Homebuilder's Deal of the Century: Great Marketing Ploy or Really, Really Bad Decision?

Unless you've been living under a rock or on an island for the past eighteen months or so, you know that the U.S. housing market - for both new construction and resales - has been in serious trouble. Very few areas have been immune to the effect. Most notably those in the prime areas of California (San Diego, Hollywood, the hi tech headquarters areas, coastal/beach areas) have been the exception to this alarming trend, as have Boston and Greenwich, Connecticut.

While these pockets of real estate still command high prices, average $1,000,000, the rest of the country's home owners and builders are still feeling the heat. Overall, housing prices, both new construction and resales, have dropped between 5% to over 30%, percentages being based on specific areas of the country. (For instance, Michigan has one of the highest percentages of dropped values - and foreclosures - in the country, largely due to high numbers of jobs in the automotive industry going overseas or to our neighbors in Mexico.)

One of the biggest factor in this continuing (and nearly all economists agree that it will continue) sharp downward spike in the real estate market is due to the subprime lending scandal. I use the word "scandal" very seriously here. In brief, loans were made by mortgage companies, savings and loans and banks to buyers who, by normal sets of standards, did not qualify for a "regular" 15 or 25 year mortgage with a fixed interest rate. These buyers were bundled up neatly into variable rate, ARM mortgages in order to purchase homes in what was then a very hot market.

Four years ago, the market prices were at their peak; sales prices were in some cases 50% or even 100% or more than the price originally paid for a property. Sellers got greedy, buyers were desperate to buy (fearing that prices would go up even higher). Subprime lending was the tool that put underqualified buyers into homes that they really couldn't afford. At this point, the resulting mess consists of the highest number of housing foreclosures in decades, an ever-shrinking buyers' market, and sellers desperate for those buyers.

All of this has contributed to an overall sense of justifiable uncertainty throughout the U.S. economy. A significant number of subprime lenders have gone bankrupt or shelved a considerable portion of their staff in an effort to stay afloat. The situation remains so bleak that Congress has considered stepping up to alleviate the problem, which seems unlikely as of this writing. Bush is not interested in bailing out the real estate market and its numerous 'players'.

Among those the hardest hit (there are so many individuals and institutions who have suffered badly by the subprime lending mess) are the small to medium sized homebuilders. Many of them have found themselves in a scenario that goes like this. They purchased acres and acres of undeveloped land several years ago, at which time the price of the land was considerably overinflated in price. They are now stuck with the residentially-zoned land which was originally intended to be either a full-blown development or single family homes on large lots, the McMansions as we today call them.

One of these mid-sized home builders is the K. Hovnanian Company, based in northern New Jersey. Actually, there are several "Hovnanian" builders, now run by the sons of Armenian immigrant brothers who originally worked together but formed splinter homebuilding companies over the past three decades.

K. Hovnanian is one of the largest builders of new homes in the Delaware Valley (although they do build in a few other parts of the country as well). Their developments tend to be 'copies' of Toll Brothers' communities, the exception being twofold. Toll Brothers develops midend and highend communities, most of them centered around a community center and facilities specific only to that particular development. They also tend to use a total of three to five interior plans for their homes, most of them on quarter to half acre lots, with a variety of facades: brick, stucco, solid vinyl, usually a combination of these three.

Toll Brothers' homes may all be virtually alike on the inside, but Toll is careful in placing different exteriors amongst abutting properties. Hovnanian, on the other hand, tends to use mostly vinyl exteriors, smaller lots, fewer exterior and interior packages, and (allegedly, by home owners) significantly lower building standards. Their home prices, thus, are more affordable to the mass market than a Toll Brothers home would be - and that's the way it is intended.

One northeastern homebuilders company took an interesting tact. Having seen their stock price fall significantly over the past year, they are advising their stockholders to sell short. The intent of this particular tactic is to 'endear' themselves to a rapidly dwindly and really unhappy stockholder base in hopes that stockholders will stick with the company, at least in part. It remains to be seen how this approach works out; results should be available by the end of the next fiscal quarter.

K. Hovnanian, however, moved in a different direction entirely to move their huge inventory of existing new homes. In mid September of this year, they conducted a 72-hour nationwide "Deal of the Century" weekend, which was heavily publicized not only by the homebuilder but by the media as well. The plan was simple: during the "Deal of the Century" weekend, the prices of their homes, both new and still in the construction phase, were slashed anywhere from $75,000 (minimum) to $150,000 and slightly upwards.

