Home Builders Never Say Never for NOL Extension
Jobs data dominate the headlines and buffet the pre-holiday markets. The numbers look grim, and grow grimmer.
Here’s a Calculated Risk summary on the latest Bureau of Labor Statistics jobs report:
For the current recession, employment peaked in December 2007, and this recession was a slow starter (in terms of job losses and declines in GDP).
However job losses have really picked up over the last 9 months (4.4 million jobs lost, red line cliff diving on the graph), and the current recession is now the 2nd worst recession since WWII in percentage terms - and also in terms of the unemployment rate (only early ’80s recession was worse).
Elected officials–assuming they’re opting for re-election–want to take job creation or at least job preservation wins back to their constituents this Fall. As home building companies drop like flies, and there aren’t enough people buying houses right now to keep them in business (as employers), the NOL Carryback has emerged Hyrda-headed as a measure that could offer liquidity as a cash tide-over to keep some businesses in business.
The Senate and House are each working on legislation that would change tax laws to allow companies to carry their losses back, and apply them to taxes paid on profits up to five years ago.
Here’s the Senate version of the NOL Tax Carryback Act, introduced in Senate on April 2, by Olympia Snowe (R-Maine) and Max Baucus (D-Mont).
As she introduced the bill, Senator Snowe said:
Click to access Finance Committee lineup.
Snowe said, “While the recently enacted economic stimulus bill included a modest NOL carryback provision to assist smaller firms, this legislation will help any company that has losses from 2008 or 2009 carry back those losses to offset taxes paid in the previous five years when they were profitable. This will go a long way in helping to keep more workers on payroll and stabilize overall operations.”
Senator Baucus heads up the Senate Finance Committee, and he and Senator Snowe have gotten traction enough in the Senate with 28 co-sponsors to make passage highly likely. Identical legislation in the form of H.R. 2452 has been introduced by Representative Richard Neal, (R-Mass.), and so far, 58 House co-sponsors have signed on in support. Which means there’s a summer worth of work to do if there’s hope for an NOL extension to win the day sometime this Fall.
Leading the charge on the latest NOL push for the home building sector is Ken Gear, executive director of a coalition of home building companies called Homes for America Alliance.
Per an article in Floor Daily:
The new entity, the Homes for America Alliance, includes about 75 big and small builders. It will focus on passing a net operating loss (NOL) measure that was included in the House and Senate stimulus packages earlier this year but was removed in conference.
An NOL extension got this close to passage in February 2009, but never made it into the reconciliation bill handed over by Congress to President Obama as the 2009 stimulus program. Why?
Long story short, leadership at the NAHB felt that changing the NOL rules would unfairly advantage the largest, mostly public builders over smaller, rank-and-file players in residential construction. NAHB chief Jerry Howard appealed in the 11th hour to Rep. Nancy Pelosi, speaker of the House, and, lo and behold, the NOL was declawed so that only businesses whose sales are $15 million a year or less could avail of the extension. That revenue constraint cuts out a lot of home building businesses.
To debrief on what’s past in the relationship between big builders and the National Association of Home Builders on NOL, have a look at previous posts here.
Most everybody’s moved on since then. Now, we’ve got a new “coalition”–the Homes for America Alliance–that is working on lobbying Congress for NOL independent of the NAHB. The NAHB has agreed to support the bill this time, right through the vote expected sometime in the Fall.
A testy relationship–between big builders and the broader NAHB leadership, which has to try to represent small to medium size companies as well as national enterprises–is getting its test with NOL this Fall.
The initiative that seems to unite real estate companies large and small is (R-Georgia) Senator Johnny Isakson’s S. 1230, which would extend the current home buyer tax credit into 2010, expand it to include all home buyers (not just first-time buyers) of primary residences, and increase the actual credit to $15,000.
Eager to Beazer
Beazer (BZH: 1.91, up 4.37%) settles.
On Bigbuilderonline.com, senior editor Teresa Burney reports:
Several federal agencies have settled a two-year investigation against Beazer Homes USA, agreeing they won’t prosecute the company for criminal mortgage and securities fraud if it meets certain conditions and pays between $48 million and $50 million in restitution over the next 60 months.
For two years, Beazer has been under investigation for fraudulent mortgage practices designed to increase the profit margin for its mortgage subsidiary and to sell its houses as well as for accounting practices designed to “smooth earnings, through cookie-jar accounting,” the Department of Justice said July 1.
