An article in the WSJ documents how home builders are dealing with the weakening market:
Slow sales have prompted builders and some individual sellers to offer unusually generous incentives to agents whose clients buy a home. Sellers normally pay the buyer's agent 2% to 3% of the home's price. Now many are offering thousands of dollars or other rewards, such as travel vouchers, on top of the normal commission.
Such incentives have long been used to sell some homes. But they have proliferated and become more generous recently as a glut of properties on the market makes it harder to sell homes. "These guys are desperate," Ivy Zelman, a Cleveland-based housing analyst at Credit Suisse Group, says of home builders.
Although there are no national data on the practice, real-estate agents and builders agree that incentives have become much more widespread in recent months, especially in areas such as Florida, Nevada, Arizona and Washington, D.C., where inventories of unsold homes have soared. Builders and sellers also are offering lots of incentives to buyers, including free kitchen upgrades, help with closing costs and even new cars.
Besides being interesting evidence of a possible impending crash in housing prices, it also demonstrates the nature of oligopolistic competion. The new home market is an oligopoly because, in any given geographic area, there is a relatively small number of home builders.
Oligopolies are loathe to compete on price. The acceptable way for oligopolies to compete is via marketing. Thus you see Coke and Pepsi advertisting about how their products fit in with your lifestyle (they haven't even bothered to advertise based on quality since the Pepsi Challenge taste tests of the 1970s), but they will never say you should buy one product because it costs less than the competitor's product.
If a home builder has too much inventory that's not moving, the logical way to get rid of it is to lower the price. But home builders don't want to provoke the other home builders into also lowering prices, resulting losses all around for everybody. So instead, the home builders leave the selling price alone but spend more money on marketing.
I predict that home builders won't be successful holding up prices because a larger chunk of the housing market is individual owners selling their used homes. An individual seller doesn't care about how his selling price affects the market, he just wants to sell. The reason why prices haven't crashed yet is because prices are sticky on the way down. Most people are psychologically unable to deal with losses, so they refuse to acknowledge that their house isn't worth what it was a year ago. Home builders are eager to help the individual owners maintain an unrealistic appraisal of their homes' worth by maintaining high sticker prices on new homes. But home builders seem to be fighting a losing battle.