Image: Katie and Mike Zwanziger look at the master bathroom in their new home in Gilbert, Ariz
Matt York  /  AP
Katie and Mike Zwanziger chose this newly constructed home after shopping for deals in foreclosures. "We'd see them online they look beautiful and nice and clean, and then you get in there and they were trashed," Katie Zwanziger says of the bank-owned residences.
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updated 3/6/2011 1:09:17 PM ET 2011-03-06T18:09:17

Homebuilders trying to fight off customers' attraction to cheap foreclosures are doing more to show buyers that the good deals can come with pitfalls.

The companies are increasingly trying to woo buyers like Katie and Mike Zwanziger, hoping that warnings about unknown repairs, limited selection and haggling with banks might help them recover from the most dismal year for new home sales in more than 50 years of record-keeping.

The Zwanzigers were ready to move to a larger home and were enticed by the number of resales and foreclosures in the area they liked. But after several weekends of hunting, the physical therapists from the Phoenix suburb of Gilbert decided to look at a new development.

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"And we got in there and found out that, truly, we spent maybe $50,000 more and got the exact house we want, the layout we wanted, the backyard we wanted," said Katie Zwanziger, 31. "So we could be happier with just a little bit more money."

Many national builders are using some form of marketing to try to make that point and beat back the quiet competition from lower-priced foreclosures and short sales.

More than 4 percent of the homes in the Phoenix area were lost to foreclosure last year, according to a report from Arizona State University's business school. Statewide, foreclosures topped 70,000, part of a wave of more than a million repossessions nationwide in 2010.

That has left plenty of inventory available for buyers and not much room for new home sales since the peak of the building boom in 2005, when about 60,000 new homes were built in the Phoenix area. Last year, the number was about 7,000.

Lennar Corp.'s website is fighting back with a "Buying a New Home vs. a Foreclosed Home" page that lays out the benefits of new construction — like home warranties, energy efficiency, and customization options — while highlighting the potential risks of buying a foreclosed home.

PulteGroup Inc. uses similar tactics in its advertising, as does Shea Homes and Phoenix-area builder Fulton Homes. Fulton and Shea both promote new homes with a "foreclosure cost calculator" on their websites that lets customers calculate potential costs.

Although foreclosures have helped metro Phoenix home prices drop 50 percent from the mid-2000s, homebuilders point out numerous drawbacks such as hidden defects and the potential of having to deal with disgruntled former owners or evicting a current tenant.

"There are hundreds of people that purchased homes from us that have been lured in by low prices on foreclosures, have tried to purchase those homes and have been outbid by investors," said Ken Peterson, Shea's vice president of sales and marketing. "Or, they waited months to get an answer back on 'can I get this short sale, can I get this foreclosure,' only to discover that they didn't get that home."

Those not willing to take on the risks would be better off buying a new home, the companies argue.

The Zwanzigers don't disagree. The foreclosures in their preferred neighborhood left them unimpressed.

"We'd see them online they look beautiful and nice and clean, and then you get in there and they were trashed," Katie Zwanziger said.

She and her husband, 29, "took a chance" and looked at a nearby Shea Homes development, expecting them to be too pricey.

Now, the couple is watching as Shea Homes builds their new 3,100-square-foot home. They're able to choose details such as colors, flooring and cabinets to make the home their own. On Tuesday, they were choosing new carpet.

Home builders say they're hopeful that as more customers turn to them instead of the overloaded foreclosure market, they'll be able to show the value in new construction.

Nationally, new home sales numbers for 2010 were dismal. Only 321,000 new homes sold, a drop of 14.4 percent from the 375,000 homes sold in 2009 and a peak of 1.28 million in 2005, according to the Commerce Department. It was the fifth consecutive year that sales have declined after hitting record highs for the five previous years when the housing market was booming.

The top 10 new home builders took huge hits, going from 289,000 homes sold in 2005 to just 85,000 last year, according to statistics compiled by Builder Magazine. Sales for market leader Pulte fell by 82 percent during that period, going from 46,000 to just 17,000 last year.

Builders like Fulton were hit hard because land values plummeted after the housing collapse, and they were left with thousands of overpriced lots.

Fulton, which is now in bankruptcy reorganization, had between 14,000 and 15,000 lots and has sold off nearly all of them, said Dennis Webb, vice president of operations at Tempe, Ariz.-based Fulton Homes. The company has refocused on a much smaller marketplace after selling about 2,200 homes in 2005. Last year, it sold about 500.

Builders, both locally based and national, are adjusting the homes they build to meet the lower prices of existing homes. They're getting cost cuts from subcontractors hungry for work and slimming down some material and labor costs by putting in different windows, kitchen and exterior treatments or cutting out stone facings.

