Builder's incentives not enough to lure buyers in shaky market: analyst
New-home buyers facing an uncertain market and nervous about purchasing a house that might end up falling in value are demanding more incentives and price cuts from home builders. As of September, about 77% of home builders were offering some sort of sales incentive in response to rising home inventories, compared with 58% a year earlier, according to the National Association of Home Builders.
Nervous home buyers want more concessions
Builder's incentives not enough to lure buyers in shaky market: analyst
By John Spence, MarketWatch
Mar 9, 2007
BOSTON (MarketWatch) -- New-home buyers facing an uncertain market and nervous about purchasing a house that might end up falling in value are demanding more incentives and price cuts from home builders.
Hovnanian Enterprises Inc., which saw its stock trade lower Friday after cutting its full-year outlook, has been offering more incentives to anxious buyers but it may not be enough, said one Wall Street analyst.
The Red Bank, N.J., home builder swung to a fiscal first-quarter loss on charges related to operations in Florida, one of the nation's hardest-hit markets. Yet before charges, the company delivered net income of 20 cents a share.
The lowered 2007 outlook despite better first-quarter results above forecasts "suggests to us that buyers' response to higher incentives early in the quarter did not meet management's expectations," wrote Banc of America Securities analyst Daniel Oppenheim in a research note Friday.
"We think higher incentives may be necessary to boost sales during the spring season," he added.
Investors and analysts are keeping close tabs on how the important spring selling season progresses to get a feel for whether a rebound is in the cards for 2007. They're also trying to get a handle on whether home builders will be impacted by pain in the subprime mortgage market.
As of September, about 77% of home builders were offering some sort of sales incentive in response to rising home inventories, compared with 58% a year earlier, according to the National Association of Home Builders.
And as of January, NAHB found 60% of companies were offering home-option items such as granite countertops and landscaping at no charge, up from 55% in September. About 52% were offering to pay the closing costs on the buyer's previous home.
The Commerce Department recently reported that new single-family home sales dropped 16.6% in January after gains the previous two months. See previous story.
"Builders continue to use both price and nonprice incentives to bolster sales and reduce inventory," said NAHB Chief Economist David Seiders in a March 5 statement.
In the earnings release, Hovnanian Chief Executive Ara Hovnanian said the company lowered prices in some communities in the beginning of the latest quarter "through additional incentives and discounts in order to maintain the pace of sales that we were targeting for those locations."
For its fiscal first quarter ended Jan. 31, Hovnanian said net contracts fell 23.3% from a year earlier. The cancellation rate held steady from the fourth quarter, rising 1% to 36%.
However, Hovnanian's fiscal second quarter appears to be off to a good start. For the month of February, the company said the number of net contracts rose 2.6% from the year-ago period. "This marks the first positive monthly comparison since the market slowdown began," the company said.
"Our first quarter is always the slowest seasonal period for new contracts, so it is difficult to get a good feel for the strength of the market," the CEO said.
"Most of our markets have begun to show signs of stabilization, but we are not yet confident that we have found the bottom of this housing slowdown," he said. The CEO added that once the market bottoms, the company is not expecting a rapid recovery, but rather a steady sales pace for several quarters.
"To use a weather analogy, it is no longer a monsoon but it has been downgraded to scattered thundershowers," Hovnanian said during Friday's conference call with analysts.
Hovnanian's shares lost 4.3% at $29.29 in afternoon dealings Friday.
John Spence is a reporter for MarketWatch in Boston.
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