METRO DENVER – “America’s Builder” is hosting a spectacular 3-Day President’s Weekend Sale on Saturday, February 18th through Monday, February 20 th at three master-planned communities in the metro Denver area. D. R. Horton – Melody Series and D. R. Horton’s Continental Series are offering incredible savings of up to $65,000 on select single-family homes at Savannah in the town of Frederick and Sapphire Pointe in Parker, respectively. Buyers in the market for a carefree condominium can visit D. R. Horton’s Trimark Series at Balterra in Aurora and enjoy a very generous savings worth up to $20,000.
A question came up on my blog as to whether or not the discounts offered by Centex, Meritage, KBHomes, and now Horton are real.
To kick this discussion off, let's refer to FTC Guides Against Deceptive Pricing .
§233.1 Former price comparisons.
(a) One of the most commonly used forms of bargain advertising is to offer a reduction from the advertiser's own former price for an article. If the former price is the actual, bona fide price at which the article was offered to the public on a regular basis for a reasonably substantial period of time, it provides a legitimate basis for the advertising of a price comparison. Where the former price is genuine, the bargain being advertised is a true one. If, on the other hand, the former price being advertised is not bona fide but fictitious -- for example, where an artificial, inflated price was established for the purpose of enabling the subsequent offer of a large reduction -- the ``bargain'' being advertised is a false one; the purchaser is not receiving the unusual value he expects. In such a case, the "reduced" price is, in reality, probably just the seller's regular price.Now that does not mean that homebuilders are abiding by the law, but it does certainly mean they could be in serious trouble if they are not.
(b) A former price is not necessarily fictitious merely because no sales at the advertised price were made. The advertiser should be especially careful, however, in such a case, that the price is one at which the product was openly and actively offered for sale, for a reasonably substantial period of time, in the recent, regular course of his business, honestly and in good faith -- and, of course, not for the purpose of establishing a fictitious higher price on which a deceptive comparison might be based. And the advertiser should scrupulously avoid any implication that a former price is a selling, not an asking price (for example, by use of such language as, ``Formerly sold at $XXX''), unless substantial sales at that price were actually made.
(c) The following is an example of a price comparison based on a fictitious former price. John Doe is a retailer of Brand X fountain pens, which cost him $5 each. His usual markup is 50 percent over cost; that is, his regular retail price is $7.50. In order subsequently to offer an unusual ``bargain'', Doe begins offering Brand X at $10 per pen. He realizes that he will be able to sell no, or very few, pens at this inflated price. But he doesn't care, for he maintains that price for only a few days. Then he ``cuts'' the price to its usual level -- $7.50 -- and advertises: ``Terrific Bargain: X Pens, Were $10, Now Only $7.50!'' This is obviously a false claim. The advertised ``bargain'' is not genuine.
(d) Other illustrations of fictitious price comparisons could be given. An advertiser might use a price at which he never offered the article at all; he might feature a price which was not used in the regular course of business, or which was not used in the recent past but at some remote period in the past, without making disclosure of that fact; he might use a price that was not openly offered to the public, or that was not maintained for a reasonable length of time, but was immediately reduced.
(e) If the former price is set forth in the advertisement, whether accompanied or not by descriptive terminology such as ``Regularly,'' ``Usually,'' ``Formerly,'' etc., the advertiser should make certain that the former price is not a fictitious one. If the former price, or the amount or percentage of reduction, is not stated in the advertisement, as when the ad merely states, ``Sale,'' the advertiser must take care that the amount of reduction is not so insignificant as to be meaningless. It should be sufficiently large that the consumer, if he knew what it was, would believe that a genuine bargain or saving was being offered. An advertiser who claims that an item has been ``Reduced to $9.99,'' when the former price was $10, is misleading the consumer, who will understand the claim to mean that a much greater, and not merely nominal, reduction was being offered.
Here is a simple way of looking at it:
- Homebuilders raised prices because they could.
- There was a mad last dash to buy houses out of fear of missing ouit.
- Homebuilders raised prices into the consumer insanity.
In situations like these, the obvious answer is not some sort of conspiracy just to be able to claim $150,000 off down the road. The obvious answer is builders have to take $150,000 off the prices in order to be able to sell them now.
To think otherwise is to believe yet another conspiracy theory as opposed to simply believing that buyers of homes were acting like "greater fools" outbidding each other for homes.
To someone that paid $150,000 or 15% higher or even $70,000 and 10% higher that is a very real discount and will keep that person underwater on their house for perhaps 10 years to come and perhaps even longer. The question is not whether repeated price hikes occurred (they did) the question was about whether prices were purposely raised just so later "discounts" could be advertised.
Nope. Sorry conspiracy theorists, prices of homes rose in response to blowoff demand, and prices are now declining as the bubble was pricked.
One can either believe that or one can believe in some sort of national price fixing and deceptive pricing scheme. Your choice.
That of course does not imply the value of "discounts" offered as upgrades, landscaping, etc are really at "fair price", but it does mean that someone likely overpaid by at least as much as the "discounts" say, and whoever did is now seriously now underwater.
I called a real estate broker in Florida to discuss this situation just today. He told me the discounts are real and substantial and things are even worse than I suspect. He cited two local homebuilders in Florida that just went bankrupt this past month on 60+ unit subdivisions that will never be built. Poof. Down payments vanished because subcontractors have first right to the money for work performed.
He also offered this explanation for the rising median prices we see: When a sale is booked, it is booked at full price even though substantial discounts are taken off. In other words we have dramatically inflated sales prices even though homes are really going for less money. Such distortions likely explain rising inventory and rising medium price in the face of declining sales and rising inventory. In other words, those rising medium prices (depending on area), could largely be total fiction.
The record home starts in January are only going to make matters worse. I had to laugh today when the president said the mortgage deduction would stay a part of tax law but added "If I were you I’d be worried about interest rates."
Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/
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