Fraudulent mortgage practices? The Wall Street Journal reports:
In the mortgage fraud case, prosecutors said Beazer ignored income requirements in making loans to unqualified buyers, and sought to hide from the Federal Housing Administration that some company branches had excessive default rates on their loans.
Prosecutors also said Beazer charged home buyers interest “discount points” at closing but kept the money and didn’t reduce interest rates on the loans. They added that the home builder provided buyers with cash gifts so they could come up with minimum down payments, only to add the gift price onto the purchase price of the house.
Cookie-jar accounting? Per Investopedia:
An accounting practice where a company uses generous reserves from good years against losses that might be incurred in bad years…
Here’s what UBS housing analysts David Goldberg and Michael Garvey note as indicative of Wall Street’s reaction to the Beazer settlement:
Earlier, Beazer announced it had reached settlements w. the U.S. Attorney, HUD & DOJ. We view the terms of the agreements favorably, as: 1) in our opinion, the impact from both a FCF and EPS perspective will be minimal, and 2) it allows mgmt to focus on reducing leverage and improving financial flexibility. Despite these benefits, we expect the company will continue to underperform given the more severe liquidity constraints it faces. Further, reflecting the limited visibility around potential changes to the co’s cap structure, we remain cautious.
So short term, from a liquidity standpoint, the $55 million settlement is a non-issue.
How about below the surface? CEO Ian McCarthy, whom we feel was unfairly demonized earlier this year in Time magazine’s “25 People to Blame for the Financial Crisis,” apologizes.
Credit: Time Magazine, Photo Illustration: Brendan McDermid / Landov; Getty . Click to access original Time article.
“We deeply regret these matters and have used what we have learned to strengthen our control and compliance culture and reinforce our absolute commitment to act according to the highest standards of ethical conduct throughout our organization. We are pleased that the governmental authorities recognized our cooperation and remedial measures,” said Ian J. McCarthy, president and chief executive officer.
Control and compliance culture? Come on, Ian. Couldn’t you and Beazer corporate attorneys have come up with more genuine language of remorse and accountability than that?
And now what? What, after all, is Beazer Homes?
McCarthy had worked for five years-plus on the Beazer brand. It was to unify a holding company of acquisitions, regions, and divisions into an operating company that stood for quality and value for customers. Why, during good times, was the “culture of control and compliance” not a top priority as a unifying brand imperative? How was a culture that permitted lying to customers and government officials committed to any ethical standards, let alone the highest?
One thing the economy has shown us in the past 36 months is that there is no shortage of home building companies.
So now the Beazer Homes trust mark stands for what it stands for among its customers, partners, shareholders, municipal contacts, and a highly skeptical public at large. All those hundreds and hundreds of good, honest, talented men and women who work for Beazer, including, mind you, Ian McCarthy, carry an added burden, working for a company that admits it played the game unfairly.
Here are some questions to ponder.
- Major home builders often close ranks around most issues, but as critical housing economics and policy issues continue to make it onto Capitol Hill’s agenda, will the home building sector be able to put its best foot forward with an acknowledged cheater as part of the bidding.
- Home builders, essentially compete with one another, so would the disappearance of one of the top 10 builders come as any surprise or bother anybody?
- Importantly, how widespread are (or were) the practices that Beazer got nailed and scapegoated for? Is mortgage fraud the “performance enhancing drugs” of home building?
- Exactly where does the notion of being trustworthy fit into home building business cultures if market demand and profitability can (and does) trump integrity and honesty?
It’s hard to imagine that Beazer could have been alone in allowing the chicanery to occur in its system when the system’s capacity was stressed to the max and everything that could get built got sold for asking price or more.
HousingWire.com reports:
“This action shows that the Administration is serious about making the housing market safe from mortgage fraud and will crackdown on those who violate the trust of American homebuyers,” said HUD Secretary Shaun Donovan. “At this time of uncertainty in the mortgage market, it is especially important that lenders, including builder-affiliated lenders, are held to the highest standards of conduct.”
It marks the second multi-million-dollar settlement over the company’s mortgage practices in as many months. In May, Beazer Mortgage agreed to pay out $2.5m to more than 1,000 North Carolina borrowers as part of a settlement reached with the North Carolina Office of the Commissioner of Banks over alleged origination violations in 2007.
Beazer’s investor relations release says:
These settlements enable the Company to close an unfortunate chapter in its history and focus its efforts on executing the Company’s financial and operating business plan for the benefit of the Company’s shareholders, employees, and customers.
