Home Builders Ramping Up Construction to Beat Tax Credit Deadline

Michele Lerner's picture

The federal tax credit for homebuyers, both first-time buyers and move-up buyers, expires June 30, 2010 but requires a signed contract to be in place by April 30, 2010. Some new home builders are taking a chance, hoping that increased buyer demand early this spring will not only absorb all their current inventory, but also some new homes they are beginning to build now.

The Wall Street Journal recently reported that some builders are starting "spec homes", those built without a contract or a buyer, hoping they will be placed under contract to beat the tax credit deadline. For resale homes, the urgency is only to get the homes in marketable condition to be ready for the hoped-for onslaught of buyers.

New homes are a different story. Typically it takes four to six months for a new home to be completed. The tax credit requires that all closings take place by June 30, 2010. A settlement on a new home means that the home is complete and the buyers are ready to move in, so those homes must be started at least by the end of February in order to have a chance of completion before the deadline.

Economists are not sure if this tax credit will have the same impact as the 2009 tax credit, which has now been expanded and extended. Some think that buyers who were considering a home purchase made their move last year. Others believe the impact will be greater in March and April of this year, as the deadline looms closer.

The housing bubble created havoc for most home builders who at the height were building speculative homes in order to keep up with demand. When the downturn arrived, these builders were stuck with the spec homes and others with cancelled contracts. That experience made most builders wary of building any spec homes at all. But now many builders have very little inventory at all and have been building only after a contract is in place. The resulting lack of ready-to-move-in homes means they need to ramp up construction now, although most say it will be on a small scale, with just a handful of homes in each community.

The Wall Street Journal reported that John Burns Real Estate Consulting's survey of home builders shows that today, builders have an average of three finished spec homes per community, down from six finished homes in July 2008.

Builders have changed their strategy with the homes they are beginning now, tending to make them smaller and more affordable since most buyers are concerned more with affordability than with an abundance of amenities.

Written by Michele Lerner

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