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Developers spell “price drop” I-N-C-E-N-T-I-V-E-S

Elizabeth Rhodes hits us this morning with a fun little morsel: Developers dangle discounts, toys to lure home buyers. (I wonder why this article wasn’t in the big weekend real estate section? Hmm… Edit: It would appear that the answer to that question is that they were saving it for the front page [pdf].)

Puget Sound-area new-home developers, motivated by an increasingly soft real-estate market, are resorting to something they haven’t done in years. They’re enticing buyers, like Matt Orlando, with big TVs, motorcycles and other inducements.

The deal sweetener that eased Orlando into his first home was a $3,000 credit toward closing costs on a one-bedroom condominium in Veridian Cove, an extensively refurbished new conversion in North Seattle.

The first year’s homeowners dues, at $197 a month, also were waived.

“I feel like I won the lottery,” says the Shoreline Community College instructor. “They were basically giving me $5,000 to move into a beautiful place I could afford.”

Incentives started appearing in late summer and are the best they’ve been in more than a decade. Indeed, until this year, builders could count on selling many new homes before they were even built.

Now there’s a four- to 13-month inventory in King and Snohomish counties of new houses, town houses and condominiums available, according to New Home Trends, a Bothell data-research firm. That’s spawned a goody-laden battle for buyers.

In other words, they’re dropping prices without actually “dropping prices.”

If this story sounds familiar, it’s because the exact same thing has unfolded in other markets all across the country over the last few years. It’s one of the surest signs that a housing market is transitioning from “boom” to “bust.” The builders are no dummies, they know that it is time to get out. The only problem for them is that they’re all trying to get out at the same time.

This will be interesting to watch unfold.

(Elizabeth Rhodes, Seattle Times, 10.29.2007)

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About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market. Tim also hosts the weekly improv comedy sci-fi podcast Dispatches from the Multiverse.

46 comments:

  1. 1
    jon says:

    I had a different take on the article. It may not be so bad after all. Builders have cut way back on the new housing coming into the market, which tells us they aren’t willing to build for less the current market. That establishs a floor for the market. The comment at the end about dropping inventory of land is quite interesting for what the future holds. It makes the rest of the article seem like some end of year discounts to make room for the new models.

    Also jumbo interest rates are dropping sharply: jumbo rates

  2. 2
    Buceri says:

    Orlando got $5K in freebies for a place he overpaid tens of thousands.

  3. 3

    THE HOUSING MARKET IS STABLE IN SEATTLE: AS LONG AS THE CREDIT CARDS DON’T DEFAULT

    See today’s proof:

    http://news.yahoo.com/s/nm/20071028/us_nm/usa_creditcards_debt_dc

  4. 4
    Alan says:

    A little more information from public records:
    – Purchased 8/28/2007.
    – Apartments converted to condos in 2007. Originally built in 1988.
    – Average unit size is 764 sqft.
    – Purchased for $233k. According to the 3x guideline, you only need to be earning $78k to purchase this place.

    $5k off comes to 2%. The lottery? Really?

    Why is Ms Rhodes reporting on incentives offered nearly two months ago? What are builders offering today? How much are incentives masking prices drops?

  5. 5
    Ben says:

    Great investigation work Alan.

    $78k sounds like a lot for a community college instructor – I don’t think that any schools pay that well these days (nothing against the guy, good teachers deserve good money but most places don’t pay it).

    Has anybody seen incentives on the Eastside? The one builder that I spoke to seemed to think that once jumbo rates were fixed up (and he expected that to happen RSN) that this whole thing was a blip and things would go back to normal (ie asking for a million bucks for what used to be a normal family home).

    Bravado or denial?

  6. 6
    B&W Nikes says:

    And they close the article with: The region needs 10 years’ worth of building lots in the pipeline to stabilize sales and prices, he says.

    Because of land’s shrinking availability and high prices, King and Snohomish counties have but six, Beekley says, which means the area may eventually have a new-home shortage.
    Wow. Scarcity and low interest rates – again.