Perhaps the settlement enables Beazer to close a chapter. We hope for the sake of many, many associates who depend on the company for their livelihood, that that’s the case.
But the unfortunate chapter whose plot thickens as public perception, consumer behavior, legislative votes, and business and financial decisions blur into a unified combative force is still open for all home builders.
Job Losses: A Dragging Indicator
The topline: The U.S. economy lost 467,000 (more) jobs in June 2009, which means that since the recession started in December 2007, 6.7 million jobs have disappeared.
Total job loss exceeded Wall Street economists’ estimates by 30% or so, and eclipsed revised May job losses by 45%.
Total unemployment is at 9.5%, a quarter-century record.
The jobs numbers for construction are mind-blowing. In a year, the official count on the unemployed in construction has risen by 816,000 jobs. Unemployment (officially) for construction has gone from 8.2% to 17.4% in 12 months. In 30 days, from May to June, construction lost 79,000 jobs.
Reports the New York Times:
The latest figures highlight a somber new reality for workers, economists said. As the recession enters its 20th month, private wages and salaries are falling, working hours are dwindling and more people are without work. In essence, economists say, months of deep, broad job losses are effectively making unemployment a way of life for millions.
The number of people who have been unemployed for more than 27 weeks has more than tripled since the recession began, to 4 million. The median time people go without a job has increased to nearly four months, from slightly more than two months at the outset of the recession in December 2007.
Job losses, and gains, lag the economy. It takes a pretty good economic lift to turn job loss rates into employment gains. Here’s the Wall Street Journal take:
When marginally attached and involuntary part-time workers are included, the rate of unemployed or underemployed workers hit 16.5% last month, up slightly from May.
The employment report is a sober reminder of the headwinds the U.S. faces even as other data suggest the recession may be nearing an end. The Institute for Supply Management manufacturing index increased in June from May, and though its level of 44.8 still signals a slight contraction in manufacturing, it is consistent with slight growth in the overall economy.
After plunging at rates near 6% at the end of 2008 and early 2009, at annual rates, economists think gross domestic product only fell around 1% or 2% in the second quarter, setting the stage for a resumption of tepid growth starting as soon as the current quarter.
Still, a jolt of consumption-driven adrenaline seems unlikely. Average hourly earnings were flat last month at $18.53. That was up just 2.7% from one year ago, a sign that inflation isn’t a risk for the Fed. However, stagnant wages could also weigh on consumer spending, especially with gasoline prices on the rise.
The pall of job loss, and continued threat to household income, opposes “Animal Spirits” collective behavior that could turn the Queen Mary 2 in the Upper Hudson River.
Policy needs to factor in real job loss numbers into its stimulus math, not hope. Clearly, the Wall Street consensus among economists is not the place to seek reality.
Economists Need Better Inflection Detection
Here’s a way of articulating the effect of force-feeding the economy residential investment from 1990 to 2005. This is in David Leonhardt’s “Economic Scene” column today in the New York Times.
It’s not fair to expect Mr. Obama’s economists to be clairvoyant. But they did make one avoidable mistake that led directly to their overoptimism. They relied on the same forecasting models that had completely failed to see the crisis coming.
These models, which are also used by Wall Street and various research firms, do a decent job most of the time. But they are notoriously bad at forecasting turning points because they are based on an assumption that the recent past will more or less repeat itself.
Clearly, recent economic history is not going to repeat itself. It included two huge asset bubbles, first in stocks and then in real estate. The models came to treat those bubbles — and the additional consumer spending they caused — as the new normal. When asset prices began falling, the models couldn’t keep up, with either the pace of declines or the economic damage they were causing.
Leonhardt argues that an effective Stimulus and an incipient economic recovery are two different things (i.e. just because the Stimulus is working doesn’t mean the economy’s getting better). His essay sort of suggests that the Administration’s money math meisters should redo their arithmetic and come back with a Stimulus 2 that actually gets the economy going again.
His big conclusion is to back the old car tire right over the rose-colored glasses: Look ahead with a sober eye.
Calculated Risk’s blog has been great at holding Treasury Department “stress test” scenarios for housing and unemployment up against the mirror of reality. Here he simply gives White House senior economic advisor Christina Romer enough rope to hang herself. She bids us to stay tuned as the real fun of the Stimulus starts kicking in, and says the programs will have palpable impact in the back half of 2009. Calculated Risk says, hey, that’s where we are now.
