Desperate Homebuilders Offering $100,000 Discounts, Free Vacations Amid Cooling Market

As US home sales begin to cool off, homebuilders have begun to panic - offering price cuts of more than $100,000 along with free upgrades such as media rooms, cabinets and blinds - reports Bloomberg

That's not all, real estate brokers are being enticed with free vacations such as trips to Lake Tahoe, Santa Barbara, Cabo San Lucas and even a dude ranch in Wyoming - all in the hopes that they will steer buyers towards houses in slowing markets. 

This generosity flows from increasingly desperate homebuilders. Hot markets are cooling fast as interest rates rise. In the great housing slowdown of 2018, shoppers are reclaiming the upper hand, after years of soaring prices that placed most inventory out of reach for many families. “Everybody is hungry for the buyers,” Konara says. -Bloomberg

Builders are definitely feeling the heat right now, as new home purchases dropped in September to the weakest pace since December 2016. Meanwhile, previously owned home sales dropped for a sixth straight month - the worst streak since 2014, according to Bloomberg. Investors in homebuilding stocks are also feeling the pain, as the sector has lost more than a third of its value this year. 

There are pockets of robust housing activity still, however - as rising wages have put more homes in reach; starter homes are still in demand, while some smaller and more affordable markets - suc has Grand Rapids, MI and Columbus, Ohio remain strong. Still, the overall trend does not look good. 

On top of interest rates, sellers in some regions face added challenges. President Trump’s tax overhaul places caps on tax deduction for mortgage interest and property taxes, hurting high-tax regions such as New York’s suburbs. In Manhattan, added supply is about to hit the market, with 4,000 new condo units to be listed for sale in 2019, almost twice as many as this year, according to brokerage Corcoran Sunshine Marketing Group. -Bloomberg

Another factor hindering home sales, according to Bloomberg, are restrictions on immigration which have made high-skilled workers in places like San Jose and Austion hesitant to buy, while a strengthening dollar has made US investment properties less appealing to wealthy buyers in South America, and Chinese buyers snapping up homes up and down the West Coast. 

In Seattle, where home prices have doubled since 2012, builders are offering cash for customers to “buy down” mortgage rates—that is, pay to get a lower interest rate. “Builders are calling us,” says Andy McDonough, senior vice president at HomeStreet Bank, which works with the companies on such promotions. “They weren’t doing this earlier because buyers were lining up.” -Bloomberg

The shifting real estate tide is perhaps most noticeable in previously sizzling markets - such as Fricso, Texas. Located 30 miles north of Dallas and full of newly constructed master planned communities, its population nearly doubled over the past decade to 177,000, while its jump of 8% last year made it the fastest-growing city in America. 

All is not well in Frisco, however, as home sales have all but ground to a screeching halt. 

On a recent weekday, Konara, the real estate broker, drives his Dodge minivan along Highway 380, a builder battleground, where national giants such as Lennar, Toll Brothers, and PulteGroup go head to head with Texas companies. He stops at sales offices, where balloons festoon posts in a vain effort to spur sales. He points to empty houses that he says were completed six months ago.

His own sales are half what they were in 2016. In many cases, he’s rebating to customers all but $1,000 of his commission on each home sale. He walks into an Indian restaurant for lunch and looks up at the television screen. A competitor, the “Maximum Cash Back Realtor,” says he’ll take only $750. “You know what that means,” Konara says. “I’ll have to do the same.” -Bloomberg

Konara received a call from Raj Patel, a 35-year-old pharmacist with two young children. Weeks away from finalizing a purchase of a $699,000 new home with "four bedrooms, a grand staircase, two patios, a balcony, a game room, a media room, and a three-car garage," the buyer is paying $90,000 less than the advertised price - and still has reservations considering that a builder in the same community is selling a similar house with the same "bells and whistles" for $75,000 less than that

Konara tells Patel "the market is getting soft," to which the pharmacist replies "Hopefully the market doesn't dip much more than this." 

Nearby, Jennifer Johnson Clarke relaxes on a couch in the living room of a model home in Frisco. There’s a wet bar to her right, a 23-foot ceiling above and an indoor Juliet balcony. Not long ago, the $1.2 million house would have been a hot commodity. Clarke, director of sales for Shaddock Homes, a 50-year-old family-owned builder, will have to work harder to sell homes based on this model. -Bloomberg

"We have an oversupply. Too many lots came on the market in the last 12 to 16 months, and demand has fallen off a cliff," says Clarke. "I’ve not offered incentives on any scale like I’ve offered this year.