Builders offer incentives to entice new home buyers

Asbury Park Press on 09/15/06

BY MICHAEL L. DIAMOND
BUSINESS WRITER

Melissa and Frank Picciolo had already made a deposit this summer on a new Manalapan home built by Hovnanian Enterprises Inc., when they decided to press their luck.

They wanted a finished basement. They wanted upgraded kitchen cabinets. And they didn’t hesitate to ask.

"Within two weeks after we put a deposit down, we went back and forth; could we include this and that? They would go back to their administration, come back and say, "Yes we can do that,’ " said Melissa Picciolo, 30.

Shore-area home builders are struggling with a downturn in the residential real estate market for the first time in nearly a decade. Builders are holding the line on price increases, but they’re offering incentives and slowing their production.

It has created opportunities for buyers such as the Picciolos, but it has also created financial difficulties for builders.

"With the economy the way it is, we’re ready to negotiate, which is something home builders haven’t had to do a lot of" in recent years, said Douglas Fenichel, spokesman for Red Bank-based Hovnanian. The company, New Jersey’s largest home builder, has seen its stock price fall nearly 50 percent during the first eight months of the year.

Home builders are slowing down nationwide. New home sales in July were down 21.6 percent from the same month a year ago, according to the U.S. Commerce Department.

New Jersey’s decline hasn’t been as pronounced, but the state isn’t immune from the nation’s real estate troubles.

"We’ve come off a little bit from last year, but the market here is not slowing anywhere near as rapidly as in other areas of the country," said Patrick J. O’Keefe, chief executive officer of the New Jersey Builders Association. "We weren’t at the white-hot levels that were prevalent elsewhere."

What’s the problem? O’Keefe and other experts said it’s a combination of rising interest rates and workers’ wages that aren’t keeping up with home prices.

Mortgage rates, which were at historic lows, essentially allowing home buyers to afford more expensive homes, have been rising for several months. The average 30-year fixed-rate mortgage in New Jersey was 6.5 percent for the second quarter, compared with 5.79 percent for the same quarter a year ago, according to the National Association of Realtors.

Moreover, homes are getting less affordable. New Jersey consumers who want to buy a median priced home, which was $373,900 during the second quarter, need to make $90,768 a year. The median family income, however, was $81,309, according to the association.

Economists have said much of New Jersey’s job growth this decade has come from lower-paying jobs instead of the technology, telecommunications and pharmaceutical sectors that once were synonymous with the state.

"There is a very cautious eye being cast on the horizon, not solely because of cyclical reasons, but because New Jersey’s competitive position is weak and getting weaker relative to the rest of the country," O’Keefe said. "An economy that is losing its economic momentum is one where the housing sector is in danger of losing customers."

Home builders have been hurt this year. Hovnanian in August lowered its third-quarter earnings expectations to $1.10 to $1.20 a share from its previous guidance of $1.40 to $1.50 a share, in part because of a slower sales pace and more pronounced use of concessions and incentives.

Meanwhile, Toll Brothers Inc., a Horsham, Pa.-based company that regularly builds in New Jersey, said its net income of $174.6 million, or $1.07 a share, for the third quarter, was down from net income of $215.5 million, or $1.27 a share, the same quarter a year ago. Its stock is down about 30 percent this year.

"The continuing malaise in the housing market, we believe, is the result of an oversupply of inventory and a decline in (consumers’) confidence," said Robert I. Toll, the company’s chairman and chief executive officer.

O’Keefe said home builders don’t want to be stuck with inventory, which is an expensive scenario since they would have to pay for property taxes and maintenance. So they have offered more incentives, such as premium lots at no extra charge, finished basements and slick kitchen appliances.

It’s a scenario that puts buyers in a stronger position. The Picciolos have a 2-year-old daughter, Victoria, and they are outgrowing their Old Bridge home. So they signed a contract to buy a home at Hovnanian’s Meadow Creek development in Manalapan that will give them nearly twice as much room, Melissa Picciolo said.

She said they considered the declining state of the real estate industry before they bought the house, but jumped in anyway; they think they can sell their current house relatively easily and mortgage rates are still considered low.

"It worked out really nicely," Picciolo said. "I was excited about the basement for my husband and daughter and the kitchen for me. There was something for all three of us."

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