With Falling Prices, Home Builders are Seeing More Buyers Cancel Deals

Dec. 17--Throughout Inland Southern California and the state, home builders this year have more to worry about than selling homes. They are struggling to make the sales stick, with cancellation rates in some areas double what they were 12 months ago.

Builders and industry consultants say sales cancellations have been spurred by falling prices in new subdivisions, causing many buyers to get cold feet.

Darren Warren, Pulte Homes' vice president of operations for its North Inland Empire Division, said when Pulte opened a new project last February in Victorville, it benefited from the last of the boom-market euphoria, which helped to spark orders at a brisk pace of 40 to 50 homes a month.

But by June, those sales were quickly evaporating, with some buyers forfeiting deposits of $5,000 to $10,000 on houses they once yearned for. Warren said that by the end of November, Pulte had recorded about 220 closed sales at the new Victorville community and 90 cancellations.

"We sold those 90 homes twice and some of them three times," he said.

For years, buyers could count on the homes they were buying to gain value by the time they closed escrow. But suddenly the game changed. As the market softened, prices of homes in future phases were lower, not higher. Builders slashed prices and added an array of incentives, from free backyard landscaping to below-market financing, to clear a glut of completed, but unsold, homes.

Warren said since last winter, the combination of incentives and price reductions lowered the effective price of new homes in Victor Valley between 5 percent and 8 percent.

Investors who wanted a quick profit were among the first to bail out of purchase contracts, builders said. They were joined by those holding out for more sweeteners in what had become a buyers ' market. Buyers cancelled after being wooed by a better offer in another subdivision or decided to wait for prices to fall even lower.

Mike Dwight, senior vice president of Ontario-based Frontier Homes, said cancellations are running at about 40 percent, up from about 20 percent a year ago.

"People commit to a purchase and then say, 'Gee, I don't know. Everything we read says prices will go down even further,' " he said.

John R. Shumway, principal with The Concord Group, another advis er to builders, said consumers are "trying to chase the bottom, like an investor in a stock market. They don't want to go to the cocktail party and tell them they paid too much for their property. They want to go to the cocktail party and say how great a deal I got, and meantime, they will jump around the market trying to find it."

John Burns, president of John Burns Real Estate Consulting, said that in response to greater competition to get and keep buyers, builders have given their sales force more training and more leeway to negotiate.

At the beginning of the year, if buyers threatened to cancel, sales agents weren't negotiating to keep them, he said.

"Now sales agents have been given a budget to negotiate, and they are much more willing to make a deal."

Builders say they also keep in closer touch with buyers after the sale to point out the special features and construction quality in their prospective homes, as a way of getting them attached to their purchase.

Also behind the rise in cancellations has been the reluctance of prospective move-up buyers to lower their sights when they sell their existing homes in a declining market, builders say. Not only are their homes no longer appreciating, but it is taking longer to sell, real estate agents say. And because customers already own a home locally, it is easy for them to back out of a deal.

Bob Yoder, president of the Inland Empire Division of Shea Homes, said because Shea builds homes primarily for a move-up market, it has seen a 40 percent cancellation rate since March.

"We have to sell 10 homes to get six that stick," he said.