Housing slump has builders primed to make a deal

As the housing slump worsens, home builders are resorting to tactics typically reserved for Labor Day furniture sales and year-end auto blitzes.

National builders with overbuilt developments in suburbs such as Maple Grove and Woodbury are now paying condo association dues and closing costs, as well as giving away upgrades worth tens of thousands of dollars in the hope of wooing buyers in a saturated and sluggish market.

Finance through Ryland Homes' mortgage arm, and you get half off options such as stainless steel appliances or a bonus room. Buy a Mattamy home, and the builder will throw in a 2008 Nissan Versa. Pulte is paying closing costs. And for three days only, ending today, K. Hovnanian Homes is offering the "Deal of the Century" -- as much as $100,000 in free options, closing costs and no association dues for a year.

Like most offers, they have fine print. The total savings depends on the price and style of the home, whether the home is finished and waiting for buyers, and where the buyer gets financing.

But industry watchers say the deals aren't just sales gimmicks. Buyers can walk away with higher-quality furnishings and more money in their pockets.

Betty Hardle, president of Residential Research Services in Columbia Heights, has been in the home-building business for nearly four decades. She said that incentives certainly aren't new but that the scale is greater "and the giveaways are more popular in this downturn than any other I've seen."

The promotions are a response to a housing downturn with no sure signs of letting up soon. Area home sales posted their worst monthly showing in August in more than a decade, according to numbers released last week by the Minneapolis Area Association of Realtors. In the past year, demand for new construction has dropped nearly 23 percent.

There are a record 10.39 homes on the market for each active buyer -- more than double the inventory per buyer in September 2005, according to the Realtors group. Average price per square foot of new-construction units is down 8 percent, a sign that builders are dropping prices to tempt buyers to sign a purchase agreement. New-home builders have already been cutting back on the number of houses they're putting up.

As the Big Three automakers learned with incentives after Sept. 11, 2001, and retailers have felt with pre-Christmas markdowns, consumers accustomed to better and better deals may hold out for more. But Jessica Reinhardt, spokeswoman for the Builders Association of Minnesota, doubts that this will be the case. "Once [builders] whittle down their inventory, I think you're going to see a return to more normal marketing," she said.

For now, with a glut of homes, nervous buyers and a tougher climate for mortgage loans, incentives could be one of the last tools left in builders' playbooks. Their stocks have plummeted in recent months. The Dow Jones U.S. Home Construction Index that tracks the industry is down around 50 percent for the year.

Asked whether the sales event was an act of desperation, Hovnanian Enterprises Inc. Chief Executive Officer Ara Hovnanian said it was a "logical thing to do" in the current market. The New Jersey-based company's stock has fallen by two-thirds since the beginning of this year.

Most of the incentives are coming from larger, publicly traded builders such as K. Hovnanian, which have monthly production and sales schedules to meet and shareholders to satisfy.

"National builders have lumber contracts and lots of other things they've contracted for that they can't stop," said John Shaw, manager of the Edina Realty corporate office in Edina. "They would rather build a home at low profit in order to keep going than to stop the corporate machine."

Small builders have smaller profit margins and can't afford to give their products away, though some local builders are offering price discounts, Shaw said.

Residential Research Services' Hardle added that smaller builders have more flexibility to customize incentives.

Moving out after 25 years

In Maple Grove, giant balloons floating in the wind and signs for the "Deal of the Century" welcome buyers such as Alle Madhuravani to K. Hovnanian's Timbres in Elm Creek community. Hype for the deal has slowed K. Hovanian's website to a crawl.

Madhuravani, 69, has been living with her daughter's family ever since she moved here from India 25 years ago. She had looked at condos and townhouses in the Timbres complex before, but the weekend incentives pushed her over the edge.

"The deal brought me in, and now I'm signing up. They are giving free upgrades ... and they are giving all of this," she said, gesturing to the flier promising no homeowners association dues for 12 months.

Home buyers such as Madhuravani have plenty of inventory to choose from, and they are taking their time. One idea behind the incentive is to give buyers "another reason to make the move this weekend," said Mandy Multerer, a local Hovnanian marketing director who is buying a townhouse herself this weekend, despite having had her St. Louis Park condo on the market since spring.

Madhuravani's Realtor, Eva Tangen of Coldwell Banker Burnet, said she's bringing more buyers to look at new-construction homes these days. Incentives are making nicer homes more affordable, which makes it tougher for existing homes to compete.

"They can get brand new for the same price," Tangen said.

Staff writer Steve Alexander and Bloomberg News contributed to this report. Kara McGuire • 612-673-7293

Kara McGuire • kara@startribune.com