New Home Buyers: Houston Home Builders are offering price discounts of 5% to 30% this summer! Sound ridiculous? It’s the reality of the 2009 New Homes Market in Houston. Good luck finding which homes are actually in your price range.
For perspective, consider a new home listed for $250,000. At a 5% discount, it’s $237,500. At 35%, the price drops to $175,000.
Great news for the lucky buyer that was expecting to pay $250k. But what about those searching in the $170’s - should they expand their search criteria to the mid $200’s?
Thanks to the current builder pricing landscape, most home buyers have no idea where to focus their home search. In this article I’ll provide some direction while sharing some valuable trade secrets.
How did we get here?
Pricing was somewhat predictable before 2008, when the red carpet was pulled from beneath seemingly random home builders. Bigger discounts at that time could be found in communities with slow sales. Quite simply, prices were determined by local supply & demand.
Those principles still apply to new home prices today. But dig a bit deeper and you’ll see that most builders are operating in either safe mode or panic mode — and their inventory prices are influenced mostly by their financial stability. Even those builders that came out ahead of the pack are still struggling with a supply glut outside of Texas, which encourages them to keep inventory levels low and offer deep discounts to move what inventory they have.
Many builders have ceased construction in their newer developments in attempt to reduce operating expenses. Others have filed bankruptcy re-organization and are unloading inventory homes and lots as part of their court-approved plan. Still others have filed Chapter 13 bankruptcy and are selling off remaining inventory under direction of their creditors - effectively selling off a portfolio of new construction foreclosures.
Making sense of it: Categorizing Builders
Remember that most home builders are publicly traded, stockholder-owned corporations. They make decisions with Wall Street in mind - thus, I categorize them by financial agenda: conservative, rehab, and bank-owned.
Conservative
Inventory Homes
Not much - many of the sales offices I’ve visited recently literally had no completed homes for sale.
Incentives
Typical - expect 8-12% off list price on inventory homes, and 5-10% incentives on new builds.
Example
For the first part of 2009, David Weekley offered a standard 10% off existing inventory across the city (so-called Employee Pricing). A moderate, predictable price incentive on a high-value home.
Some of the more conservative builders are still operating as usual, with no serious financial trouble to cause drastic price reductions. Most of the long-term successful builders are in this category (Morrison, Weekley, Lennar, for example). In my opinion it’s because they have maintained the proper cost-to-value ratio for their product, unlike some of the builders that grew so quickly by riding short-lived buying trends and hype.
Rehab
Inventory Homes
Scattered, hard to find, and hard to get any real information about. Most sales offices are closed, with all sales handled by a handful of reps or inner-office personnel.
Incentives
Outstanding. I’ve seen price reductions reach 30% from list price and 20% from actual market value.
Example
Mercedes Homes, amidst a Chapter 11 Bankruptcy, opted to discontinue building in the new Spring Trails Discovery community. They reduced prices on a pair of remaining homes by nearly 30% (from the $290’s to the $210’s). These were excellent floor plans, packed with upgrades, and on standard interior lots (i.e., nothing wrong with ‘em).
Many builders have filed Chapter 11 Bankruptcy (re-organization), which means they are seeking protection from creditors while they reorganize debt and outline a plan to continue business. Contrary to the idea that bankruptcy means out-of-business, this scenario suggests a builder has a feasible plan to continue operations. A commonly known example is Delta Airlines, whom operated under Chapter 11 Bankruptcy protection from late 2005 to early 2007 (and they’re still around).
Some of these builders are also seeking mergers or selling off parts of their business to other builders.
Bank-owned
and Chapter 7
Inventory Homes
Scattered, regular MLS listings.
Incentives
Attractive, priced like a foreclosure but still a new construction, never lived-in
Example
David Powers Homes went out of business completely, leaving several almost-complete homes in Cy-Fair’s Bridgeland community (among others). A few are still available, offering buyers a shot at a semi-custom new home in Bridgeland for less than $90/sf. That’s pretty hard to find otherwise.
And the less fortunate (formerly aggressive) builders have filed Chapter 13 Bankruptcy and/or closed their doors completely, leaving behind a varied list of completed homes, under construction sites, and vacant lots. Just like the Rehab builders above, these builders offer some very attractive deals - mostly in the $200,000 and up price range.
For builders filing a Chapter 7 Bankruptcy, the inventory homes for sale are controlled by the builder’s creditors, making them much like foreclosures. For builders that have closed down completely, the homes are literally new construction foreclosures.
So what happens to the partially completed homes, you ask? It depends on the bank, but several I’ve seen have arranged for the homes to be finished out by a different builder/contractor; these home sales are handled much like a traditional under-construction builder sale.
Where to find the killer deals
So where do you find the ridiculous 30% discounts?
The best deals are coming from the Rehab builders - specifically in neighborhoods they’ve decided to exit. The key is that they’re selling off any remaining inventory homes, selling the now-closed sales office, and building spec homes on any lots they have left that are owned (versus optioned, which is another discussion). These neighborhoods offer home buyers the insane discounts mentioned above.
The down side is a lack of marketing (they’re hard to find), lack of information (no on-site sales), and low inventory. The deals are out there, though, and in some neighborhoods you wouldn’t expect.
So new home buyers, keep the above in mind as you browse through the crowd of home builders. While you can’t know for sure what price reductions are available on each home, you can get a head start by just doing some homework on your list of target builders. Or you can just follow one of the links below to skip over the homework - we’ll be happy to give you the answers.
Johnny Schiro, Broker
Icon Real Estate
The Woodlands, Texas
About the author
Johnny Schiro is a Houston Realtor and co-owner of Icon Real Estate — an independent residential brokerage in The Woodlands, Texas. Johnny writes mostly about local market trends, buying & selling strategies, and industry insight. Comments and feedback encouraged.
June 6th, 2009 at 1:00 pm
I have to move to Houston from Dallas TX for work and I need to find a house close to KBR 4100 Clinton Drive. I need to find a house in a good area that I can modify with a handicap bathroom. If I can find a discounted house at a good price and have it modify will be a blessing for me. My budget is about $175,000. Buying a house at full price and then paying to modify it will break my budget. What do you recommend? Do you know of any homes in that area?
June 6th, 2009 at 1:28 pm
Hi wstorrs,
Can you give me an idea of what type of home you’re looking for? Just the basics:
- how many bedrooms
- how much total living space (sqft)
- 1- or 2-story
- just new or recent construction, or are older homes acceptable?
You likely won’t find much in the immediate vicinity of 4100 Clinton, but there are some nice communities within a short drive (Atascocita area is likely your best bet for a suburban setting).
Feel free to email me directly to discuss further - johnny@houstonicon.com
-Johnny