Mortgage Interest Deduction Debate Could Flare up As Mid-term Noise Builds
It was Q&A time as Mark Zandi, Moody’s Economy.com chief economist, concluded a silver-lining forecast that had Housing Leadership Summit home building company executives cheering at the news last week in Chicago.
First question from the front of the room:
“What do you think will happen to the mortgage interest deduction?”
Mark Zandi responds toward the back of the room: “Do you want me to repeat the question?” he asked, ‘Will the Phillies win the World Series?’”
Laughter.
Then he repeats the actual question, which is probably one burning into the stomach lining of just about every home building company executive right now.
How sacred are housing finance and taxation’s sacred cows?
Amid what even optimistic residential real estate executives term is a fragile new-home market, the fate of the mortgage interest deduction has come into question as pols angle for support.
- CNBC’s Diana Olick reports this sacred cow is “in play.”
- CNN reports that the issue is a political hot potato, but that doesn’t mean it’s not going to get taken up as a battering ram issue as the mid-term elections near.
- The National Association of Home Builders’ taxation guru Robert Dietz, noting “an uptick in analysts discussing modifications,” has this analysis of ramifications of home mortgage interest deduction modification.
Contrary to popular belief, home builders’ heads are not buried in the sand when it comes to structural shifts that the economy and its policymakers are making to de-lever corporate, banking, and household debt. Nor can they ignore that conservation of matter (in the form of money owed) means that the past two years have served to push debt from private balance sheets to the Mother of Balance Sheets, the U.S. Treasury.
So Mark Zandi’s answer, while it’s not what home builders want to hear right now, was essentially, “be part of the solution or you’re part of the problem.”
To illustrate, Zandi shows this slide:
Click on image for larger version.
Zandi says:
“This slide can not play out, because if it does, we’ll be Greece.”
So, assumptions beneath Zandi’s forecast that housing starts (single-family, multifamily, and manufactured housing) will normalize at 1.7 million by 2012 include one that the nation’s economy doesn’t go to budget deficit hell in a handbasket.
Clearly, entitlements and taxation sacred cows are going to get lots of scrutiny as policymakers and the president figure out how to pay back the money it borrowed the past couple of years to avert financial oblivion.
Here’s what Harvard economics professor Edward Glaeser has to say in argument that the current mortgage interest deduction supports the wrong thing:
Now that prices have stabilized, we can imagine slowly leading this political sacred cow towards a good stockyard. The interest deduction currently has an upper limit of $1 million. That limit could be reduced by $100,000 per year over the next seven years, which would lead to a less regressive $300,000 cap. After that point, we could consider replacing the interest deduction altogether with a flat homeowner’s tax credit that would encourage homeownership without encouraging borrowing or big houses.
The NAHB’s Dietz contests the notion that the deduction in effect supports wealthier households and older householders. Big Builder’s Sarah Yaussi offers her personal analysis of the Dietz theory here, discussing particularly the collateral damage that would occur to local community revenue bases were the deduction dramatically reduced or eliminated.
Zandi said that one possible mortgage interest deduction modification scenario would be to put a cap on all itemized deductions that would have them max out at, say, 15% of the taxpayer’s total tax liability.
In considering the debate scenarios on his radar, here’s what Dietz writes:
I think the proposals that are most likely to see debate are ideas we’ve seen before, such as:
(1) Limit itemized deductions to a 28% rate (or some non-top marginal income tax rate). So taxpayers at 33%, 35% or 39.6% (for 2011 and thereafter) rates would not be able to stack Sched A items at the top of their income, losing a % of the deductions. This proposal has been in the President’s budget proposal for the last 2 years.
(2) Reduce the cap of the MID from its present law $1 million (plus another $100,000 for home equity loans [meaning the non-acqusition, rehab, or construction element]) to some % of median housing prices. The 2005 Tax Reform proposal had a version of this. Eliminating the MID for second homes would fall into this category.
(3) More radically — eliminate the MID and replace with a refundable tax credit, perhaps for first-time homebuyers. No gov’t proposal related to this that I can point you to, but some think tanks have suggested it.
