Ever wonder why builders increase prices several times while building a new subdivision? The primary reason is not that they misjudged their costs or the proper price for their inventory, but to create a sense of urgency on the part of potential buyers. Builders believe invoking this sense of panic in buyers will make them more inclined to “buy now.”

Builder price increases usually occur at five different stages of the construction process:

  • the first increase occurs when ground is broken for the project;
  • the second increase occurs when streets have been laid;
  • the third increase occurs after the model home is constructed;
  • the fourth increase occurs with the grand opening of the subdivision; and
  • the fifth increase, usually the largest, occurs either at the end of the builder’s fiscal year or at the end of the calendar year.

If builders are experiencing high sales volumes, additional increases will occur every month —sometimes every week. However, if builders are experiencing low sales volumes, rather than cut prices, builders simply resort to releasing fewer homes for sale.

first tuesday take: With the continued onslaught of short sales and foreclosures hitting the market and the expiration of the first-time homebuyer tax credits, California’s languishing real estate market prevents builders from exploiting this aggressive marketing strategy. Thus, builders simply aren’t able to employ these pricing tactics while the inventory of new and existing homes remains uncharacteristically high (and will stay elevated until consumer confidence and jobs return to the economy). [For more information on home builders and the construction industry, see the August 2009 first tuesday article, The construction industry is a hurdle blocking recovery.]

A practical tip for agents to pass on to prospective buyers: property prices and terms are not set in stone, regardless of builder pricing activity or the multiple listing service (MLS) listing prices. A practical real estate agent will advise his buyers to negotiate any terms they wish when submitting offers on properties.

With interest rates at record lows, agents are helping tenants who are potential homebuyers find their starter homes and are negotiating to achieve the best terms when making offers, but it is not often on the more pricy builder inventory. [For more information on new housing, see the February 2010 first tuesday article, First-time home buyers and new housing.]

RE: “Builder’s pricing strategies are aimed at creating sales urgency” from the Los Angeles Times