05 Nov 08 Things Home Builders are doing to Stay Afloat and Sell More Homes

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Amid a market plagued by declining real estate prices, strict lending practices, low consumer confidence, foreclosures, short sales, and high inventories, selling new homes seems next to impossible. However, many home builders are hoping to increase sales by changing sales and production strategies. In markets across the nation, home builders are altering nearly every aspect of their businesses to increase sales and remain afloat during a U.S. recession and one of the worst real estate markets our nation has ever experienced. Below are a few things both large-scale and small-scale home builders are doing to sell homes.

Going Green - Increasingly, new home builders are going green by implementing green building strategies and using energy efficient products to build homes. Building a green home saves the homeowner money on their electric bill and reduces the carbon footprint that a home leaves. Products like solar-panel roofing may reduce a homes carbon footprint by as much as 48%, but combine that with energy efficient appliances, recycled insulation, water management faucets and toilets, dual pane low-e windows, CFL or LED light bulbs and any other energy saving product; and any homes carbon footprint and monthly electric cost is drastically reduced. Green homes cost more to build but many consumers are willing to pay more for an energy efficient home and home builders are discovering that the “green” label pays off in more sales.

Asking Uncle Sam for a Little Help - In 2007, the construction industry as a whole employed 11% of America’s workforce and helped create income and jobs for professionals in several industries supported by construction. New homes are a crucial component of our nation’s economy; homebuilders’ stability is vital for our recovery. Recently, national home builders and the National Association asked the government for more tax incentives for home buyers stating that the $7,500 tax incentive passed earlier this year did little to stimulate new home sales.

Auctions/Short Sales - Many widely recognized national home builders have resorted to auctioning off their inventories. D.R. Horton and Lennar are two of the largest builders who have listed properties at auction. If auctioning a home, the builder must consider the cost of construction. The National Association of Home Builders in Washington has stated that the average 3,340 square-foot home costs $403,925 to build. That is $219,015 for construction, $45,507 for undeveloped land, $65,969 to prepare the land, $11,258 for marketing expenses, and $19,499 in sales commission. As you can see, much of the expense is in the purchase and development of the land. For those builders who have purchased land prior to the 2005 peak of the housing boom, auctioning a single-family home at 30 - 40 percent lower than the asking price may not result in a loss for the builder. However, John Burns, of John Burns Real Estate Consulting in Irvine, California, warns that price declines of as little as 10 percent might wipe out any profits.

Offering Smaller Homes - California-based KB Home is one of the first large-scale home builders to launch new developments mainly comprised of smaller less expensive homes. The move is designed to compete with foreclosed home pricing. Jeffrey Mezger, KB’s Chief Executive Officer, stated that the company had to shift to smaller, cheaper houses in order to compete with foreclosed houses flooding markets such as the Inland Empire region of California. A year ago, KB’s main focus was on building 3,400 square-foot homes with a price tag of $450,000, to building 2,400 square-foot homes selling for $300,000. And while Mezger has said this worked for a time, the company has now shifted again towards even smaller, less expensive housing - 1,230 square-foot homes for $200,000.