We can debate the pros and cons of each, and I feel the cons are heavy and significant, but for any proposal the proof in is the transition rules. The housing tax deductions are capitalized in the prices of housing. Changing those rules means changing housing prices, which means effects in household wealth, state/local property tax collections, and other economic impacts. Thus, the prospects for a given tax reform proposal are limited by how efficient and thoughtful its transition rules are. The problem of course is that Congress uses a 10 yr budget window, and transition rules typically push the revenue gains outside the window, thereby reducing the value of the proposal.
It is true that we face a mismatch between government spending and tax receipts on the order of 5% of GDP in future years (a structural gap between promised expenses and expected tax policy, as opposed to a cyclical gap tied to the ebbs and flows of the business cycle). That gap is why you hear debate about the future of 2001/2003 tax cuts, a VAT, and tax reform, as well as government spending (particularly entitlements). And that will continue.
Still, Zandi’s guidance for home building company strategists is essentially pragmatic. Some concession on the current deduction is highly likely given the straits the nation will be in if it doesn’t come up with deficit reduction actions sooner than later. So he’s saying builders have an opportunity to get fully into the shaping of the concessions so they don’t wind up total losers in the bargain.
Increasingly, lobbying Capitol Hill is more complex than merely supporting or opposing measures that come up for debate in Congress. As home building matures and ratchets up in sophistication of its lobby, it will wind up making gains in some directions even as it gives up ground on others.
On this issue, as with positions on evolving energy legislation, home builders face tough, complex advocacy decisions that can pit short term relief squarely against long-term business interests. Few matters are black and white.
Ultimately, Zandi’s prediction is that the Phillies will win the World Series. And that builders had best collaborate in a solution for the nation’s national debt. Or else.
Here here!
Perry Bigelow — The Original Voice Behind Energy Efficient Home Loan Qualification
The words, “learn now or pay later” carry a none too subtle threat, and one we believe should grab home building business executive audiences by the collar and shake forcefully. Three of every four dollars of residential energy costs in the United States come from owner-occupied, single family homes, according to a Wells Fargo white paper overview on the “Green Home Market.”
Whether it’s energy independence, climate change, fuel costs or all of the above, the biggest risk to home builders would be to take an inflexible position on the debate and wait out the outcomes. Inaction will only come back to haunt.
After mortgage principal and interest payments, energy is either the second or third largest expense item in the monthly housing cost list, depending on the local property tax bill. Even as the housing downturn drags from inertia to slow-motion progress in the months ahead, energy is a wedge factor that can swing a buyer to new versus used in a heartbeat.
And like it or not, energy and climate are on the national agenda short-list. On the heals of financial reform legislation, we’ll most likely see attention focus to immigration reform, an issue also of importance to home builders, both from an operations viewpoint and a home buyer demand perspective. After immigration reform–perhaps with a mid-term election intervening–one or more of the dozens of energy reform proposals will slog toward reconciliation and then to the President’s desk.
Not acting would be foolish.
And yet today, we still collectively support a housing finance complex that effectively rewards home buyers’ trading up for extra square footage and less energy efficiency, and punishes the purchase of a home that can save as much as 30% over what average new houses use in energy.
What’s even more scary–but understandable in light of the myth and chicanery that has grown up in and around the sustainable, high performance residential construction sector–is that we’re aware that a good percentage of our audience’s eyes glaze over at the mere mention of “green building.”
So you’ve learned this in the years since all the green talk has gradually become a global bid for survival: Most home buyers won’t pay for green. Put that together with mistrust and disillusionment with elected officials, who all seem bent on passing laws and building codes that add to the building costs, and you’d appear to have a pretty good argument for just trying to sell homes while others figure out what’s going to be law and when.
Wrong.
Two vital down-the-road issues require immediate action from a unified home building industry voice. One is the U.S. debt to GDP ratio, whose dire endgame we can see in sneak-preview mode if we take a look at Greece and the other weak Eurozone economies getting crushed under the weight of servicing what money they owe to others. Home builders must get out ahead of ways they can be a part of reducing the public debt to a more manageable level, or their businesses will be decimated further in the long run.
Also, energy and the climate. The time to hesitate is through.