A great deal of skepticism amongst real estate professionals (agents and brokers in particular) met this marketing ploy. (The rate and amount of an agent's commission on new home sales is generally quite lower than that paid on resales; dropping the price of a new home by these amounts certainly would result in very low commissions for agents.)

On Sunday, September 30th, K. Hovnanian "announced" the results of the "Deal of the Century". In a half-page color age, they offered a "Thank You, Delaware Valley!". "Thank you for proving that the housing market is alive and well. And thank you for proving again what we at K. Hovnanian have always believed...that home ownership is one of the smartest, strongest, safest investments a family can make.

Thanks to the more than one hundred homeowners in the Delaware Valley who purchased a home during our 72 hour sales event. And although the "Deal of the Century" is over, it's still a great time to get a sensational value on a beautiful new K. Hovnanian home" The ad goes on to list six new K. Hovnanian developments in southern New Jersey alone, plus two adults 55+ communities in northern New Jersey.

Why do I question the true merits of this highly unusual home marketing technique? I have two questions I'd like to raise.

1. The ad states that "one hundred families" in the Delaware Valley area 'purchased' homes during the "Deal". Translated, that means that ONLY one hundred individuals/families signed a contract for a Hovnanian home in all of the Delaware Valley. You see, the Delaware Valley area here is defined as the states of Delaware, Pennsylvania, and New Jersey: three of the most highly populated states in the country. Out of the millions of people residing in these three states, only one hundred families signed a contract of sale? My next question would be this: Out of the measly one hundred people who were pulled in by this marketing tactic, how many of them will actually QUALIFY for a mortgage? No statistics on that, folks. Let's be generous and give Hovnanian the benefit of the doubt here. Three-quarters of that number will qualify for a decent mortgage: that means that out of all of the millions of people in Pennsylvania, Delaware and New Jersey combined, 75 families bought a home. How much did it cost Hovnanian to advertise and set up this "Deal of the Century"? Did enough people nationwide actually qualify to purchase a new home to make it worthwhile? Out of the 75 homes sold in the Delaware Valley, what was the average price of the home sold? What was the amount of "discounts" that Hovnanian lost in order to have these people sign a sales contract? And I keep coming back to the real number of sales contracts from the "Deal" weekend that will actually lead to a home sale?

2. My second question is much simpler: Why on earth would ANYONE want to purchase a home from this particular homebuilder unless they were given the exact, same discount as those who purchased during the "Deal of the Century"? Would you sign a contract on a $350,000 K. Hovnanian home knowing that not quite a month earlier, someone else was able to work out a contract for $250,000, on the exact same house? if I couldn't be guaranteed the exact same terms and conditions as those offered during their 72 hour deal, I wouldn't even bother to consider looking at one of their new homes or communities. The implication is that people are so stupid that they would think "Gee, I should have gone to the 'Deal of the Century' weekend, but we just couldn't get everybody on board. I guess, in this - a buyer's market - that I'll just have to take my lumps and pay full price for a Hovnanian house now. Wow, what a bummer!"

About a mile away from my home is a K. Hovnanian development. I'd like to call it 'new', but in all honesty, I can't. It was in the works for about six years before they finally broke ground on a mixture of condominium, townhouse and single family homes. Work started first on the lower-end houses, which are bunched together like sheep in a pen. When I sit idly at the traffic light right by this development, I can see from my window the siding peeling from more than a few townhouses. I can see the particularly small, poorly laid out streets there. (The passage width, having driven there, is one and one half car width's wide.) Once they broke ground, the cheapest houses sold fairly well - but this was over two years ago. Since that time, they are still building, starting on the single family homes. But there are still a fairly high number of acres that are barren and devoid of trees and wildlife. It really is an eyesore, especially when I remember all of the beautiful and heavily-wooded area it once was. But to each their own, I guess. If buying one of these houses is the only way that a family can get a home of their own, more power to them, who am I to mourn the loss of the trees, deer, birds and shrubs, and I wish them - sincerely, from the bottom of my heart - the very best with their new homes. In this market, they need all the help that they can get...