Forget free kitchen upgrades, tropical vacations or complimentary closing costs. The latest marketing efforts from home builders center around financing, with rock-bottom mortgage rates, delayed payments and mortgage insurance for job losses.

It's the newest batch of offers from an industry limping through the worst downturn in decades and gearing up for what's set to be an abysmal spring selling season. Builders know cash is essential to pay the bills and survive, so they're trying anything to make a sale, even if it further stresses margins as cash flow concerns mount.

Lennar Corp., Toll Brothers and Hovnanian Enterprises are offering interest rates well below a national average hovering above 5%, with industry giant Lennar lowering the bar to 3.875%. As soon as this weekend, Hovnanian expects to offer insurance that covers payments for some laid-off homeowners, while Pulte Homes will foot the bill until 2010 in several markets.

"I give them credit; they're not just rolling over and playing dead," Robert Curran, Fitch Ratings' lead home-building analyst. "They're looking to distinguish themselves among their peers in a very, very tough market. It probably pulls [in] some incremental sales, but I think in the environment we're in right now, it's probably not going to make a big difference."

Most of the nation's largest builders stuck in a string of quarterly losses realize that. As shares have plummeted by nearly half in the last year, the sector's confidence has hit record lows, dragged down by job losses -- tens of thousands on Monday alone -- and plummeting prices. Eleven of 20 metro areas showed record rates of annual decline, according the S&P/Case-Shiller home price data through November.

That's in addition to increased competition from foreclosures. The National Association of Realtors reported this week that December's existing sales showed a surprisingly strong gain, aided by banks dumping foreclosures for bargain prices and "short selling" by troubled sellers getting less than they owe.

While the trade group's chief economist noted that the market remains "far from normal balanced conditions," the fact that sales happened as the financial meltdown continued gives builders hope. Industry watchers constantly mention pent-up demand from buyers awaiting pricing stability or lower mortgage rates. Builders are increasingly impatient: Since the housing bubble popped, the sector has tried everything to move inventory.

As the market began to sour, companies resisted price cuts, instead offering gourmet kitchens, landscaping and getaways. Price wars followed, with a circus atmosphere and discounts hitting six figures.

Builders also employ "buydowns," which make an upfront cash payment to an investor purchasing the mortgage. Since November, Centex Corp., the nation's third-largest builder, has offered a 3.25% mortgage rate that rises to 4.5% after two years. It reports Feb. 3, but executives recently said fiscal third-quarter orders crumbled 80% from a year earlier.

Toll Brothers recently shocked the industry by extending the financing for the loan's life. The Pennsylvania-based luxury builder offered a 3.99% fixed interest rate for 30 years on loans of $417,000 or below for buyers with at least a 720 credit score and a 20% downpayment. For qualified buyers, Pulte also offers a conventional fixed 3.99% for three decades in six markets including Denver, Chicago and Cleveland.

Not to be outdone, Lennar recently rolled out its 3.875% fixed rate in a number of its 40-plus markets. No further information was available.

K. Hovnanian American Mortgage, which has offered a 4.5% rate for several weeks, will likely match Toll's number in some markets by this weekend. It could require as little as 5% down for strong credit scores. M.D.C. Holdings Inc.'s HomeAmerican Mortgage Corp., meanwhile, has a 30-year fixed rate at 4%.

But even the lowest rates seen in years aren't enough to overcome unemployment, which increased nationwide last month and has spared few sectors. Those without jobs or afraid of losing them are unlikely to buy.

That's why No. 6 builder Hovnanian is putting the finishing touches on a policy for "involuntary unemployment" that would pay the monthly mortgage for up to six months. The plan includes a 60-day vesting period and a 30-day wait from the date of losing a job where the borrower worked for 30 hours or more per week for at least 12 consecutive weeks.

"We hope this will give a little peace of mind" to jittery buyers, said Dan Klinger, Hovnanian's mortgage arm's president. "The investors that buy these loans after closing should also like the idea ... The mortgage payment is still made."

It doesn't apply to the self-employed, independent contractors or seasonal workers. Firings and voluntary resignations don't count. New Jersey-based Hovnanian's builders fund the policies, which cost just a few hundred dollars per year per qualified loan, Klinger said.

Another strategy involves giving even those who remain employed a temporary break. For strong buyers closing on or after May 1, Pulte, the nation's fourth-largest builder, will cover 2009's payments, up to six months. The deal, which can't be combined with the 3.99% offer, is available in Minnesota, Denver, Chicago, Indianapolis, Michigan and Cleveland, according to a spokesman. Michigan and Minnesota buyers must put down 10%, with 20% for others.

Such programs come with a cost that has eroded once-healthy margins. Last year's estimated average gross margin was 12.8%, compared with 26.2% in 2005 -- the highest in recent years, according to JPMorgan. Toll leads the list at 24.3% in 2008, down from 32.2% in 2005. Hovnanian's 6.67% is 2008's lowest, a plunge from 25.3% in 2005. Lennar slipped to 17%, from 26.3%, while Pulte hit 11.9%, from 23.3%, JPMorgan noted.

But for most builders, margins aren't the most relevant metric. "The goal is to generate enough cash, stay liquid, survive and play another day," said David Goldberg, UBS' building analyst.

Source: The Wall Street Journal, January 28, 2009