Among the next steps to fix housing will be to fix housing finance. Part of the solution would be in changing how mortgages are approved by adding “E” for energy to the time-honored formula for calculating a buyer’s monthly ability to pay to operate her home.
This was an idea Bigelow Homes founder Perry Bigelow brought to Capitol Hill in March 1991, and it would introduce a free market catalyst to build and renovate homes by correcting a loan amount for the actual ongoing operating costs of the home in addition to paying the seller’s sticker price. Bigelow Homes has guaranteed energy costs for its home buyers for more than two decades.
Perry Bigelow’s 1991 idea ran afoul of Fannie Mae and Freddie Mac interests in their own energy efficient mortgage programs, which ultimately foundered. Today, remarkably, the theory, verbiage, and conviction that the Leading Homebuilders of America group has adopted as a rallying cry to alter mortgage underwriting and appraisals around energy efficiency, springs directly from Bigelow’s position on the issue.
“I don’t care about authorship on this,” Bigelow says. “I care about getting it done.”
Ken Gear, director of the Leading Homebuilders of America group that has been championing the issue in and among Congressional committees, notes that he’s amazed that several different sources who’ve looked into approaches on housing finance and energy have arrived at the same place, adding an “E” to PITI to fairly qualify buyers for a loan.
New Home Sales–Surprise, Surprise, Especially for the Tax Credit Naysayers
New home sales for March blew away consensus expectations among Wall Street analysts. Their models were broken before and they still are. But if you’re listening to us, you already knew that, and you’re busy not paying attention to the media noise about what it means.
You’ve declared a six month moratorium on mainstream media coverage and daily Wall Street mumbo-jumbo, and your focus is operational. Like ours is.
We heard Tom Lee, chief equity strategist at JP Morgan, respond recently to a question about why his 2010 forecast on the equity markets is much more optimistic than that of most of his peers. In so many words, he’s predicting continued strong recovery in equities because that’s what his analysis tells him. “It sounds smarter to be a bear,” he added.
This is what we believe to be the case right now in housing. We know builders who’ve said the soon-to-expire tax credits for home buyers did not create the surge in demand they’d expected. Both public builders and private ones–underwhelmed by the impact of the Uncle Sam inducement–say the first wave of the tax credit from February to November of 2009, had a much bigger impact and that it pulled buyers forward from the home buyer pool of the future.
But it’s hard to compare the two programs. One started last February 2009, and ran through the entire Spring selling season into the Fall. The surge had nine months to build. The one that’s about to expire straddled the seasonal low-ebb for home buying–the months of December, January, and February.
Many a home builder would have had to roll the dice on spec home building practically the moment in early November 2009 that the ink was dry on the legislation to extend and expand the tax credit.
What’s more, bad weather in the mid-West and Atlantic coast in February may have restrained activity builders may have expected, which pent up traffic until later.
What’s clearer to us is this point, and it’s precisely here that we must again disagree with the consensus on the post-expiration effect: Home buyers are smarter. Waiting–in this case, to the last possible moment before the expiration of the tax credit punch bowl–has been smarter than not waiting. Why? Well, in many instances, they’re getting a better deal than if they bought earlier in the program window.
Now, $8,000 is $8,000, and $6,500 is $6,500. So, if Uncle Sam takes that punch bowl away, will smart home buyers believe for a second they’ve forfeited their opportunity to make June or July or August the best moment in a generation to buy a new house? No.
What the credit extension and expansion succeeded in doing, as M.D.C. Holdings CEO Larry Mizel has pointed out, is to draw the focus on home buying over to new vs. used.
The likelihood that home buyers believe they’re making a smart choice to buy new now is higher because home finance has corrected, and valuations have begun to solidify.
Now, even optimistic JP Morgan strategist Tom Lee posits that home prices have another 6% or 7% to fall on a national basis before the bottom sets in (he’s predicting it’ll be 2022 before we see them regain their 2007 peak pricing levels).
But we’re not recommending home building companies pay any more attention to analysts now than we were a month ago. They just don’t know. If you focus on building smart, and building “finance-able” homes, the analysts’ forecasts can get to be a source of amusement rather than the cause of an ulcer.
A Surge in Home Buying? Well, What Do You Know?
