What would it take to get home buyers off the fence?

Stuck with bulging inventories of homes, builders might offer packages of special financing, price concessions, lower down payments and perhaps application guarantees.
By: Kenneth R. Harney: LATimes.com
If you'd love to purchase a new house but you're sitting on the fence, what exactly would it take to get you to buy?
Mortgage rates lower than today's 5% range? Smaller down payments? Below-market value pricing? Special amenity packages? Or a big tax credit?

What's the magic mix that will get you motivated? Or is it unlikely you'll get off the fence as long as you're worried about the economy and further drops in real estate values?

Questions like these are at the core of the housing industry's problem: Builders are stuck with bulging inventories of homes - most of them priced lower than six months or a year ago - that are still not selling. Strategies to bring buyers back into the market dominated the recent weeklong annual convention of the National Assn. of Home Builders in Las Vegas. It was also the key subject of a consumer opinion survey conducted by the association's research subsidiary.

The study, conducted in early January, polled more than 700 self-described "on-the-fence" buyers. Asked why they hadn't yet committed to a purchase, 44% said they were holding out for lower mortgage rates, 41% said they weren't sure they could qualify for financing and 38% said they expected to see lower house prices (some had more than one reason, bringing the total above 100%).

Researchers asked what individual enticements - financial or otherwise - would motivate them most to get past their worries and buy.

The mortgage rate that consumers said would be most effective in persuading them to buy now: a 30-year loan with a fixed 3% interest rate. Whether by coincidence or design, one of the largest home builders for high-end buyers, Toll Bros. Inc., announced a 3.99%, 30-year, fixed-rate loan on new houses nationwide during the convention, which ended last Sunday.

A 30-year, fixed-rate loan at 3% was ranked twice as effective an enticement as a 3% loan fixed for five years, with an adjustment to 5.25%, fixed for the remainder of the loan term. Not surprisingly at a time when Fannie Mae and Freddie Mac require substantial down payments for the best interest rates, the study found that a zero-down option would be highly attractive to potential buyers - more than twice as effective as 10% down.

Guarantees by builders that loan applications will be accepted if buyers verify their income and have a "fair" credit score ranked high in the survey. Such a guarantee was rated far more effective than standard application procedures, where applicants can be rejected at the underwriting, appraisal review or other stages.

Price concessions also are compelling to would-be buyers. Most effective of all: a 10% discount below true market value - in other words, instant equity for the purchaser upfront.

Among other findings in the study that some builders found sobering: Their traditional approach of offering "incentive packages" of free upgrades and amenities may not be all that effective. The same may be true for "green" features - energy efficiency certifications and environmentally sensitive designs. If a new house comes with a green certification but costs $2,000 more than a standard model, this doesn't motivate shoppers to buy, researchers found. Even if the house costs the same as a standard house, that won't do the trick.

Bottom line: Look for builders to offer combination packages of special financing, price concessions, lower down payments and perhaps application guarantees.