Are New Home Builders Skewing the Numbers?

Builders will do anything to make sure their homes sell. They will do ALMOST anything to make sure they sell at full retail "value". Why is that? It's because the largest builders, those who are traded publicly, report sales figures based on the contract price of the home. They report these numbers at the time the contract is signed, not when the home is sold and the loan is closed. They don't have to report to what lengths they had to go in order to get that contract signed.

Therefore, a builder can offer such things at great vacations, or new cars, in order to entice a buyer into signing a contract to buy. These incentives allow the builder to report a "full contract price sale" indicating a strength in the numbers that is not reflecting the cost of the incentives offered. This makes the builder appear to have sold the home at a healthy full price.

Which makes the builder appear healthier than they might be in reality. It also skews the housing numbers as reported in the media.

For example - in today's news:

From Wall Street and Washington: “Sales of new homes fell 3.2% in October to a seasonally adjusted annual rate of 1.004 million, the Commerce Department estimated Wednesday. New-home sales are now down 25.4% in the past year. Measured out over the first 10 months of 2006 compared with the same period in 2005, sales are down 17.9%.”

“Median sales prices were up 2% in the past 12 months to $248,500. Home builders have piled on incentives, including offering free vacations and new cars, to sell homes and work off inventories. Such incentives are not subtracted from the sales price reported to the government.”

Therefore, the housing numbers may not be something that should carry as much specific weight in nationally reported economic indicators.

What is the harm here then? It's this: When a home is built and sold in a subdivision by a builder, they finish and move on. They leave behind a group of homeowners who drive new Jeeps or even a new Mercedes (or some other DRASTICALLY depreciating asset - albeit one for which most Americans are HORNY), but whose homes won't appraise for what they bought them for.

Appraisers must take into account all sales incentives that were used in the original sale of a home. For example, if a home was contracted for $400,000, it is reported on the top line of an appraisal form. Any incentives or concessions used are then mentioned on the next line down and those incentives are SUBTRACTED from the home's current value, or its value as compared to the other homes in the neighborhood. A home that was purchased for (and has a mortgage for) $400,000, but had a $30,000 incentive on it, is now appraising for $370,000, all other things being equal.

This leaves a group of home owners who are most likely upside down in their homes. 99% of them didn't put any money down either, making the situation even more dire for them.

I have heard reports from places like Las Vegas, where there are vast subdivisions that have a 70% vacancy rate. Only three of 10 homes actually have people living in them.

Try getting a good appraised value in a neighborhood like that.

But the builder is apparently more healthy as a result of this wrangling, and they effectively shore up their share prices as a result, thus achieving their overall goals as a company. Lest you think a builder actually cares about you, the buyer.

You are simply a commodity.