Case in point (see our previous post). The New York Times has this report leading its business pages today.
Real estate agents say buyers and sellers are hurrying to take advantage of the tax credit, which is worth up to $8,000 for home buyers. But the last-minute rush is also prompting some foreboding about what will happen to the market on April 30 when the credit ends — and whether it is too risky to let it end at all.
The Times reports that “arguments for extending the tax credit for a second time are just beginning.” This is not the case. The argument to extend it yet again cropped up practically the moment it was extended for the first time last November.
Our Hill sources say some Congressional staffers have asked National Association of Realtors and National Association of Home Builders lobbyists to test their constituencies’ pulse on an extension, but smart money would say that an extension would be highly improbable.
November’s mid-term elections loom.
The press no sooner gets finished reporting that the home buyer incentives were having little to no effect, when now we’ll see a spate of media reports on the surge in buying just before the program’s deadline.
Why we wouldn’t surmise that it makes sense for as many people as possible to wait as long as possible until just before the expiration to get the best price ever? While prices in a few markets have started to flick up a bit, most sellers are highly motivated to discount enough to get the deal.
The economy has trained home buyers the way supermarkets once trained double-coupon shoppers to strike at the optimal moment for the deal of a lifetime. So the weather is better and the floodgates are open.
Now, naysayers can go back to calculations on how much the home buyer tax credit program costs taxpayers, and worrying about what happens to the marketplace when the program sunsets.
Nevermind the headlines.
Shea Homes’ Spaces Has Got the Home Building Industry’s Attention
Among 2010 New Year’s resolutions, perhaps consider this. Note to self if you’re a leading home building company senior-management executive spying floor plans, elevations, marketing, and sales efforts at what could be an inflection point new product strategy for American new home building in the 21st Century.
Don’t get caught by the CEO of the company whose homes you’re snooping around in.
But if you do get nabbed–as one top 100 home builder’s VP of sales and marketing did one pristine early December afternoon in the heart of California’s Inland Empire home building war zone–you might hope that it’s Shea Homes CEO Bert Selva who busts you, and that it’s in one of Shea’s just unveiled Spaces communities.
Said perpetrator’s name shall go unreported. It’s actually not that important. Espionage of this nature is part and parcel of the high volume home building game, and Bert Selva knows that. He took it all in stride and let his prisoner off gently when the fellow said, “Bert, you’re doing an amazing thing here. I’ve been here four times now. I should probably buy one of these houses.”
“In what other manufacturing business do you have the ability to walk into your competition and pick up their trade secrets (i.e. floor plans and elevations) in their marketing materials? If it’s innovative, it doesn’t stay secret for long,” says Selva.
In fact, Selva’s pleased with the stir Shea’s introduction of Spaces homes has created. He’s had dozens of calls about Spaces, including a number from the CEOs of several public home building companies, and there’s a reason. Sleek, simple, functional, flexible, sustainable design. And, to boot, you can use those same descriptives for the operational process, which makes it low in variability, high in scaleability, and therefore affordable.
Affordable, cool, energy-efficient. That’s the thinking behind the Spaces homes. Take the process engineering revolution Jeff Mezger and his team at KB Home pulled off to make KB’s Open Series the talk of 2009 and give that whole initiative a demographic and psychographic pitch toward that generation of 77 million we’ve long referred to as “tomorrow’s home buyer.”
Think iPod or iPhone. Think W hotel. Think different.
“What did Apple do with the iPod that made it a great product?” says architect Mike Woodley, who entered the top-secret creative development of the Spaces project in late 2008. “They made it work really well at several functions; they streamlined the design, and they got rid of all the knobs. That’s what we’ve done with the Spaces homes. It’s flexible, clean, and it’s all about how people live in and use a house. We got rid of all the knobs.”
Woodley notes an important phenomenon that’s held from the time he was running charrettes on the project late last fall through the present, when he presents Spaces to everyone from Shea division presidents to local planning commissions. Not everybody likes it, and not everybody gets it.
“We actually know we’re onto something when we have the older school guys talking about how this or that doesn’t line up, or this is too thin, or that’s not enough,” says Woodley. “This really is new, and it’s got to appeal to buyers who don’t want what we’ve been doing for so long now.”
