Back to the mailbox. These are the types of questions I am getting. Here is what I have to say:
We are thinking about buying a new construction home. In the Sunday Paper the builders seem to be giving away the world. What is the deal?
New home communities that have been around more than a year or two have a very difficult balance. The people that have already bought, might have bought at a price that is higher than the current market will bear. But, the builder would probably be committing financial suicide if they were to go back to those previous buyers and start giving away money. At the same time, imagine the impact if the builder were to drop prices by 20% for the community. The previous buyers could be devastated... and angry.
The way the builders try to balance this act is to give away inducements. Instead of cutting the price (which would be reflected in the tax records), they give away upgrades... or TVs... or cars. The thought behind this is that for the purposes of future valuation, as agents and appraisers view the tax records for prices paid by other owners, those prices will be higher, maintaining value for all of the residents.
Here is the backlash. Imagine a buyer moving into a property that they paid $300,000 for in 2008. The paid 5% down ($15,000). When they bought the house, they got a flat screen TV ($2,000) and a Mini ($28,000). In effect, they received a discount of $30,000 (10%). Their mortgage is $285,000, but their real equity is only $270,000. Over the long haul, it won't be an issue. The value will come up, and the mortgage payoff will go down. But, if that buyer had to sell right away, they could be in a lot of trouble.
The challenges. Here is the big problem. The house has to appraise for the loan amount. The bank shouldn't care if the buyer is getting a Mini and a big screen. Those aren't connected with the property in the future and are not subject to the loan.
At this point, we could wander off into the causes for many people to walk away from their homes and allow the banks to foreclose... the value and the mortgage are not in line with each other. This isn't a big issue in Gwinnett County, or most of the Atlanta market, but is in markets that have seen larger drops in market value.
The bottom line is that the incentives are nice, but the value is the primary consideration. Also keep in mind your personal time frame. If you are going to stay put for a while (vaporously defined as more than 7-10 years), the inducements might be nice. If you might be transferred, or like to move more frequently... probably not so good.
