What Does It Take to Get Buyers Off the Fence?

If you would 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 percent range? Smaller down payments? Below-market value pricing? Special amenity packages? Or a big tax credit?

Or is it unlikely you will make a move as long as you're worried about the economy and further drops in real estate values?

Questions such as these are at the core of the housing industry's predicament: 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 annual convention of the National Association of Home Builders in Las Vegas. It was also the subject of an eye-opening new consumer opinion survey by the association's research subsidiary.

The study, conducted in early January, polled more than 700 self-described "on-the-fence" buyers, segmented to represent people in all areas of the country at varying price levels. Asked why they hadn't committed to a purchase, 44 percent said they're holding out for lower mortgage rates, 41 percent said they weren't sure they could qualify for financing, and 38 percent said they expect to see lower house prices.

Concerns about falling property values were most prevalent among respondents in the West, while buyers in the Northeast and Midwest were more likely to be waiting for lower interest rates. Buyers in the South tended to be more concerned about their ability to qualify for a new mortgage.

Researchers asked participants what individual enticements -- financial or otherwise -- would motivate them most to get past their worries and buy. Some of the results were surprising to builders at the convention. A few of the findings even appeared to conflict with the builder association's policy positions.

For example, although the association is vigorously lobbying the Obama administration and Congress for a 10 percent federal tax credit with a cap of $22,000 in the most expensive markets, the survey results suggested that a tax credit alone is not sufficient to motivate buyers to sign contracts.

The study examined the effectiveness of a credit roughly the size the association is seeking. It ranked sixth on a list of 10 features that would pull buyers off the fence -- well behind mortgage and price concessions.

The mortgage rate that consumers said would be most effective in convincing them to buy now: a 30-year loan with a fixed 3 percent interest rate.

Such a loan was ranked twice as effective an enticement than a 3 percent loan fixed for five years, with an adjustment to 5.25 percent, 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 percent 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 six times more effective than standard application procedures, in which 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 percent discount below true market value. In other words, instant equity for the purchaser upfront.

Among other findings that some builders found sobering: Their traditional approach of offering incentive packages of free upgrades and amenities might not be all that effective. The same could be true for heavily marketed green features such as energy efficiency certifications and environmentally sensitive designs. New houses that come with a green certification but cost $2,000 more than a standard model don't motivate shoppers to buy, researchers found. Even if the house is green-certified and costs the same as a standard house, that alone 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. They'll still push for tax credits on Capitol Hill, but financing concessions appear to have more clout with their potential customers.

Kenneth R. Harney's e-mail address is KenHarney@earthlink.net.