In doing so, Shea captured efficiencies enough to build profitably with a price tag to customers up to 15% below equivalent homes in the 2,000 sq. ft. range and below, whose prices are already 15% to 20% less than they were at their 2006 peak.
So Shea, which up to now could only compete by out-wowing its rivals with location, architectural panache, amenity, and quality, now can compete on price. Amid estimates that foreclosures and distressed sales will remain part of the fabric of real estate like an unwelcome visitor with no plans to leave, competing on price is not an option. This is especially true for private home builders whose capital structure won’t allow them to simply impair lot values and dump them on the cash-for-acres net operating loss tax carry back market.
So private home builders in particular face a 2010 that like the past 24 months or more means surviving on their wits. And that means gaining a desirability advantage over both foreclosures and competitors. The simplest equation here is winning on both price and design/engineering.
To do that, home building strategy must change both product and process. Spaces does that for Shea.
The Fix Housing First Job is Not Done Yet
When Raleigh, N.C.-based St. Lawrence Homes executive Rich Ohmann speaks, we know we have to listen.
Yesterday, it was what Rich made of the media’s take on housing starts, which portrays home builders collectively as a villainous drag on a fragile economic recovery. Here’s Ohmann’s reaction:
I love this story. It blames housing for dragging down the ‘budding economic recovery’. I would submit that the prior turns of homebuilding were fueled by the creation of new homebuilding firms (we were one of them in the mid 1980’s). Today’s languishing condition is only partly due to the condition of the market (no disputing the fact that things are awful in our economy as a whole). I would place the blame for a majority of the lack of vibrancy in homebuilding on the fact that innovators and new business creators aren’t able to secure ANY funding for a venture large or small. (emphasis added by Housing Crisis) A young entrepreneur can’t start up without cash and there’s no credit. The old world entrepreneurs are still trying to figure out what to do with what they were left with when the world came to a screeching halt.
There’s no recovery without a credit source to fuel it. Am I the idiot here or am I just one of many?
You are not alone, Rich.
As you know we’ve been on the road this week. Everywhere everyone in residential real estate–single-family, multi-family, affordable, etc.–wonders to us aloud, “What’s happening out there? What are you hearing?”
What we’re hearing is that there’s no consensus on what’s going on, as much as we crave a pattern, and want to see a trend develop. Where there are bright spots, they’re bright for isolated reasons. The theme and broader backdrop is still hugely challenging, save in part for the public home builders, whose almighty balance sheets will see them through another treacherous stretch of 12 months or more.
- We’re hearing cheery one-offs from home builders such as Irvine, CA-based MBK Homes, that they’re not only sold out on their planned homes through their current fiscal yearend, ending April 1, 2010, they’re also 50% sold out for their coming new year.
- We’re hearing this phrase repeatedly, and in more and more places: “We’re buying finished lots. We have to.”
- We’re hearing that public companies that were doing 1% of their market’s homes on volume of 1,400 homes a year, now have 4% marketshare doing less than a run-rate of 200 units a year. The publics can build; many privates can not given the cost of money to go vertical today.
- We’re hearing that as long as a company has access to ”internal finance,” they can build. If they don’t, they’re SOL, and ergo a “drag on the economy,” as the Associated Press story referenced above would contend.
- We’re hearing that company after company that succumbed to the credit squeeze of 2008 and 2009 has a principal or three who’re locking and loading to reenter the fray as Messrs. NewCo in 2010.
- We’re hearing rumblings that the FDIC has begun operating in similar ways to the Resolution Trust Corporation in the 1990s. When a bank goes into zombie mode, and can’t move on its real estate holdings because doing so would throw its entire capital structure into turmoil, the FDIC now comes in and takes the bank, and begins deploying the commercial real estate for 10 or 20 or 30 cents on the dollar, just like the RTC back in the day. The noteworthy thing is that the FDIC is trying to keep from letting the land go to speculators–rather, it’s trying to place the residential land portfolios with companies who earnestly want to make a longer term go of building communities out.
- We’re hearing that job loss, job loss, job loss is the issue policy and policy-makers need to give their full attention for the next year, or many of them won’t be in office after next year’s mid-term elections.