So we should see an impact in the 2nd half of 2009 … and that starts now!
The organizational structures, facilities, and implementation programs to get in place to actually spend $30 billion a month in Stimulus monies are enormous. One can believe that it would take this amount of time to get the infrastructure for spending in place.
But the material issue behind whether the Obama economists are way off in their math boils down to the continued tolerance limits of the financial system that the stress test may have failed to expose.
Also, it’s a natural in a highly politicized and polarized culture that people react in one of two ways to dramatic errors in significant economic forecasting: 1) they think you’re lying or spinning and have something to hide; or 2) they think you’re an idiot.
Either way, credibility takes a hit. So Christina Romer, Larry Summers, and Tim Geithner had better hope they’re right about second half traction for their programs. Not just in measuring whether the Stimulus money has been effectively deployed; but in seeing the multiplier effects of success begin to turn the tide of expectations from negative to positive.
A Less-is-More Footprint for Re-loaded Stock Building Supply
Click to access Stock site. Now 51% owned by the Gores Group, a private equity firm.
Financially chastened and dramatically cropped, Stock Building Supply beat a fast track–a la the Chrysler 60-days-and-out restructuring model–under new majority ownership toward resuscitation and reincarnation.
ProSales editor Craig Webb reports this morning on Stock’s announced emergence out of Chapter 11 a leaner meaner outfit that will operate 100 locations in 19 markets.
The bullet points on the story:
- Stock has emerged from Chapter 11, saying it had satisfied concerns raised in court during its nearly two months under federal bankruptcy-law protection;
- The company’s new footprint: Washington, D.C., area; Paradise, Pa.; Richmond, Va.; Raleigh-Durham, Charlotte and Winston-Salem/Greensboro, N.C.; Greenville and Columbia, S.C.; Atlanta; Austin, Amarillo, Houston, Lubbock and San Antonio, Texas; Albuquerque, N.M.; Salt Lake City and Southern Utah; Spokane/Northern Idaho, and Los Angeles;
- Stock cut the number of facilities it had on May 6 roughly in half, to 100, and has departed 32 markets;
- Employee headcount peaked at 17,000, and fell to 7,200 in May 2009, on its way toward staffing of about 5,000, per the company.
Stock’s strategic overhaul sounds as if the company wants to leverage its relationships with builders and remodelers toward a deeper, more holistic supply partnership, a plan that makes sense particularly as home builders work to streamline vendor rosters toward measurable cost cuts in their offerings, which translate into lower home prices that can compete with foreclosures.
It said it will do this by seeking to sell a larger number of products to each customer, rather than just one or two core offerings. For example, Stock said it will roll out what it described as a tracking system that will give customers real-time ability to track the location and expected delivery time for their orders.
Any relationship between Stock minority parent Wolseley Plc’s CEO shake-up yesterday, and the timing of Stock’s surfacing from BK today? [see yesterday's post].
Not really, says ProSales Webb. Wolseley removed outgoing CEO Chip Hornsby because the company needed someone to take a fall commensurate with the 75% loss in shareholder value that had occurred on his watch.
Meetings Today
We look at our Outlook Calendar. There are meetings there we never knew about before we’d checked the view of the day’s obligations. A problem with Outlook meeting scheduling is that any time slot that is not blocked out entitles someone to go in and grab you for a meeting. No discussion necessary. No picking up the phone to check on your availability. If it’s not blocked out, you’re in for the meeting.
It then becomes an offense to decline the meeting. “Your Outlook said you were available. You should organize your schedule better so that if you’re not available, others will know.”
Hmmm.
A tactic might be simply to block out all of one’s time permanently on Outlook so that someone who wants to “Invite” you into a meeting would have to pick up the phone to check on your availability.
Well, the meetings are going to happen today. One boss we had recommended this:
Our strategy for this meeting is … to get out of the meeting as soon as possible.
That one stuck, and still makes sense. Where else to turn for inspiration?
Indexed, maybe. We’d like to invite Jessica Hagy to our meetings, although she may or may not have actually been in a few.
Click to access Indexed.
Safer Borrowers Says Who?
As part of the overhaul of financial system regulation, a new consumer protection agency for borrowers is taking shape.
The New York Times reports:
The Obama administration sent Congress a detailed proposal on Tuesday to create a consumer protection agency responsible for financial products, a move that is the first shot in a heated battle with banks and other financial institutions over how to regulate home mortgages, credit cards and other forms of lending.