  7. 7
    on topic says:

    [Edit: Personal information about Mr. Orlando removed by request. See below. –The Tim]

  8. 8
    alex says:

    I hear from a source I can’t reveal that these discounts can get to double-digit percentages (I mean “real” discounts from the asking price, not just incentives).

    Do you guys realize, though, that by spreading these pessimistic news we are helping push the market down? Moreover, I wonder how many of the regular readears of this blog (myself included) stand to profit from a downturn… I, for one, would love to see prices come down to more “realistic” levels.

    This sorta makes me suspicious of financial news… just any news anywhere, including blogs.

  9. 9
    Angie says:

    The 3X guideline is for what you should borrow (on a 30 year fixed-rate note), not the sales price. Maybe he had a big down payment—we have no way of knowing.

    I know the info about his particular unit and his income were pulled from public records, but for the record, I think it’s bad form to be ferreting out and discussing this particular individual’s info. How would you like it if random people on the internet were discussing your income without your knowledge or consent?

  10. 10
    Alan says:

    I would never choose a random person and post that information. I wouldn’t even do it to someone here or on the forum. However, he volunteered to be in the public eye by having a news article written about him. What if the article had included that information? Once they had his permission to feature him in the article, would there have been a problem with including extra data from public records?

  11. 11
    Alan says:

    Also, we do have a way of knowing how much he borrowed. That is public record too. You just can’t see it online.

  12. 12
    EconE says:

    Incentives? You don’t say. I guess you haven’t been following MLS listings for condos.

    Flippers have been dropping prices also.

    This one started at $1,600,000 earlier this year….

    http://redfin.com/stingray/do/printable-listing?listing-id=1244598

  13. 13
    John says:

    As much as the news media loves to overhype good news, they will seize upon bad news just the same. Today is price drop, tomorrow is empty buildings, abandoned projects. This is only the beginning.

  14. 14
    fred says:

    This is such bullshit. The notion is that there’s plenty of potential homebuyers who could pick up a house tomorrow, but don’t, because they won’t get enough platitudes. Um, no. When demand goes down, and supply stays or rises, you bring price down, not thrown in a free blender. $5000 incentive? Off a $220,000 price tag? Wtf? Incentives make sense in a competitive market, not in a drying-up one.

  15. 15
    laxtosnoco says:

    Posting that fellow’s salary info is in bad taste. Sure, it’s technically public information, but he’s not a public official. He just agreed to be interviewed for an article; it wasn’t like he was pushing an agenda.

    I think one of the moderators should delete that post.

  16. 16
    on topic says:

    I’m a public employee too. My employer happens to put up more detailed info than Shoreline CC does.

    I guess I just assumed that everyone knew that this info was public and easily accessible, so I didn’t consider that anyone might have a problem with referencing it.

    If it is offensive, please do take it down.

  17. 17
    Marc says:

    “Incentives make sense in a competitive market, not in a drying-up one.”

    Fred, I have to respectfully disageee. Your statement might be true if buyers always have perfect access to information and always make rational decisions. But, the article’s subject, Mr. Orlando, is a perfect example of people who get excited and pull the trigger with imperfect information and/or irrational decision-making.

    The reality is that this most (or at least a significant percentage) of consumers jump at incentives. This is why people sign up for credit cards they don’t need at airport kiosks in exchange for a lousy t-shirt. Or pay $5,00 or $6,000 too much for a brand new car in order to get a 0% interest rate.

  18. 18
    Nostradamnus says:

    90% price drops coming soon! Keep holding your breath!!!!

  19. 19
    TJ_98370 says:

    90% price drops coming soon! Keep holding your breath!!!!

    The Meshugy clones are back.

  20. 20
    BanteringBear says:

    EconE:

    That’s one of the ugliest POS listings I have ever seen. Less than 1500 square feet of hell on earth for $1.2m? No thanks!

  21. 21
    Scotsman says:

    90% price drops coming soon! Keep holding your breath!!!!

