Deceptive Pricing or Deep
Discounts?
Mike "Mish" Shedlock
February 21, 2006
D.R. Horton is having a Spectacular President's 3-day
Sale at Savannah in Frederick.
METRO DENVER "America's
Builder" is hosting a spectacular 3-Day President's Weekend
Sale on Saturday, February 18th through Monday, February 20th
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.
(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.
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.
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 out.
- Homebuilders raised prices
into the consumer insanity.
I do not believe homebuilders
raised prices just to offer discounts. The numbers of houses
they sold at ever increasing prices proves it.
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"
email: Mish
http://globaleconomicanalysis.blogspot.com/
321gold Inc
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