Homebuilders are far from desperate when the market starts to cool. They have a range of strategies at their disposal to avoid cutting prices. Instead of immediately reducing the cost of a home, builders begin by working through a list of tactics that still allow them to maintain their margins and keep their projects profitable. A builder in Southern California recently shared their approach in a survey, and it’s a great example of how they’re navigating the challenges in the current market. According to their response, they’re doing everything short of reducing base prices to move homes.
First, they’re covering closing costs. This is a huge incentive for buyers, as it eliminates a financial burden that can often scare off potential homeowners. Mortgage rate buydowns are another tactic they use. By lowering the mortgage interest rate, they make homes more affordable in the long run, without having to reduce the asking price. They’re also covering Homeowners Association (HOA) fees for two years, which can amount to thousands of dollars, making the property more attractive to buyers who are already dealing with higher costs. And if that weren’t enough, they’re offering a Design Center allowance, allowing the buyer to select upgrades at no additional cost. This adds value without touching the home’s base price.
This strategy works—until it doesn’t. These methods are effective in the short term, as long as the market doesn’t continue its decline. But if things worsen, builders will turn to more aggressive measures to sell their inventory. Next, they’ll start giving away upgrades in inventory homes. Homebuyers appreciate upgrades, and offering them at no extra charge increases the perceived value without lowering the home’s asking price.
If this still isn’t enough, builders will start giving away premiums. This means they’ll include high-end finishes, premium appliances, or even fully finished landscaping—all at no extra cost. The final move will be lowering base prices on completed or nearly completed homes. This is the last resort, but by this point, they’ve already exhausted other options.
This example shows how builders can avoid price reductions, which are generally seen as a sign of distress in the housing market. By offering incentives instead of outright price cuts, builders can maintain the perceived value of their homes and avoid a race to the bottom. However, this approach will only last so long if market conditions do not improve. Builders can delay price drops for only so long before their strategies are tested in the long term.