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Builders Not Cutting Home Prices; Playing Up Buyer Options, Upgrades

When it comes to home prices in Orange County, homebuyers and sellers could end up in a standoff.

Take Shady Canyon, The Irvine Company’s gated hillside community that caters to local executives and golf enthusiasts.

The last of 400 custom and semi-custom homes are nearing completion on the 1,070-acre development, which opened to strong buyer demand just a few years ago. More than 40 of those homes,both new and resale,now are up for grabs, local brokers said. Only two of those 40 have sales pending.

The typical number of homes that an established development such as Shady Canyon should have on the market usually runs around 2% to 3% of the total, brokers said.

The 10% of Shady Canyon homes that haven’t sold points to a big gap in price expectations between buyers and sellers, said Ed Blatchford, a realtor with the Tustin office of Coldwell Banker who focuses on higher-end homes.

Shady Canyon homes can run anywhere from $3.3 million to $12 million. Builders and other sellers at the development aren’t willing to adjust their prices, or offer significant concessions to prospective buyers, Blatchford said.

“They need to, if they want to sell,” he said.

OC home sellers,especially builders of new homes,have resisted dropping prices of their homes. That hasn’t been the case in other areas in California, which also have seen big sales declines during the past year.

In areas where land is less scarce, such as parts of the Inland Empire, builders are dropping prices by as much as 20%, according to real estate economist Walter Hahn, who does consulting work from Irvine.

“That hasn’t happened here,” he said.

And it’s unlikely to because of the limited amount of new homes and continued job growth in OC, Hahn said.

While sales across the county have declined,and prices for existing homes have fallen,homebuilders here typically haven’t had to lower prices.

The median price of a new home sold here was about $604,000 in January, according to recent data from La Jolla-based market tracker DataQuick Information Systems. That’s up about 14% from a year ago.

Builders have been more willing in recent months to entice buyers with incentives such as picking up closing costs, paying for escrow and settlement fees, and increasing agent commissions, Blatchford said.

The amount of those discounts isn’t factored into the sales data provided to DataQuick.

Some builders are going to more press-generating extremes. Some have offered plasma televisions, paid vacations and buyer referral bonuses, among other offbeat incentives.

At K. Hovnanian Homes’ 404-condominum Avenue One project in Irvine, the New Jersey-based builder has been looking to lure buyers, as well as brokers, through a number of ways.

The company, part of Hovnanian Enterprises Inc., is offering buyers a $10,000 gift card for chic furniture store West Elm at the time of closing. It’s also offering homebuyers a $5,000 referral bonus for bringing in other buyers.

The Avenue One development has condos that start in the high $300,000s. The mid-rise project is nearing completion along Jamboree Road and Dupont Drive, next to three high-rise condo towers.

For several months, Hovnanian has been offering a 5% broker co-op,a commission paid to a realtor who brings in a buyer,on deals closed by the end of this month. For sales closed March through April, the homebuilder’s offering a 3% co-op for brokers.

How much these incentives are hurting the builders’ bottom lines remains to be seen.

During a strong housing market, a builder is usually able to sell upgrades for the home,better finishes, appliances or bathroom features,on top of the base price of a house. Such options can run anywhere from 10% to 15% more.

Upgrades are a big moneymaker for builders,they only cost about half of what homebuyers are charged, Hahn said.

In a slower housing market, builders,in a bid to lure buyers,often will offer upgrades for free, cutting out a big profit for them, Hahn said.

“They’ll do that before they think about dropping the base sales price,” he said.

Nationally, Toll Brothers Inc., the country’s largest builder of luxury homes, said that incentives during its most recent quarter were about $8,000 more than a year ago.

National homebuilders with operations here have been implementing even more aggressive incentives and buyer discount programs, which has led to a drop in profits.

Miami-based Lennar Corp., which runs a big part of its operations in Aliso Viejo, reported a much larger use of sales incentives last year. They ran $32,000 per home in 2006, compared to $9,000 in 2005.

In Lennar’s Western markets, sales incentives offered to homebuyers increased to 7.5% in 2006, compared to 1.5% in 2005, the company reported.

The average sales price of a Lennar home was $315,000 for the 12 months through November, compared to $311,000 in 2005.

Stephen Scarborough, chief executive of Irvine-based Standard Pacific Corp., earlier this month said in a release that the “sudden and swift decline in demand in most of the major housing markets across the country last year gave rise to significant price reductions and incentives to move inventory.”

Those reductions, along with big land deposit write-offs, cut into Standard Pacific’s fourth-quarter earnings. The company posted a loss of $98.4 million in the quarter, compared to a profit of $154.9 million in the fourth quarter of 2005.

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Mark Mueller
Mark Mueller
Mark is the Editor-in-Chief of the Orange County Business Journal, one of the premier regional business newspapers in the country. He’s the fifth person to hold the editor’s position in the paper’s long history. He oversees a staff of about 15 people. The OCBJ is considered a must-read for area business executives. The print edition of the paper is the primary source of local news for most of the Business Journal’s subscribers, which includes most of OC’s major corporate and community players. Mark’s been with the paper since 2005, and long served as the real estate reporter for the paper, breaking hundreds of commercial and residential real estate stories. He took on the editor’s position in 2018.
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