Tax-Credit Hangover: Here Come The Builder Price Cuts

Builders, who ramped up speculative construction to take advantage of the federal home buyer tax credit, won't know until the credit ends this month how many extra homes they have. But they're already cutting prices and offering deals to move inventory.

Beazer Homes USA (BZH), is offering up to $50,000 in free design options on some houses. Lennar Corp. (LEN), which already slashed more than 15% off of some Las Vegas inventory, is advertising a 3.99% mortgage rate "fixed for life." DR Horton (DHI) touts "The Great American Home Sale" on June 12 and 13. The sector giant provided no further detail.

They "want to keep the momentum going," said Jody Kahn, a vice president with John Burns Real Estate Consulting. "Traffic and sales fell off pretty dramatically in May."

Indeed, a national survey of real estate agents by Credit Suisse shows that traffic at homes for sale fell in May to its lowest level since the financial crisis of late 2008. The decline from April to May was the biggest-one month fall since the survey started in January 2005.

Plus, the current discounts threaten to whittle the gross margin and eat into revenue, hurting builders just as they're set to turn a profit. The offers also threaten to prolong the housing downturn: Price stability is key to real-estate recovery, while price declines make it more likely that contracted buyers will abandon their deal.

Builders have long struggled to find the right number of speculative homes, or units built without a signed buyer. Most like to keep a few around to satisfy last-minute job transfers and people who don't want to wait for a multi-month construction period.

When the housing bubble popped, builders found themselves stuck with a glut of unsold homes too big and too pricey for buyers' downsized preferences. The humbled industry scaled back on construction and switched to a build-to-order strategy.

But some builders didn't have enough inventory to meet buying demand during the first tax credit that expired Nov. 30. When the government extended and expanded the credit until April 30---with a closing deadline of June 30--builders got to work. Even KB Home (KBH), which had been among the most vocal proponents of eschewing spec construction, put up units in some markets and communities.

While it is unclear precisely how many spec houses went up in recent months, no one expects a replay of the housing crash. This time around, the builders overbuilt "significantly less severely," said David Goldberg, a home builder analyst with UBS. "There's a lot less standing inventory than what people assume."

-By Dawn Wotapka, Dow Jones Newswires; 212-416-2193; dawn.wotapka@dowjones.com

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