    In parts of the country they’re already here, admittedly for a variety of reasons. Much of the Midwest has seen huge price drops. And in parts of Detroit you can’t give away a house. If 50% only takes us back to ’02/’03 in much of the country, maybe a good world-wide recession can cause a significant portion of the remaining 40% to occur? The only certainty is that we’ll know soon enough!

  22. 22
    declinest says:

    today it’s incentives and tomorrow it’s outright price drops. why would we need incentives to buy a home when there is supposedly a land shortage?

  23. 23
    BubbleBuyer says:

    Proof that you can afford a SFR if you are creative and a little flexible with required ammenities! Sorry couldn’t resist posting from Marin bubble blog.

    http://www.funnyordie.com/videos/3114

    Third Date with Will Ferrell on FunnyOrDie.com

  24. 24
    Kime says:

    “It may not be so bad after all. Builders have cut way back on the new housing coming into the market, which tells us they aren’t willing to build for less the current market. That establishes a floor for the market.”

    Why does that establish a floor? So many homes are not sold by builders but by homeowners and sometimes lenders.

  25. 25
    TJ_98370 says:

    Question:

    why would we need incentives to buy a home when there is supposedly a land shortage?

    Answer:

    “We can’t make any more of the land, but we can build huge high-rises on the beach.” – Robert Shiller

  26. 26
    Lil' Skwappy says:

    Read a Forbes article today projecting a 3% *GAIN* eastside in 2008. I’m skeptical. What do you guys think about the future of Bellevue/Redmond over the next year or two?

    http://beat.downtownbellevue.net/2007/10/seattle-area-most-stable-housing-market.html

  27. 27
    george says:

    I am shocked, shocked, shocked to see that headline on the front page of the Seattle Times, not to mention words like “increasingly soft real-estate market” and “puget sound” strung together. In the same paragraph!

    Who do we have to thank for this attempt to be accurate for once? Other than Tim and his blog, I mean.

  28. 28
    Andy says:

    I hope Prof Orlando doesn’t teach economics…

  29. 29
    BellevueRenter says:

    Actually a builder in this area is giving out 5.375% 30-year fixed loans with 10-year IO option to qualified buyers. Besides, the closing cost is also waived. Compared to market rate, literally it is about 7-8% drop in monthly cost.

  30. 30
    The Tim says:

    I do not like to edit or delete comments, and usually avoid doing so, but since “on topic,” the poster of the 11:08 AM comment above regarding Matt Orlando’s salary, indicated approval of its removal, I have removed the information regarding Mr. Orlando’s salary.

    Mr. Orlando personally emailed me, requesting the removal of this comment as well as all discussion “referring to my personal finances,” referring to it as “both inappropriate and quite unethical to discuss my personal financial matters in the blogosphere.”

    However, I am going to have to decline that broad request. By agreeing to be interviewed and featured in an article on an explicitly financial subject in Seattle’s largest newspaper, Mr. Orlando has implicitly invited a public discussion of his personal finances.

    Attempting to suppress or control such a discussion is fruitless and nonsensical. I’m all in favor of respecting people’s privacy, but when you put yourself in the spotlight, you get to take the positive attention along with the negative.

  31. 31
    disbelief says:

    Hey, what d’ya expect if you win the lottery!

  32. 32
    Angie says:

    The guy’s just a private citizen, not a public figure. Cut him some slack, in that “do unto others” way.

    In other news, our household just got postcard out of the blue from a developer who’s got a new townhouse project up in our neighborhood, as well as a few others across town. Close on one of their units by the end of December and they’ll pay your mortgage payment for 3 months!

  33. 33
    Jerremy says:

    This builder is offering no payments until June of ’08.

    http://www.bennetthomes.com/

  34. 34
    The Tim says:

    The guy’s just a private citizen, not a public figure. Cut him some slack, in that “do unto others” way.

    I am. That’s why I deleted the comment above that contained his actual salary information, which is in fact fully-accessible public information.

  35. 35
    Jesse says:

    Jerremy, your post is really making me wish I found this blog earlier just so I could have posted a crazy arse Steve Jensen Homes promotion.

