February 26th, 2009 by Michael Oliver

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So everyone knows the homebuilding industry is seeing a down market that’s probably the worst seen since the Great Depression (That’s actually easy to see at this point) so what happens when the new home market gets this tough? Well luxury homebuilder Toll Brothers has come out and proclaimed: “Use our mortgage company to buy one of our homes and if you lose your job within the first 24 months we’ll pay your mortgage (up to $2500/mo) for up to 6 months.” Now there are a couple things I see here on average a Toll Brothers home runs about $600,000 so a mortgage even with 20% down (making the loan amount $480,000/ on a $600,000 home purchase) would be roughly $3360/mo so the $2500 wouldn’t really cover the entire payment but hey it’s something.

Here’s the other “details” of the incentive to be able to take advantage of it should the unforeseen to occur: Toll is being smart about the offer. You have to “vest” in the house for 60 days before you become eligible, you have to have been continuously employed for wages or salary for 12 consecutive weeks prior to the effective date of job loss, and you cannot have knowledge of any impending job loss as of the date of settlement. You also can’t be self-employed, which knocks a whole lot of potential buyers out as well.

I think from a marketing standpoint it’s a great thing but I think this is the wrong homebuilder to roll it out. The buyer profile here is less worried about losing their job and more worried about losing a large portion of net worth through a bad general economy. That’s what’s keeping these buyers from buying, that and they typically need to sell an above average home first before buying the larger move up home. For most buyers a Toll Brothers home is their largest most expensive “estate” home they will ever own. I think if a builder like KB Home, DR Horton, or Pulte rolls something like this out then that would really help boost some sales for them. Lennar I just saw also has this plan going if you lose your job they will pay your mortgage but from what I understand it’s more of an expensive insurance plan that you can receive in lieu-of other incentives. I would like to see one of the more positioned first time builders adopt this policy in addition to some decent incentives that could really help them sell homes for sure. I also think very few home buyers would be able to “de-fraud” this incentive because I highly doubt someone would “try to lose their job” because a homebuilder was going to front 6 months worth of their home payments….

For those lower end builders this I believe for them is the future of the “new home incentive” I really like the security it would offer would-be-buyers in today’s tough economic environment. Plus this is an incentive that foreclosure homes could never compete with and that’s the new home industries number 1 competition even more so then other builders is the foreclosure homes within shouting distance of a home builders development. I’m not sure Lennar’s “along the same lines” mortgage protection incentive has taken root yet but I’m sure it’s not hurting. I think the issues I see with Lennar’s incentive is the way it’s structured either take a sub 4% mortgage OR get the mortgage protection incentive. It’s hard to tell someone who more then likely is not concerned about losing a job (That’s why they’re ok with making a home purchase) to turn down an amazing interest rate for the “protection”. HOWEVER if they took an opposite approach and added it on every home (that qualified along the same guidelines as Toll Brothers) I think that would be a huge piece of mind incentive for the buyers and that would turn sales I’m sure of it. The other side of the coin is maybe this is just too expensive of an option for those builders to just “throw in”. However I don’t think so, some of the incentives I see are worth 10’s of thousands if a KB or Pulte said “hey lose your job we’ll pay up to $1250/mo of your mortgage for 6 months” that only costs $7,500. IF the unfortunate does occur (and for 95% it won’t) that to me seems way cheaper then having to throw in an additional 10k for everyone in incentives that maybe this protection plan would compensate for. In any event this is some interesting times for builders and I would not be surprised at all to see this go wide scale. (Note to KB Home, Pulte Homes, and DR Horton you should figure out a way to do this because I guarantee this would be an effective way to turn additional sales with more then likely small actual costs. (In relative home builder costs speak))