For their part, banks and mortgage lenders are placing top priority on killing the proposal.
The proposal would create a stand-alone agency dedicated entirely to protecting consumers. It would be added to existing bank regulators like the Federal Reserve, the Federal Deposit Insurance Corporation and the Comptroller of the Currency.
Case-Shiller Price by Market Map–Flash Envy
The Wall Street Journal has an enviable Flash infographics group.
Here’s their latest treat, an interactive map of Case-Shiller price data by market.
Click image to access Wall Street Journal interactive map.
San Diego’s False Starts
San Diego residential real estate had an astonishing April and May in the teeth of the worst housing recession in at least three generations. Believe that and we’ll tell you another one.
Actually, when the numbers are accurately tallied, San Diego residential real estate had a pretty good April, up 20% from the same month in 2008, and a moderately good May, up 6.5%.
That’s not 63% better than April 2008, which is what the California Association of Realtors originally reported. And a 6.5% lift in May is no where near the 89% mega quantum leap the association crowed about a month ago.
If it’s their job to count the stuff right, why can’t they do their job? You’d think they were trying to pull one over on people. Fortunately, real estate economist Tom Lawler caught the, ahem, error of CAR’s ways.
The Wall Street Journal reports:
The California Association of Realtors expects to make sharp downward revisions in its recent monthly reports of soaring home sales in the San Diego area, Robert Kleinhenz, deputy chief economist of the trade group, said in an interview. Those revisions will mean modest downward revisions in statewide sales, he added.
The revisions are likely to be announced in late July, when
the Realtor group reports home sales for June. The problem resulted from a glitch in data from a multiple-listing service in San Diego, Mr. Kleinhenz said. He said a change in computer systems used there resulted in incorrect data being sent to the Realtor association over the past year or so.Thomas Lawler, an independent economist in Leesburg, Va., who tracks home sales nationwide, raised questions about the San Diego data in a report last week. Mr. Lawler noted that the numbers reported by the Realtors vastly exceeded those from MDA DataQuick, a research firm in La Jolla, Calif., and other sources.
Nothing like needing to sharply, downwardly revise published data to cultivate trust in an already wary market.
Orange County Green Shoots
Housing recessions don’t end when starts, sales, and pricing data say they’ve ended.
Everybody who’s been through them knows it’s different than that. Bob Toll, Toll Brothers’ patriarch and CEO, has put it this way:
“Somebody gets up on a Saturday or Sunday morning and decides it’s a good day to buy a house, and a reporter for the New York Times finds out and reports in a Monday headline that it’s a good time to buy a house.”
It has gone like that enough times that veterans of residential development and home building swear that’s what happens.
In an isolated number of markets–including ones that were doing nothing good six months ago–people are starting to say, “the light’s back on.”
Here’s a note from the Orange County Register’s real estate writer Marilyn Kalfus.
“Orange County is continually trending to inch up month over month,” said Kristine Thalman, CEO for the Orange County chapter of the California Building Industry Association.
She said the $10,000 tax credit for new home buyers is continuing to spur demand since it went into effect in March.
“As one of my builders called it, somebody turned the light on,” she said.
Statewide, builders pulled permits for 2,203 single-family homes in May, down 7 percent from April but 40 percent lower than in May 2008. On a seasonally adjusted basis, CIRB reported that May’s figures were down just 1.6 percent compared to April.
“This is very good news,” said Robert Rivinius, the California Building Industry Associaton’s president and CEO. “As this continued strength in new-home construction shows, the credit is indeed working.”
The Franchise Tax Board has reported that nearly all of the $100 million for the program is spent. The homebuilding industry is trying to get it extended.
Based on the strength in the single-family market, CIRB for the first time this year has adjusted its annual forecast upward this month. The Board now expects single-family housing starts to total 24,900 and total housing starts to be 40,200 for the year.
Those familiar with the plotline of housing downturns know that recovery isn’t a single event, but a process. It’s the light going back on in multiple markets, when enough prospective buyers believe that the market has made enough prospective sellers capitulate.
The constant flow of policy has slowed down and added complexity to the process. Big, noteworthy players have capitulated, but only in isolated instances. The heavy hand of a corrective market has not driven enough property holders to their knees for potential buyers to believe their moment has come.
The policy game has favored sitting tight in hopes of some form of bail out as opposed to cutting one’s losses and moving on. That’s probably why the bottom, so to speak, is proving to be elusive.