Feeling The Pinch
Home builders are starting to see the effects of a slowing real
estate market. Some are holding the line on prices and offering free
upgrades and extras to attract buyers.
BY DAVID P. WILLIS
BUSINESS WRITER
For now, Stephen and Jaime
Dane are living in a summer rental in Avon.
Their new four-bedroom home at K. Hovnanian Homes' Manors at Metedeconk
development in Jackson
is under construction.
"Right now, it is a big hole with some bricks around it,"
said Stephen Dane, 32.
The Danes put down a deposit in February and expect to move into their
home in January. Some may say it was a great time to purchase a new home.
The builder, working with its own mortgage company, gave the Danes a
$10,000 credit for improvements inside the house and another $10,000 for
upgrades outside.
"We have a nice big home," Dane said. "We were happy
with the incentives that they gave us."
Once red hot, the market for new homes in New Jersey has begun to cool.
"The frenzy in the real estate market that we have experienced in
the last three or four years is no longer in existence," said Tom Critelli,
president of Danitom Development, which has offices in Holmdel and Paramus. "We are seeing good traffic, but not
necessarily anyone overreacting to having to buy now (and) worrying about
the price going up later."
The number of homes that will begin construction this year is expected
to decline by about 10 percent from 2005, which was a banner year for
builders in New Jersey,
said Patrick J. O'Keefe, chief executive officer of the New Jersey
Builders Association.
"Last year was the most active year for home building in 18
years," O'Keefe said. There were 38,481 building permits issued in
the state in 2005, up from 35,936 in 2004 and 32,984 in 2003.
He began to notice that the housing market, mostly resales, were
beginning to slow down later in the year.
"In this case, it was as if someone was taking their foot off the
accelerator, the market was slowing," O'Keefe said. "Prices
were still going up, but the forward momentum was lessening over
time."
What's behind the real estate slowdown? Among the reasons: rising
mortgage rates and changing buyer sentiment.
From 2000 to 2005, housing prices statewide were up 86 percent,
O'Keefe said. But household income only rose about 15 percent, making it
harder to afford homes, even with low interest rates, O'Keefe said.
"Middle- and modest-income households were literally priced out
of the market over that five-year period," he said.
Higher interest rates worsened the situation. "Simply put, buyers
can't afford what's on the market," O'Keefe said.
Meanwhile, buyers are uncertain whether prices will decline and fear
purchasing at the top of the market, said economist James W. Hughes, dean
of the Edward J. Bloustein School of Planning and Public Policy at
Rutgers University. "The golden years are certainly over," Hughes
said.
And the slowdown in the existing home market is playing a role as
well. For most buyers, a new home is either a trade up, or, for senior
citizens, a move into an age-restricted community, O'Keefe said.
With prices peaking in the resale market and a large inventory of
homes on the market, houses are taking longer to sell.
"In order for them to move up or move across, they need to sell
the home they currently reside in," O'Keefe said.
So, O'Keefe said, home builders are reacting by:
Not starting new construction until they have a firm commitment for a
sale.
Not increasing prices. "The builders have become price conscious
as the customers have become price conscious," O'Keefe said.
Including upgrades in the price.
Working with the prospective customer to reduce costs. Maybe you don't
want to add that sun roof or finish the basement, O'Keefe said.
Builders acknowledge they are feeling the market's effects.
K. Hovnanian Homes, the largest home builder in New Jersey and
subsidiary of Hovnanian Enterprises of Red Bank, has been able to meet
its budgeted sales goals, but has not raised its prices for the past six
months, said Barry T. McCarron, a division president.
The market for new single family homes is challenging because
potential customers have to sell their existing homes, he said. So, the
company is working with customers to make sure their homes are priced
correctly to sell in the current market, McCarron said.
Meanwhile, K. Hovnanian is making sure its own homes are priced right.
It may include some discounting of upgrades or options on certain homes,
McCarron said.
"We are doing it a little more frequently than we have in recent
years," he said. "Once again, it is all part of our overall
strategy to make sure we are priced right in the current market
conditions."
Age-restricted homes are a brighter spot for K. Hovnanian.
"The active adult buyer has a little more experience in both
buying and selling a home," McCarron said. "They are probably a
little more inclined to be confident that they can sell their own home
because they are willing to price it correctly."
East Brunswick-based Kara
Homes, which has
built several developments in Monmouth and Ocean counties, has also been
adjusting to the market, owner Zudi Karagjozi said. The company started
to see a slowdown in sales in October and November, he said.
It had to cut costs, including laying off 20 to 25 percent of its work
force over the past six months, he said. He would not say how many
workers were involved. "We have pared down the company in
size," Karagjozi said.
The company also has given incentives to buyers, such as giving a
credit on options, to help make a sale, he said. "It hasn't been
much, but a little bit."
Kara Homes also has reduced the price
of some of its homes, he added.
Now Karagjozi said he is optimistic. The company's revenue has
increased by about 25 percent for the last six months over the same
period last year.
"The most important thing is (it's) legitimately not as bad as
people perceive it to be," he said. "The buyers that are coming
out right now are buying, that I can tell you. You might have lost
traffic, but they are buying homes."
In May, luxury home builder Toll Brothers Inc. cut its 2006 fiscal
year sales forecast, the third cut since November, by 200 homes to a
range of 9,000 to 9,700. The company sold 8,769 houses in 2005, according
to Bloomberg News Service.
"We think in the near term, there is excess supply on the market
which needs to clear,' said spokesman Frederick N. Cooper. "In the
longer term, the outlook for housing is still very healthy."
While sales at each development differ, Cooper said sale
representatives have to work harder to sell a home.
"I think right now, in a number of markets,
buyers are feeling less pressured today," Cooper said.
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