Sustainable Land Development Today - February 2008 - (Page 33) FINANCE Discounting Themselves Into Disaster Short term gains to boost home sales spell long term problem for the market, where there are better ways By Michael D. Pattinson America’s homebuilders traditionally look forward to a new year. First quarter purchases usually produce the majority of a homebuilder’s annual sales as homebuyers turn New Year’s resolutions into new-home reality. But this year is likely to be different. This year, homebuilders are holding back releases, scaling back expectations and moth-balling communities. There are no new-year advertising blitzes or model grand openings. This year, builders are bracing themselves for another 12 months of sales torture, and they only have themselves to blame. As new-home prices reached their inevitable peak in the fall of 2005, homebuilders had an opportunity to demonstrate their marketing and market-management skills. Get it right and the soft landing they all hoped for could be achieved. Get it wrong and the industry faces disaster. We now know the end result – the hardest landing in living memory – and some say, the worst housing market since the Great Depression. So where did America’s homebuilding industry go wrong? In a word – discounts. America’s largest homebuilders all believed that the answer to slowing sales rates and price resistance lay not in creative marketing, but in price discounts. And so they began a process of undermining the value of a family’s most precious asset. America’s homebuilders use sophisticated marketing techniques, lavishly furnished and decorated models, luxurious landscaping, audio visual presentations, websites and E-blasts, television and radio commercials, magazine and print advertisements, sign programs and creative financing. All of them were thrown out the window when the slow-down came in favor of discounting, a method that doomed them to failure. Homebuilders forgot that the $50,000 discount they offered today would be matched or ex- they have just put into their dream home. America’s consumers are not in the habit of borrowing money to buy a depreciating asset. Who wants to own a product that isn’t worth the loan on it? The French retailer, Louis Vuitton never discounts the price of its products - never. The company makes handbags costing up to $4,000 each and has a waiting list for them. They put their faith in superior quality and design and they make sure that supply does not exceed demand. There are other companies that avoid discounts at all cost, preferring to dispose of excess merchandise rather than undermine the value of their brand by selling products at discounts. ceeded by a competitor tomorrow. They ignored the fact that as their discounts grew, consumer confidence would fade and disappear. Today, builders complain that they have traffic to their model homes from well-qualified prospects, many with the need and ability to buy, but they are keeping their checkbooks in their pockets and refusing to write the deal. Builders complain that there is no consumer confidence. No kidding! Consumers know that a builder, offering them a $50,000 discount today, could offer a $75,000 or a $100,000 discount on the same house to another buyer tomorrow and wipe out the equity After Shock Resale prices have fallen as new homes have undercut established market prices. Land prices have suffered appreciably as bank appraisers calculate the impact of $50,000 to $100,000 discounts on new homes. New land values have forced builders to take write-offs that we now call “impairments” so as to disguise the impact of the discounting folly. These impairments have led to spectacular losses reported by America’s large public homebuilders. Recently, KB Homes reported a $772 million quarterly loss; Lennar reported two quarters with losses exceeding $500 www.SLDTonline.com 33 http://www.SLDTonline.com
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