The game is orchestrated so that the buyer feels a sense of urgency and purchases a house whether it’s worth the asking price or not.
I was surprised to read that, when it comes to newly built homes, price hikes are far more common than price decreases, even in today’s sub-par real estate market. An LA Times story explains that the price increases don’t necessarily mean that such homes had been previously underpriced, nor that new homes are immune to larger forces in the house market. Instead, home builders plan on regular price hikes, so that the sense of urgency and excitement among buyers rises hand in hand as the price creeps higher and higher. So when do the prices of new homes start rising? Long before they’re ever built, apparently:
“Price increases don’t start when you have models,” said William Becker, a veteran consultant who has been advising builders and developers for more than 40 years. “They start when you get zoning.”
Prices continue to rise with each step the builders take—when ground is broken, when streets are laid out, when a model is built, and so on. The builders understand that they’re probably not going to sell tons of homes very early in the game. Then again, they’re probably not really trying to sell tons of homes very early in the game.
Even at a super low price, few people are willing to commit before they can envision a neighborhood or tour a model home. But by starting with a low price, builders can demonstrate a track record in which the new development’s asking price rose early and often. The message sent to potential buyers is this:
“We want people to say, ‘What a dummy I was. I could have gotten it at X, and now I have to pay Y. I won’t do that again,'” Becker said.
In this atmosphere, a buyer feels the pressure to buy sooner rather than later, though there’s no real way of telling if, in two years, that buyer will be able to resell the place at X—or even at X minus $50K.