Home Buyer's Risk, Developer's Burden?

June 2, 2008— -- New incentives by developers are luring a few buyers off that fence and back into the market, causing sales to creep up ever so slightly -- by 3 percent.

What's so surprising is just how genuinely happy these new homeowners are at the chance to get into a housing market that has offered more chills than thrills.

New home buyer Lynn Herendeen of Livermore, Calif., can hardly contain her excitement over her new three-bedroom, two-bath townhouse.

"This is our first home. It has more than one bedroom, more than one bathroom and a garage, so we are so excited," Herendeen said.

She and her husband decided to plunge into the unpredictable housing market when they heard about a unique incentive program. Their builder guarantees the price of their home for two years. If the Herendeens sell within that period and cannot get at least what they paid for it, the developer will make up the difference in cash.

"When we came in to really talk about it, they told us about this price guarantee and it was at that point we realized, 'Well, why bother waiting? It's such a good price and it's a good deal, let's go for it,'" Herendeen said.

Many potential homeowners are afraid to jump into a dropping housing market, wondering if prices have hit rock bottom. So, some developers have come up with a variety of incentives to get buyers back.

"It is [a risk for developers], but we believe it's basically been a three-year recession for real estate, and we don't think there's another two years in it," Signature Properties development company president Mike Ghielmetti said. "But we're willing to risk that instead of just telling everyone else on the street, 'Hey, it's your risk.' We're saying we'll share it with you."

Misti and Steve Fettig didn't find a two-year guarantee, but did get a promise that if their new home drops in value before it's completed in six months, they'll only have to pay the lower price.

"After looking around a while, we really like the area, and as far as incentives go, they do have a price protection program here -- in case the prices do go down, we'll actually get the lower price -- we won't be out," Steve Fettig said.

Fettig said he believes it is a good time for first-time buyers in the market.

"The rates are low, there's a lot of incentives, there's a lot of inventory, so it is a buyer's market." he said.

Another developer uses a not-so-subtle ad that guarantees home prices. It begins with big bold letters declaring, "The housing market sucks." The ad then goes on to explain that this particular developer guarantees home prices, not just until the house is built, but for as long as the developer is selling new homes in the area. The ad ends with the proverbial "fat lady" singing.

Since these promotions, builders say they've noticed an up-tick in sales.

University of California/Berkeley Haas School of Business assistant professor Thomas Davidoff is cautiously optimistic.

"It may help slow the absence of demand. It might be a gimmick that works as a sales product," he said. "It should be something that gets developed in the future, but I seriously doubt that it's going to single-handedly turn around the housing down-turn now."

But critics question whether these sales tactics will actually draw enough people back into the housing market to make any significant difference.

"It's transfer of risk from buyers off to sellers who may be in a better position to bear the risk that makes the sense," Davidoff said. "[But] I think it's hard to justify rushing into home buying for almost anybody."

But, thrilled new homeowners like Herendeen may not care whether she's part of the housing recovery. She says this was just too good a deal to pass up.