"Our average size hasn't changed as much as our prices have," Webb said. "We can still build a 2,500-square-foot house but make it $150,000 less than the other 2,500-square-foot house."

For Shea Homes, which has a major presence in the Phoenix market, drawing buyers also means a focus on energy efficiency. The new homes it is building now include beefier insulation and more efficient windows.

"Our homes are better today than they were a few years ago, and that's just because there this cycle of research and development that's going on in home building and those things that were out of the reach of many consumers two, three, four years ago, they're now more affordable," said Shea's Peterson. "So we have the ability to add some of those features in our homes that truly differentiate that home from any other home out there."

Copyright 2011 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Video: Foreclosures to Slow Down?

Explainer: Corcoran: Five homes for $350,000 or less

  • Image: Texas home

    Each week, TODAY real estate expert Barbara Corcoran looks around the U.S. to see what homebuyers can get for their money. This week she goes from Texas to Massachusetts in search of truly unique properties you can get for $350,000 or less.

  • Spring, Texas – $319,900

    Image: Texas home

    4 bedrooms, 3.5 baths

    What could be wrong in a town called Spring? It’s just 30 minutes from downtown Houston. What a pretty exterior! It has a stately brick facade, double-height entry and arched windows. Take a look at this marble entryway and sweeping staircase! The staircase is only one of two – the second is in the kitchen. The living room has a treyed ceiling and French doors to the kitchen. The very formal dining room has wainscoting, nice molding and big windows. The kitchen is light and bright with a windowed dining area. In the backyard, there’s a big lawn, mature trees and covered patio. And you can tell the owner’s a Texas A&M fan!

    Click here to view the listing.

  • Owasso, Okla. – $339,999

    Image: Oklahoma home

    3 bedrooms, 2.5 baths

    Owasso, about 20 minutes from Tulsa, Oklahoma, is an Indian word meaning “end of the trail” and it’s only been a town for 100 years. They love parades! They have seven every year. Their marching band will be in the Rose Bowl Parade this New Year’s! The old brick and wood door and posts give this home an old-time feel. The living room has a corner stone fireplace and hardwood floors. The combination family room and study has a vaulted ceiling and French doors. There’s crown molding in the dining room and a pretty arched window. Upstairs there is a big, sunny bonus room with a half bath. This backyard needs a big wood deck to feel more comfortable, but the half-acre lot has plenty of mature trees.

    Click here to view the listing.

  • Springfield, Mass. – $344,000

    Image: Massachusetts home

    3 bedrooms, 2.5 baths

    Of the 34 us cities named, Springfield, Mass., is the first! Basketball was invented here and it is home to the Basketball Hall of Fame. One reason this contemporary colonial looks so big on the outside is its under-scaled wood siding on the front — but the statues should go! The two-story entry has a big staircase with views of the entire home. There are hardwood floors and lots of windows, but for sales purposes the living room is bit too stark and modern. The open family room has hardwood floors, glass doors flanked by big windows and gas fireplace. There are tile floors in the kitchen plus a sunny dining area and white cabinets. The upstairs loft has more sunny windows. The paved patio out back has a koi pond and perfect plantings.

    Click here to view the listing.

  • Knoxville, Tenn. – $344,900

    Image: Tennessee home

    3 bedrooms, 2.5 baths

    In the 1930s Knoxville was known as the “underwear capital of the world” because it was home to 20 textile and clothing mills. Now it’s home to the respectable University of Tennessee. The reason this lawn is so perfect is the underground irrigation system. This is an old English-style brick home with traditional columns. The double-height entry has a blonde wood winding staircase. There are wood floors in the living room, a vaulted ceiling and another fireplace. The open kitchen looks easy to use and I like the sun-filled corner dining area. The small backyard patio needs a low fence to better define it, but the tall fence that surrounds the backyard provides privacy.

    Click here to view the listing.

  • Gainesville, Fla. – $349,900

    Image: Florida home

    4 bedrooms, 3 baths

    It’s hard to picture a contemporary log home like this in Florida – if not for the palm trees on the left you’d swear you were in Vermont! It’s on a secluded acre of land with four big bedrooms plus an office and media room! Living room has double-height ceilings and a wall of windows looks out on the wooded grounds. The glossy light blond floors are a great choice! The open kitchen has cherry cabinets, granite counters and a breakfast bar. The black refrigerator should be replaced. There’s a screened-in porch and wood deck overlooking the dense woods.

    Click here to view the listing.

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Data: Latest rates in the US

Home equity rates View rates in your area
Home equity type Today +/- Chart
$30K HELOC FICO 4.40%
$30K home equity loan FICO 5.80%
$75K home equity loan FICO 4.54%
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Low Interest Cards 13.70%
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Source: Bankrate.com