Builders Scraping the Bottom for Buyers

August 21, 2008 4:11 p.m. EDT

ANALYSIS

Builders Tout Down Payment Aid Before Window Shuts On Program

By DAWN WOTAPKA
Of DOW JONES NEWSWIRES

NEW YORK -- Home builders, painfully aware the end is near for seller-funded down payment assistance programs, are aiming for a sales spike before the government-enacted Oct. 1 deadline.

But industry watchers say any increase will be temporary, not enough to jump-start the moribund building sector. What's more, not all of those contracts are expected to close, possibly boosting cancellation rates later this year.

Even so, builders -- which have come to count on sales from the controversial programs that essentially let sellers fund buyers' down payments -- will take what they can get.

"They're all advertising, 'Hurry up,'" says John Fioramonti, senior managing director of Meyers Builder Advisors, a real estate consulting firm. "They're talking it up and pushing it as hard as they can."

On its Web site, Standard Pacific Corp. (SPF) alerts buyers that "once in your lifetime, the right door opens .. very briefly." Hovnanian Enterprises Inc. (HOV) warns those wanting a no-money-down deal that they "need to act now!" Neither builder was immediately available for comment.

Such dramatic words might push some buyers into action, but JPMorgan analyst Michael Rehaut warns any sales uptick is unlikely to last.

"People on the investor side will recognize it for what it is," he said, "more of a temporary boost."

That's bad news for a sector already weakened by the prolonged housing slump that left builders with depressed bottom lines, saddled with unsold inventory and scrambling for buyers who are either too afraid or unqualified to buy a new home.

Many contracted buyers, meanwhile, have abandoned deals, raising cancellation rates in the last few quarters. Though some builders' cancellation rates have slipped recently, industry watchers expect them to climb as buyers who rush to ink deals before Oct. 1 change their minds or encounter financing issues.

The seller-funded down payment assistance ban is part of the sweeping Housing and Economic Recovery Act, which President George W. Bush signed earlier this summer. Critics, including the Federal Housing Administration, have long complained that such programs contributed to the real estate downturn because they help people buy homes with little or none of their own money while giving some purchasers keys to residences they can't afford. That, the critics maintain, fuels defaults.

Nehemiah Corp. of America, a nonprofit that sellers reimburse for funding buyers, disputes that. It is working to save DPA, though that is an uphill battle.

Under the new law, lenders must approve borrowers' credit before the deadline, so buyers closing after Oct. 1 can still tap the assistance.

"We're talking final credit approval has to be done before Oct. 1," said Lemar Wooley, a Housing and Urban Development Department spokesman.

That's why some builders have set September deadlines. The longer a deal is in backlog, the more likely it is that credit will have to be reapproved, endangering the DPA.

"Limited alternative mortgage finance options would be available to that buyer," Rehaut said. "That order would be likely canceled and lost."

After the deadline, experts expect new-residence sales to remain depressed -- possibly falling more -- stressing home prices and increasing impairments, which have already topped $24 billion industrywide.

It's hard to estimate just how much sales could suffer: Builders don't know how many buyers couldn't afford a house without the assistance.

"There's no way of knowing how many are taking advantage of it just because it's there," Fioramonti said.

Industry giant Lennar Corp. (LEN) has said one-third of the mortgages it originated used the assistance, compared with as many as 20% of the overall loans in Ryland Group Inc.'s (RYL) backlog, Rehaut has noted.

"Once DPA is eliminated, we think it will result in the exiting of at least 10% of demand in the current market," he said.

That will undoubtedly be painful for the industry. But Centex Corp. (CTX), one of the nation's largest builders, labeled the change a likely positive "over the long term."

"The end of DPA will probably pressure industry sales in the near term, but over time our buyers and the market will adjust," said Cathy Smith, the builder's chief financial officer, in an earnings call last month. "We continue to believe that a return to more normal qualification standards is a very good thing long-term, even if it carries with it a little short-term pain."

Centex declined to comment for this story.

---By Dawn Wotapka, Dow Jones Newswires; 201-938-5248; dawn.wotapka@dowjones.com