    Basically, Steve Jensen hopped into bed with Countrywide. If you financed your house through Countrywide good ol’ Mozillo and Co would make your first 6 mortgage payments on your overpriced Steve Jensen home. The promotion ended abruptly in August, but the Steve Jensen website had it advertised until about 10 days ago. I guess the Jensen/Mozillo fling wasn’t all it was cracked up to be.

    The 10/3 post on the Jensen website is a classic:

    http://www.stevejensenhomes.com/index.php

  36. 36
    DoubleE says:

    I’m a long time reader of this blog from Spokane and I just wanted to comment on the Eastern side of the state. Builders are offering discounts over here. I visited a couple of new home open houses last weekend. At the first one, I asked if the builder would throw in any extras to make a deal. The realtor stated that normally the builder only landscaped the front yard, but he was certain that the builder would landscape the backyard and put up a fence for no extra charge. At another open house, the realtor told me the he recently sold a new home, which had been on the market for a long time, and the builder accepted over 15% off the asking price. The builder told the realtor that he lost money on the deal. The median and average price of homes in the Spokane area has decreased approx. $10k over the last 2 months per the local paper. The decrease was even larger next door in Idaho.

  37. 37
    Goldeneye says:

    Guys,
    I want prices to come down too. But
    a) Expecting a 90% drop is silly in my opinion. Not that it has not happened before – it happened in Japan, but one can say with certainity that it won’t happen here. If prices in Seattle go down 90% then I am assuming things will go even worse in other parts of the country – this would be worse than the Great depression and the whole world would suffer. Again, I think that is next to impossible.

    b) Regarding a builder offering 5.375% 10 yr I/O loan, its a bad deal if you stay in the house for more than 10 years. You need to sell the house immediately in 10 years. Also, the deal is only for overpriced houses that the builder built but could not sell either because the buyer backed off at the last moment, or because the buyer’s mortgage was not approved. The deal is not available for regular houses that the builder built.

    c) Jumbo rates coming down is a godsend for housing in this area. This is because jumbo loans was the only way people could afford houses more than $550K. Too bad the Fed’s plan of lowering interest rates to help housing seems to be working at least partially. The thing is, the high mortgage rates was a big deterrent to buyers. The super high jumbo rates was a bigger deterrrent in places like Seattle where prices has risen so high. This will be a big relief for people who plan to buy and who have a decent amt to pay for a down payment. Of couse, subprime has gone now, so that removes some buyers out of the market. The thing is, we need to see some really good price drops to cause the downward spiral – a few good hits to the prices will cause all speculators to flood the market thereby depressing them even more. Currently speculators are still holding on, since prices are appreciating here, albeit slowly.

  38. 38
    what goes up comes down says:

    Goldeneye — give me a break.

    A.) For some reason Seattle is different than the rest of the nation — always, if it happen some where else it can happen in Seattle.

    B.) The less homes builders sale than more deals will be given — no doubt. Builders need to move “regular” houses off their books.

    C.) People taking out Jumbos in this market are crazy. Do you understand the whole point of being required to take out a jumbo is you are financing a staggering amount of debt. If anything if people had half a clue they would look at the bottom part of the market.Taking out a jumbo now is about the worse financial move someone can make. Maybe an unique concept will strike the American people — live within your means — give up the granite counters, the 40″ plasma, and the 3 car garage — actually put some money in savings for that rainy day — because those clouds on the horizon look pretty dark — Live simply and sleep well.

  39. 39
    wreckingbull says:

    Hey DoubleE

    What is the status of Kendall Yards? Is all the funding still there? Are there really going to be buyers for all the residential and commercial real estate going in? Are the taxpayers of Spokane going to continue to front public money after what happened at Riverfront Square?

    I am fascinated by this project (In a train wreck sort of way). To me, it is a perfect storm for a financial disaster to both the private developers and the City of Spokane.

  40. 40
    Sarah says:

    Jesse,

    I saw your post regarding the 6 months no payments that Steve Jensen Homes was promoting and was compelled to respond.

