Builders offer handsome upgrades to lure buyers in a slowing market

Just flipping through the pages of a local real estate section and you'll see the enticing ads from home builders offering special incentives such as free landscaping, closing costs or appliances.

It's not a new phenomenon. Builders always provide more buyer incentives as a year closes and they need to get rid of their speculation homes and unsold inventory. Another factor this year, though, is that the new home construction market is cooling after record-setting sales.

Promotional efforts are increasing nationwide as demand in the real estate market falls. Though metro Detroit never experienced the housing booms that California, Florida and the Northeast had with their skyrocketing home appreciation in recent years, home construction has played a large role in keeping the economy afloat here. According to the Southeast Michigan Council of Governments (SEMCOG), 25,362 new residential building permits were issued in the region last year.

"When you see record-high sales, you expect the market to pull back a little," said Darshan Grewal, president of Singh Homes of West Bloomfield. "And here in Michigan we're seeing the automotive job sector deteriorating, something that is causing a big concern for potential home buyers."

Such low consumer confidence has single-family home builders adjusting their market expectations downward, according to the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) released Wednesday. The index gauges builder perceptions of current single-family home sales and sales expectations for the next six months as either good, fair or poor. The survey also asks builders to rate traffic of prospective buyers as either high to very high, average, or low to very low. Scores are used to calculate the index; any number over 50 indicates more builders believe sales conditions are good as opposed to poor.

Though builders nationwide still have a favorable perspective at 60, the news isn't as good in the Midwest. The HMI for Midwest builders dropped seven points, from 45 to 38.

Singh Homes is one of the luckier ones. They expect to set another record in 2005 and close the year with about $70 million in sales, a 25% increase from last year.

Still, it's the lure of long-term savings that builders hope will persuade buyers they can and should purchase now and not worry later -- especially as interest rates creep up and make it more expensive to buy a high-end home.

In one recent luscious deal, Pulte Homes, based in Bloomfield Hills, advertised a free gas fireplace, free main-level hardwood floors, free upgraded cabinets and a free washer and dryer at one upscale development in Maryland. Also, it offered a choice of free heat for six months, a free 42-inch plasma television set or free window coverings worth $5,000.

Still, buyers should be aware that in such high-end homes, upgrades like hardwood floors, fireplaces, cabinets and appliances are standard, and included in the price. The true buyer incentives in this deal were the heat, television and window treatments.

Most incentives are intended to maximize their value with a specific buyer segment, said Melanie Hearsch, Pulte's corporate communications manager.

"For example, a first-time buyer might be more motivated by incentives tied to the mortgage or base cost of the house, where a move-up buyer might be more excited by better pricing on options and upgrades such as landscaping packages," Hearsch said in an e-mail to the Free Press.

"At our Liberty Park townhome community in Novi, a popular incentive among our first-time buyer demographic is a complete move-in package offering a washer and dryer, other select appliances, blinds and window treatments -- items that will save the new homeowner from having to spend that money out-of-pocket after move-in."

A September survey of 488 single-family home builders by the National Association of Home Builders found that 58% were offering sales incentives, excluding price, compared with 51% six months earlier.

Dominic Moceri, president of the Building Industry Association of Southeastern Michigan, said the fourth quarter always inspires builders to offer incentives. Smaller upgrades might be light fixtures and carpet, he said.

"Builders also reward people putting down larger down payments by taking cash off the top of the purchase price or offering additional upgrade incentives," Moceri said. "Builders offer year-end incentives to close out inventory and rev up building activities for the start of the new year."

Home buyers might have to ask whether a builder is promoting any special deals, as not all builders publicize the offerings. And builders may be more responsive to negotiations if you request home upgrades as opposed to a price reduction.