What Happens When New Home Prices are $100K less than Existing Homes?

I was waiting for this shoe to fall; now it's starting. Homebuilders desperate for the cash flow are throwing massive discounts onto the market. Until now, stubborn sellers who refused to sell for less than they bought during bubble days could just sit out and wait, and say "this will bounce back soon". But now with brand NEW homes on their block selling for a major discount to older homes... not so much.

Also interesting to see Hovnanian (HOV) doing this sort of action to (in part) make quarter end numbers. I don't think management gets it that the numbers right now in their financials don't matter one iota. Beating a dragged down earnings estimates don't mean squat when their is no sunshine on the horizon. The market is a discounting mechanism 6-9 months forward, but we are talking a multi year issue. So if not for 'beating the quarter' reasons, one must wonder about cash flow. And viability. Some of these companies are still paying dividends for gosh sakes, when they should be hording every last cent....

I can only imagine what buyers of this merchandise in 2005/2006 must feel like looking 3 streets over and seeing similar homes going for 10, 20, 30% off. I doubt this will be the only builder pulling such antics.

• Upscale home builder Hovnanian Enterprises Inc (HOV) is holding a nationwide three-day sales that effectively cuts home prices by up to $100,000 through incentives and offers extra appliances and upgrades.
• Hovnanian said on Friday the sale, held amid a slumping U.S. housing market that many do not see recovering before 2009, will be held Friday through Sunday in the 19 states the home builder serves.
• "It's not going to give you a shot in the arm for your brand, but it's a way to generate cash," Standard & Poor's equity analyst Ken Leon said. "Looking at their cost structure, Hovnanian decided they need to sell at least 1,000 homes this weekend."
• Home prices in the various communities in the sale, dubbed "The Deal of the Century," range from the high $100,000s to the mid $1,000,000s, the Red Bank, New Jersey-based company said.
• The sale comes about a week after the No. 6 U.S. home builder posted a third-quarter loss and a 27 percent decline in sales. Hovnanian also warned on September 6 that conditions in most of the regions it operates remain challenging.

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What will next quarter's sale be called? "No this one REALLY is The Deal of the Century".

Again, these calls for Fed fund cuts to spur housing are inane. A 0% interest rate won't make homes affordable for these high price regions for the typical teacher, accountant, firefighter, retail worker, etc. Where will these buyers be coming from that will stampede in to save the day? Nowhere. Not at these prices.