Bargain Basements

To lure buyers, builders try all sorts of come-ons

If you're thinking of buying a townhouse in the Los Angeles suburb of Alhambra, David Kao would like to talk to you. The salesman for Olson Co. still has 12 units in the Gateway Walk development to sell, even though they've been on the market since February.

He recently began throwing in free kitchen upgrades, which include stainless steel appliances and maple cabinets. Kao is selling a two-bedroom, two-bath townhouse for $499,000, about $50,000 below what the company was getting for similar units last year. He'll even pay the homeowners' association fees for six months, roughly $1,800, or include a free 42-inch plasma-screen TV. "It has been a little slow," Kao says. "Everyone wants a little more."

Facing their toughest year in more than a decade, homebuilders are coming up with a blizzard of incentives to help move houses. They're offering free swimming pools, finished basements, trips to Hawaii, and even luxury cars. Centex Corp. (CTX ) has been cutting prices as much as $100,000 in Northern California. "The new housing industry is taking a page from the automakers," says RL Brown, a Phoenix Real Estate consultant. "It's a model clearance sale."

Incentives are most prevalent in cities such as Las Vegas, Miami, Phoenix, and Sacramento that have enjoyed the sharpest price appreciation in prior years. The most common is an "interest rate buy-down" in which builders subsidize the early years of a loan. Shea Homes in Walnut, Calif., for instance, offers a mortgage fixed at 3.99% for five years, about two percentage points below market rates.

Luring new buyers isn't the only reason builders have embraced giveaways. They're also using incentives to keep existing customers from canceling contracts. It can take six months to deliver a finished house, and builders have traditionally accepted downpayments as low as $2,000. As home prices began to cool, speculators hoping to flip their houses simply cut their losses and ran. To keep customers from bailing out, KB Home (KBH ) is offering rebates of as much as $30,000 on homes they've already sold.

The incentives appear to be working. While still down 5.9% year-over-year, new-home sales were running at a slightly higher rate in May than in April. Still, David F. Seiders, chief economist for the National Association of Home Builders, expects new-home sales to fall about 11%, to 1.14 million, for the year, suggesting things may get worse before they get better. "It's a whole new sales environment out there," says Builder magazine editor Boyce Thompson. As the automakers have learned, once you start offering incentives, it's hard to stop.

By Christopher Palmeri

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