    I live in the community where that promotion was offered and I speak with the sales staff regularly. So, I would like to correct you in your many false assumptions about Steve Jensen, his homes, and his relationship with Countrywide Home Loans.

    Firstly, the reason it was “abruptly” pulled in August was because the home sold. Apparently it must have worked. The same promotion is now being offered on a different home.
    After speaking with the sales staff regarding the reasons behind offering this type of promotion, they reported that it offered the opportunity for homebuyers who have an existing home that must first be sold, but who do not wish to make a contingent offer. Therefore, they can purchase the new home and have time to sell their current one without having to make double mortgages.

    Regarding Countrywide…I used them to finance my new Steve Jensen Home and found their service to be outstanding. I had shopped for my loan for a great deal of time. Once I found the program that I wanted for the lowest rate, I spoke with Steve Jensen’s Countrywide rep, and he not only matched the program and rate, but also gave me $2500 towards closing costs (this is directly from Countrywide – not Steve Jensen), but also did not charge me an origination fee (usually around 1%). On top of that he closed my loan in 1 week! I would definitely recommend Countrywide again.

    Steve Jensen Homes is about quality and service. I am sure that he uses Countrywide as a preferred lender because they help make our experience in purchasing a new Steve Jensen Home very smooth and pleasant.

    Lastly, I have purchased many new homes in my life and have yet to find the quality that is found in Steve Jensen’s homes. Since you referred to his homes as ‘overpriced’, I am under the assumption that you are inexperienced in identifying quality and value.

    http://www.stevejensenhomes.com

  41. 41
    Jesse says:

    Sarah, how much do you get paid to be a mindless shill for Steve Jensen and Countrywide? Seriously, your ‘response’ to me read like a fargin’ Jensen homes/Countrywide advertisement.

    Good luck with your overpriced home, and enjoy being upside down in your Countrywide loan…especially after Countrywide files BK and their CEO is hauled off and given an orange jumpsuit to match his orange ‘tan’…or haven’t you been paying attention?

  42. 42
    fred says:

    Marc:
    Point taken. Few economic models I’m familiar with take into account an easily duped consumerate. Though I’d argue that credit cards are a competitive, not dry market.

  43. 43
    Nacho says:

    Wow Jesse, you sound like one of those losers who is bitter because they got turned down due to crappy credit. get over it dude….

  44. 44
    Cookie says:

    Jesse,
    Methinks thou protest too loudly.
    You clearly have issues.

  45. 45
    DoubleE says:

    wreckingbull,

    Kendall Yards in Spokane is stilling moving along at a very slow pace. I have a birdseye view of the project from my office window. So far, they have only moved dirt and rock around. I’ve seen at most, 3 pieces of equipment operating at the same time and approx. 3 or 4 workers. No activities in the mornings and no building construction so far. In took about a month to get the electrical, cable and other improvements across Monroe Street.

    I don’t have a lot of knowledge on the project, but I believe the City of Spokane has pledged the property taxes over the next 10 years (maybe longer) from the Kendall Yards properties and other nearby properties (added after the original plan) to pay the government debt needed for the infrastructure improvements at Kendall Yards. It would definitely be bad news if the City spent the money for the improvements and the project wasn’t completed. Like you mentioned, once again the taxpayers would be on the hook.

    I actually like the Kendall Yards project. They are using some land that was an eyesore and will hopefully turn it into something useful. It’s all the condo development in downtown Spokane that I can’t stand. They built the ugliest condo I’ve ever seen right next to the Spokane River facing Riverfront Park. It looks like a jail. They say it’s finished, but the top level and the roof look unfinished (nothing matches). At work, I refer to it as the future Motel 6. My coworkers agree that the building is ugly. One person at work mentioned that the builder only has to sell the condo once to make money. Current condo buyers will have to wait a very long time to sell and not lose money.

  46. 46
    TheDexter says:

    Be careful of all incentives. Half of them are dubious anyway. Instead of 10k credits for working with particular lenders and such, just be real and take it off the price.

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