Housing’s New Recovery, for Better or Worse
If this is recovery, then why does it have to feel so much like the other R word?
Forecasts, predictions, crystal ball prognostications notwithstanding, it’s hard to know what’s going to come following one financial quarter of positive GDP. It’s safe to say that for home building, comps in 2010 will come in favorable to those of 2009. Fact is, that level–say 700,000 housing starts as a run-rate some time in 2010–will be up just enough to wipe out more companies who’ve been treading the brink of the abyss for the past couple of years.
Maybe we should be grateful we’ve backed up a step or two from the abyss, but that’s not going to keep many good companies from being swept into the vortex of foreclosures, commercial real estate finance turmoil, and rising unemployment.
In looking ahead, the economic environment may be ripe to brighten grudgingly in the year ahead, but that’s relative to the type of gloom and vertigo that prevailed as the world came undone a year ago.
What we may begin to finally be grateful for is that the machinations of policy will have finally played out. We’ll stop needing to be amazed at the intellectual challenges of our elected government officials, and we’ll see, eventually, markets take shape around new sets of values.
We’ve learned this lesson well: public policy limbo is private sector hell. Even as the equity market has charged forward based on cost-cut based earnings and future expectations, the rest of the normal economy has been left an eerie freeze-frame of mandates cancelled by conflicting mandates.
Too-big-to-fail made a mess of knowing anything’s intrinsic value.
So now, for those who’ll survive the storm the question could well be does the biggest challenge continue to be economic/environmental? Or is it structural?
In other words, for home builders, is our fate in our hands or not? If the answer is not “no,” then there remain operational improvements and daring innovations to achieve.
This is precisely the predicament of Big Builder 2009 Virtual’s Atlanta-based Dream Team, which is laboring to strike lightning in a bottle for a big remaining chunk of Vickery–a showcase New Urban community that opened to universal kudos in 2003 and stalled in 2006, went radio silent in 2007, and went back to the banks in 2008. It’s now a showcase of the popping of the housing bubble.
But no one questions that this community–which is architecturally refined and streetscaped for the ages–has intrinsic value.
The question is how to put that bar of intrinsic value back where it should be, given that the housing correction everywhere has overshot normalcy.
The Atlanta Dream Team–Ryland division president Chuck Fuhr, Reynolds Signature Communities’ Michael Langella, Newland Communities’ Jennifer Landers, John Thomas Homes’ Bill Evans Jr., and architect Michael Medick–are putting the final touches on their vision to reenvalue Vickery.
Clearly, they know that they’re going to need to achieve two essential goals for building and marketing the remaining 22 acres: 1) is to retain architectural consistency with an established design ethic of sustainability and style, and 2) build homes that will sell.
They’re probably going to have to cost a good 20% less to build than they did in 2007, according to strategic estimates of Fuhr and his Dream Teammates.
Here’s a list of “assumptions” the team is making so that they can design and proffer a business plan that addresses the Fall 2009 current opportunity at Vickery.
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- Repositioning of community must meet county approval.
- Concessions are needed and are available.
- Past due financial obligations are satisfied by seller.
- Installed infrastructure was per plan and has been accepted by county.
- All developer obligations met – to date.
- No regulatory issues outstanding.
- New owner assumes Declarant’s role.
- Bank will sell for what we determine it is worth.
- Retail component sold to an accomodating owner.
The assumptions here are that in order to drive value back into Vickery, numerous parties with varying interests are going to have to make concessions and share risks for a project to pencil.
Partnership–not just lip service–will be the work-out solution of the next several years. It will be characterized by creativity, patience, and adaptability. Partnership–it will be hard and complicated and require trustworthiness, but it will also be more dependable than say credit backed derivatives and structured investment vehicles.
Home Buyer Tax Credit Extension Gets Tweaks; NOL Lives
Our near-flung correspondent in Washington, with an ear to the ground on Capitol Hill, provides this bulletin, updating the shifting details and language of an extension of a stimulus credit for home buyers:
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- First time homebuyers, the income level to qualify is $75,000/150,000 (couple).
- For step up buyers the income level to qualify is $125,000/250,000 (couple).
- For first time buyers the credit remains $8,000.
- For step up buyers, they must have been residing in their primary residence for 5 years.
- For Step up buyers the credit is 10% of the sales price, with a maximum of $6,500.
- The credit runs from Dec. 1, 2009 to April 30, 2010.
- For legitimate sales contracts as of April 30, 2010 you have 60 days to close.
- There is a waiver for military.
That’s the latest–although subject to change–detail on the tax credit measure in the Senate. As indicated earlier, the House has indicated a willingness to adopt the Senate bill and hand it over for President Obama’s signature.
NOL is still alive. I expect it to be part of the final bill. It’ll be a 5 yr carry back for only one tax year. (Either tax year beginning or ending in 2008 or 2009 (not both)). The 5th carry back year will be reduced by 50%. There will be no restriction on the amount of losses you can carry back, however the taxes paid and available for refund in the 5th year are reduced by 50%.
A deal has been worked out on the substance but not the procedural issues. I expect that to occur today. Depending upon the level of cooperation from Republicans it appears it’ll either pass the Senate today or they’ll have to do another cloture vote and pass it Saturday or Monday. The House will then accept the Senate language and it’ll go straight to the President.
Naturally, opponents still abound. One of the more articulate of these is the National Multi Housing Council, which makes the case that a home buyer tax credit reflects a misguided overemphasis on homeownership to the detriment of the one-third of Americans who choose to or have to rent.
NMHC president Doug Bibby’s latest email blast to his membership hurls a few slings at Congressional supporters of the home buyer tax credit, and paints the shifting compromise details in its near-final language as wins for multifamily players.
As NMHC Update went to press, lawmakers were working on a compromise measure that would likely extend the first-time homebuyer credit through April 30, 2010 and possibly allow some step-up buyers who have been in their primary residence for at least five years to take the credit. There was also discussion of reducing the maximum credit to $7,290. Final details are still being negotiated by key Senators.
The momentum to expand the credit was slowed by increasing media and Congressional scrutiny of the credit as an ineffective and costly stimulus that is also marred by fraud. A Washington Post article on Tuesday called a credit extension “throwing good money after bad.” (Additional articles critical of the credit are posted at www.nmhc.org/goto/HB-Tax-Credit.)
The credit, and analysis of the effectiveness–or lack thereof–is not solely a housing inventory issue, although stanching the deflation in residential real estate prices that fuels foreclosures is a big part of the economic tide reversal being sought. Too, it needs to be looked at as a jobs measure; for sales of homes, new and used, bring with them consumer economic activity, which helps earnings, and creates demand for people to do more work to meet the need for more goods and services.