Home builders get creative to make sales
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The Twin Cities suburb called New Hope may have a name that rings with optimism, but there are plenty of things around town that are crimping the hopes of builder Peter Long of Kingsman Construction.
Perched at the wheel of his white pick-up truck, Long gives a tour of the area.
He built a total of 80 houses here and in neighboring suburbs back in 2004. Last year, that number plummeted to just three new homes.
Long slows down in front of a two story home, which, he says, is key to understanding why his business is suffering these days.
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"Coming up on your right here, this house was vacated by its owner and went through the foreclosure process," Long says.
After the owners left, a pipe burst inside and flooded the place. Long says that's driving the price of the home down and creating more competition for his 4 new homes sitting on the market.
Buyers are hungry for deals like this one.
"If someone can come in and purchase that at a discount, hire a contractor to fix it up, they are still able to buy it for less today than they would a new construction," Long says.
What's more, some would-be buyers can't qualify for credit to buy Long's homes, given the recent chill in the credit industry.
So, Long is trying to find ways to keep his business running. He pulls up to another home in New Hope, a rambler he built in 2007 and hasn't been able to sell.
"What we've done with this particular house is we have a renter in there to help make our payments. That renter then is working on some credit situations that they have so that they can eventually purchase in the fall of 2008," Long explains.
And would he have considered this option in the past?
"We would never have put a renter in a new construction house for the past seven years," Long admits. "But today you're doing that. Guys are just trying to manage their cash flow."
When Long does eventually sell to the renter, he'll drop the price from $319,000 to about $280,000.
The Commerce Department says it's seeing the steepest drop in new home sales on record. Between 2006 and 2007, the number of national new home sales fell 26 percent to 774,000 units.
As builders reckon with those historic figures, many, like Peter Long, are trying out some creative ways to move their inventory, according to Joshua Fowler of the Builders Association of the Twin Cities.
"Some of them have been giving pretty substantial discounts on the house, selling some of them at a loss," Fowler says. "That's not the norm, but (I've been hearing about) all kinds of incentive packages. I've heard about giving trips away and those kinds of things, just to get people to come to the door."
Fowler says pricier homes going for $500,000 plus are actually selling fairly well without all the marketing gymnastics, but some builders tell a different story.
According to Bill Johnson who runs MW Johnson Construction, it's not the high-end homes that are moving.
"Actually, we're selling more in the lower price range, (to) first time buyers," he says.
MW Johnson Construction, the largest privately held builder in Minnesota, builds about 300 houses a year ranging in price from $150,000 to several million dollars.
Johnson says he's trying to weather the housing slump without too many sales gimmicks, though he did put some of his inventory up for sale at a giant auction in the Twin Cities a couple weeks ago, in which several new home builders participated.
The company unloaded 20 units at the auction, but he still has 80 units sitting.
Johnson says he's not demoralized, which is hard to figure, since his profits have pretty much dried up and he's laid off 30 workers.
He seems intent on presenting his loss as a buyer's win.
"We're not making any money but that's okay, because in the big picture, we'll be all right," Johnson says. "If we can get people into homes and start building wealth, that's good for all of us."
Johnson says it's also important to note that even if he cuts prices on the homes he's selling, he's getting discounts from all his suppliers and contractors, who are also slashing prices to get more business.
But builder Peter Long is somewhat sanguine about the situation. He's not abandoning his new home construction business, but he is branching out.
"We've had to get into the remodelling business and addition business," he explains. "We're still going to do some new construction, but we're going to have a mixed bag. We're not going to be solely dependent on one thing."
Even if the housing market does turn around in a year or two, Long won't return to specializing in new home construction. He says it's a dog that won't bite him twice.
