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Economy

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Builders lure buyers with loan incentives

Companies hope to avoid price cuts as rates increase

Greg and Julie Corbin were shopping for a home in May when interest rates spiked and shrank their budget. Lennar Corp. persuaded them to pay full price anyway.

The Miami-based builder volunteered to cover their loan costs and cut half a percentage point off their interest rate if the couple used its in-house lending unit, Universal American Mortgage Co. The Corbins bought their four-bedroom home in a suburb of Tampa, Fla., last month for $213,000, about 50 percent more than the area’s median price, with loan perks they estimated were worth at least $10,000.

“You just can’t beat a deal like that,” said Greg Corbin, 40, taking a break from moving boxes into his new house last week. “It made our decision easy.”

Builders including Lennar and PulteGroup Inc. that typically throw in concessions such as kitchen upgrades are also leaning on their financing units to boost orders as rising mortgage rates sap customer buying power. Those incentives may become more widespread as housing companies seek to avoid cutting prices after the biggest sales drop in three years and a 27 percent stock decline from a May peak.

“They’re almost certainly going to have to report a drop in home sales for the quarter, and their shares have taken a pounding in the last few months because of that,” Christopher Low, chief economist at FTN Financial in New York, said recently. “They have a sense of urgency, because if they have to report prices fell, too, it will be a disaster.”

The number of contracts signed to sell new homes dropped 13 percent in July from June, according to the Commerce Department. The median price gained at an 8.3 percent pace from a year earlier, slower than the prior month’s 11 percent increase and less than half of April’s 18 percent jump.

Homebuilders had been some of the biggest winners from the Federal Reserve’s efforts to push down borrowing costs to record lows, with a Bloomberg stock index of 14 companies more than doubling in 2012. The gauge has slumped as 30-year mortgage rates jumped from a near-record low of 3.35 percent in May to 4.51 percent last week, according to Freddie Mac.

This year’s biggest losers have been M/I Homes Inc., Hovnanian Enterprises Inc. and MDC Holdings Inc., which sell to first-time buyers who have the most difficulty qualifying for home loans.

“We got very spoiled by 3.5 percent mortgage rates,” said Ara Hovnanian, chief executive of New Jersey’s biggest homebuilder. July’s decline in new-home contracts stemmed from buyers taking “a little breather,” he said.

Publicly traded builders sell about one in four new U.S. homes and have more access to capital and flexibility to offer closing cost incentives than smaller competitors, said Stephen Kim, a Barclays analyst who downgraded his outlook for builders in July.

“The next shoe to drop is going to be incentives,” Kim said. “That’s about the farthest thing from massive price appreciation as you can get.”

The median price of a new single-family home in the U.S. fell in the last three months to $257,200 after hitting an all-time high of $279,300 in April.

That peak was 6.4 percent higher than the former record in 2007 and is up from $204,200 during the depths of the housing crisis in October 2010.

Prices bounced back faster than volume. July’s annualized new-home sales pace of 394,000 was 72 percent below mid-2005’s record 1.39 million, according to Commerce Department data. Existing single-family homes sold at a pace of 4.76 million in July, 25 percent below the all-time high in September 2005.

Lennar’s incentives averaged $20,200 per home in the quarter ended May 31, down by $9,600 from a year earlier, Chief Financial Officer Bruce Gross said on a June conference call. Interest rates were falling during most of that period.

PulteGroup, the largest U.S. builder by market value, this month was offering as much as $3,500 in closing-cost assistance to buyers at communities in Las Vegas, Jacksonville, Fla., and Tigard, Ore., who finance through Pulte Mortgage LLC, according to its website.

A spokesman said this isn’t a new program; PulteGroup has offered assistance with closing costs for years.

“For the consumer, using Pulte Mortgage helps create a simpler buying experience where they can be more confident the mortgage will be ready when home construction is complete,” Jim Zeumer, a spokesman for the Bloomfield Hills, Mich.-based builder, said in an email.

“Few things are more frustrating to the homebuyer than having to push back a closing by a few days or weeks because the outside lender wasn’t ready with the mortgage,” he said.

Incentives offered by homebuilders may include paying down interest rates, waiving closing costs, and prepaying mortgage insurance.

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