.

[Expat]

Ha ha ha ha!
Five years of telling people they are morons. Finally I have the proof. Screw 'em all. Every last "homeowner" in the America. Greedy bunch of energy and resource wasting spoiled brats.

And now, thanks to all this stupidity and greed, the entire world financial system is imploding. My only consolations are my family, being long Euros, and not owning a house. I look forward to moving back to the States in year of two and buying an enormous mansion for half a million. A few mortgage brokers can cut my lawn and skim the pool if they are looking for work.

[Anonymous]

Bernanke is playing with fire by suggesting that banks work to forgive some of the principal on these ridiculous mortgages. First, having a system in place to go about examining these case by case is an absolute pipe dream. And in the end, this medicine would only make the patient sicker and cause undue negative social/moral disturbances throughout our society for years to come.

[Anonymous]

Bernanke is playing with fire by suggesting that banks work to forgive some of the principal on these ridiculous mortgages. First, having a system in place to go about examining these case by case is an absolute pipe dream. And in the end, this medicine would only make the patient sicker and cause undue negative social/moral disturbances throughout our society for years to come.

[staff curtis]

What needs to be done to help sellers "get over" their losses is to just outright get rid of the house at the best price they can get TODAY! In a year, they can buy the same house back for even less! I'll bet you someone who bought a house for $400k may get it sold for $250k now, but can buy it back for $150k down the road. It will just suck if you're seriously upside down.

As long as the market is either going up or down, you can profit from it.

[Ray Andrew]

Folks, while I'm a long time housing bubble believer, I've grown weary of the hatred spewed at Californians in general and the IE in particular. Take a deep breath, you guys are going to give yourselves a stroke. Most of us out here who bought in the late 90's are doing just fine. We didn't buy into the hype or take out a HELOC to buy a BMW or plasma TV. Most of us have solid 30 year fixed loans at 5.25%, healthy 401K/IRA/529 and no desire to buy Prada. Myself, I live in the IE bordering Orange County, and see no brown lawns and very few For Sale signs (our city is ranked 6th highest median income by the U.S. Census and 21st safest in the entire nation by the FBI). So just keep in mind that not all of the IE are f'ed.

[shockg]

The key point in the article is " and builders in the Inland Empire are resorting to old-fashioned price cuts:"

WHO CARES ABOUT THE IE?? Many here don't or they would spend time on IE housing blogs.

Peter. The title of this article is very misleading but im not surprised by your cherry picking.

[Regina]

I live in northern california and there are certain cities where people are still trying to sell houses for a simple 2000 sq ft for 950,000 they were probably asking for 1.25 mil before. So I can buy 3 new houses for 950,000 why would I buy yours. See how stupid this all is. NIGHTMARE is all I can think of.

[dd]

If you want to see what may lie ahead go on realtor.com type in Detroit 0-$50,000 and see what you get.

[BargainHunter]

Last Housing Bear Market in the early 90's took 52 months to hit top to bottom. What makes us think that this one will last only 24 months.
This is much worse than the last bear market and should last at least
64 months. We are only 16 months in the bear market, so aave your money because the real bargain is 4 years from now! Let the dummies buy 1st! Patience is a virtue, so buy when the time is right, that is when 3 X household yearly income = right price value for an average home. So Wait it out! Don't buy yet! Save now to buy Later!!

[LeavinLA]

dd: Detroit is a vastly different market, as I know firsthand. Extreme unemployment. Unbalanced economy. No ocean. A much lower pricing structure to start with. And the money left for the suburbs in the 1960s.

But nice try at fear mongering. Utter bull$!#, though.

[Mr Pasadena]

Mr Ray Andrew. No one in here has hatred for people like you. You are no different than me. I took out a HELOC but never spent it. I couldn't understand how people can afford $800K house in various areas I was looking at purchasing a larger house for my growing family. When my loan broker told be about all the new kind of loans, he said not to get caught up in it or at least sell my house at the same time. He said it will eventually crash. All of us are fumming because of the problems the people that should never have owned a house in the first place caused by thinking they would get something for nothing. In the process, they screwed us and priced us responsible people out of a legitimate real estate market. Now they use the sympathy card and want a government bailout. Well, how about every American stop being responsible and get as big of a loan as possible and then demand a government bailout. Or even simpler, how about every American stop paying their mortgage and demand a 50% write down eventhought they can afford it and have equity in their homes. But then people would call us greedy.

Bernanke, be careful what you wish for. As smart as you think you are, there are only two solution here. Housing prices go down to a point where people can afford them again or salary go up so people can afford to buy at these prices. If you try to prevent the former, you are asking for long time recession in housing. If you want the later, inflation will shoot up but you will just take that out of your CPI calculation like the Fed did with food and energy.

Let the market work. You know that is the best thing to do. Stop the liberal politics of saving people's houses they could not afford in the first place. And those who took out equity loans for fun should lose their homes. I do not want my tax dollars to fund this ridiculous housing market where I cannot afford a bigger house for my family!!!! For every undeserving family you save, a deserving family is punished. That is the fact. I cannot afford these prices and will not go into debt for the rest of my life. And I do not want to pay for some else's mistake!

If price come down to a level I can afford, I will spend what I earn but still make sure I have savings for my retirement. Oh..... But I forgot. At this point both liberal, conservatives, Republicans, and Democrats want people to be in debt for the rest of their lives. Since there is a negative savings rate in America, why should I be so greedy to even think of having any savings of my own. That just isn't fair to everyone else. I should not have the right to be careful and make sure my retirement will be smooth in my old age.

MR BERNANKE AND ALL POLITICIANS. JUST THINK OF THE ABOUT STATEMENTS BEFORE YOU SO CARE FREE IN SPENDING OUR TAX DOLLARS FOR A BAILOUT OF THIS MAGNITUDE.

[Debbie]

It's amazing to me that buyers, investors, realtors and loan originators believed that the market would not hit a ceiling. Prices from 2001-2006 were over inflated, but sold anyway. Chicago properties, in poor condition, sold at enormous prices, and I'm glad sellers profited from stupid developers and investors. Now we have a glut of empty, board-ups just waiting to be filled with Section-8 tenants. Good for them. They'll get granite countertops, oak cabinets, hwd flrs, jacuzzi's, etc. and finally live respectfully right next to the sap that paid $350k and up.

[BA]

Californians screwed everybody else in the country. they drove prices thru the roof in the northern rockys when they retired up there. they took all their equity with them and payed stupid prices. try buying a nice place in Montana now.

They drove prices up when they showed up in Dallas/Fort Worth. again bringing their equity and blowing prices sky high.

I hope it is very painful for them the next couple of years.