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House Sales In Region Increasingly Called Off

James Cheeks and his wife and son, Malachi, are to move soon to a new home in Clinton. They were ready to void the contract last month, though.
James Cheeks and his wife and son, Malachi, are to move soon to a new home in Clinton. They were ready to void the contract last month, though. (By Bill O'leary -- The Washington Post)

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By Tomoeh Murakami Tse
Washington Post Staff Writer
Wednesday, October 18, 2006

NVR Inc., the region's largest home builder, said yesterday that four out of 10 of its new-home sales in the Washington area were canceled last quarter, making it the latest builder to report that more buyers are backing out of deals.

Around the Washington market, cancellation rates have tripled in the past year, to 17 percent, according to researchers at Hanley Wood Market Intelligence. In August alone, that meant about 250 cancellations. In its most recent earnings report, builder Toll Brothers Inc. said cancellations in the quarter that ended in July had more than doubled, to 18 percent nationally, while numerous builders said in interviews that their cancellations locally had increased.

Developers and builders say buyers are abandoning five-figure deposits on their future homes because they cannot sell their existing homes or did not sell them for nearly as much as they had counted on.

In an effort to reverse the trend, builders are helping buyers sell their old houses, delaying closing dates or offering favorable loan terms -- or even cash, beyond the free decks and plasma televisions they have been using to try to lure customers since the housing market began cooling a year ago.

For instance, both Pulte Homes Inc. and Toll Brothers here are offering "home staging" services -- that is, help for buyers who want to polish their existing homes to sell them. Pulte will give its customers up to $2,000 toward such services. Toll Brothers is also covering up to six months in mortgage payments for the new homes if buyers take out the loan through the company. The idea is to give buyers room to sell their old homes, a company representative said.

It is difficult to put a price tag on how much in incentives builders are giving to buyers with existing contracts because they tend to be worked out on a case-by-case basis. But both cancellations and builders' efforts to stop them have generally been more prevalent in markets where prices increased rapidly during the housing boom, including Washington.

With little success in selling their home and a settlement date rapidly approaching on a new $900,000 house in Clinton, Irica and James Cheeks last month decided to walk away from that dream house and their $60,000 deposit.

The Cheeks said that when they signed the contract to buy, in spring 2005, they had no idea the market would turn as quickly as it did. They decided on the house from Ryan Homes, part of Reston-based NVR, after they grew tired of losing bidding wars for resale homes, said Irica Cheeks, 33, a marketing manager for a nonprofit organization in the District.

They figured they would sell their house, also in Clinton, for about $725,000. That factored in the way the value of the house had been climbing. But now, after three months on the market, the house is priced at $670,000.

But after the couple notified the builder that they wanted to cancel the deal, the company agreed to push back the settlement date, the Cheekses said. The company also offered more money toward closing costs, which the couple used to reduce the interest rate on their new mortgage. The money will also cover several months of the loan, the Cheekses said. NVR, which sells thousands of homes each year in the region, declined to comment on this situation or on its earnings report yesterday. However, a 39 percent cancellation rate means hundreds of missed sales.

"Overall, the company was very understanding," said James Cheeks, 33, a systems engineer, who now plans to settle on the new 8,000-square-foot house next week. "I think they were more flexible than they wanted to be, but I think they had to at this point. They realized that they needed us as much as we needed them. And they started throwing in more incentives."

Some builders said they try not to offer additional incentives once a contract is signed because it would upset earlier buyers and prompt others to ask for more.

"We don't renegotiate contracts -- that's a dangerous slope to put yourself on," said David DeSantis, vice president of sales and marketing for PN Hoffman Inc. "If I do a deal like that for one customer, inevitably, other people get wind of it. We've certainly offered incentives on new contracts . . . and existing buyers come to us and say, 'Hey, I want those incentives.' Fortunately, we're able to point out to them that they bought at lower prices."

Instead, DeSantis said he tries to prevent cancellations by hosting parties and sending construction and neighborhood updates to keep buyers excited while they wait for the homes to be built. At the Alta condo near Thomas Circle in the District, where the builder has had some cancellations, DeSantis and his staff this month held an interior-design competition at its model units. Existing buyers, as well as new ones, were invited.

"In a way, it's more important for us to save existing contracts than get new ones," he said. "We don't want to have to go back and resell them in a market that is not as energetic as the one we sold them in."

Builders are trying to address what for some could be a bigger threat to the bottom line than slow sales.

At NVR, the jump in Washington-area cancellations -- to 39 percent in the three months that ended Sept. 30 from 19 percent a year earlier -- helped drag profit for the quarter down 32 percent from the previous year.

The cancellation rate in the Washington area was the company's steepest. Its national rate for the quarter was 27 percent.

When sales are slow, large builders can control the number of homes they have to sell by not building or by backing out of contracts to buy land. For example, NVR recorded an $81 million write-off of deposits on land in the third quarter.

However, cancellations are a big headache for builders because they have already spent the money to build houses and are responsible for carrying costs.

"In the builders' eyes, there's no excuse for having a house standing there," said Jonathan Dienhart, director of published research at Hanley Wood Market Intelligence, which follows the building business, in California. "They're doing everything they can to stop standing inventory from increasing any more."

"Standing inventory" in the Washington market had roughly tripled, to 3,600 homes, by August, the latest figures available, compared with a year earlier, according to Hanley Wood.

Deborah L. Rosenstein, vice president of sales and marketing management for Christopher Cos., a local builder, said her firm tries to work with every buyer, but she expressed frustration at some "outrageous" demands.

"Home buyers are really taking home builders to the carpet. . . . They just want to get out of contracts," she said. "Sometimes consumers are unrealistic. When the market was good, they weren't saying, 'You know, it's too low; let me give you another $50,000.' "


© 2006 The Washington Post Company

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