In Phoenix alone, points out Marcus & Millichap VP for Investments Peter TeKampe, 300,000 people have lost their job since the economic heyday that ended in 2007. In Atlanta, the number is 60,000. Apartment vacancy rates are on the rise. Household formations are stagnating. The structural drivers of the residential investment component of the GDP are challenged.
So, we’ve been wondering for months now, when home builders say, “I’m buying lots,” what’s on the other side of that equation? Are they buying lots to replace lots they’ve sold at full value? Is the scarcity in good finished lots in Phoenix, parts of Southern California, and even in Florida, Atlanta, and the D.C. metro area a scarcity caused by home buyer demand? Think again.
How can it be now, when other than a few exception veins of economic fortitude, earnings and well-being are so uncertain?
Among the biggest questions we face in our time, and we appear to be out of time to evade them, are these:
- How will Americans pay for healthcare?
- How will Americans both a) transition from dependence on non-domestic energy sources, and b) reduce its negative impact on climate and the environment?
- How will Americans segue into a new economy that can create demand for its workers?
Home builders–it is clear from a growing number of economists’ diatribes and media muckraking–are being held up as chicanery-prone, money-hungry beneficiaries of both the up and the down side of the economic parabola.
So, we have a thought, and it springs from what we feel was a highly effective unified effort among home builders in support of the extension/expansion of the home buyer tax credit and the telescoping backward of the NOL tax carry back provisions for larger companies.
We feel that in light of how successful companies were in harmonizing their interests and telling their stories to elected officials, home builders should sustain their momentum, and keep their act together.
The Fix Housing First brand, in other words, could take on a new mission. It could build off its collaborative outreach among home building, real estate, the AARP, and other organizations, to go another step or two to move the economy where it needs to go.
Fresh from the victories achieved on Capitol Hill, we’d suggest the following for Ken Gear and the organization that lobbied so well to sustain the stimulus of housing demand.
- Keep the consortium of builders together to Fix Housing First;
- Focus the educational and policy influence program on housing’s direct impact on jobs
- Get public home builders actively involved with the FDIC’s bank take-over programs to identify workforce housing districts in metro areas nationally
- Bring public and private home building companies together–using some percentage of the public home builders’ accrued cash supply as a guaranty–to capitalize acquisition of land parcels from FDIC banks, set up fee-building opportunities, with municipal workforce needs as a primary driver.
This would be a story that elected officials could both understand and act on.
We’re beginning to come to grips with the fact that the arduous, unbearably flat and grudging recovery ahead of us will continue to take a toll on what we knew as the home building landscape circa 2006. That world is done.
Home building companies need to account for how good and how trustworthy they have been and continue to be. That need goes 24/7. The minute one of them stops that, trust goes by the wayside, and a company is no longer a business.
Right now, home builders have an opportunity to seize on what they gained recently with Congress and the President, and continue the crusade to Fix Housing First, bringing their story to the public. This means staying together as a group, and putting resources and focus toward new economy solutions for one of our nation’s chronic problems–workforce housing.
If the big builders can become part of that solution–and they have the means in both capital and skills to do it–then it will go far toward easing Rich Ohmann’s, and many many others’, anxieties about getting blamed for being both the cause of the catastrophe, the beneficiary of the rescue, and the dampener of sparks of economic momentum.
Housing Policy Places a Big Bet on Home Builders
An extended, expanded home buyer tax credit and an expanded Net Operating Loss tax carryback measure last week rode the coat tails of the passage of law adding to the benefits period for those who are unemployed.
Don’t think this outcome is not a triumph for those who fought for every Congressional vote, and don’t think for a moment that all this government beneficence was a given. Many, many other advocates and champions lobbied hard to have their respective proposals and resolutions bolted on to the freshly signed Worker, Homeownership, and Business Assistance Act of 2009.
The mantra “Fix Housing First” came to light just before all the stuff hit the fan in September and October last year. It took a good hard look into the economic abyss and a unvarnished look at the certain pain still ahead for many people on Main Street, Wall Street, and Capitol Hill to get that Fix Housing First is more than a magic marker placard motto for those with vested interests in housing and real estate.
It’s the economy, …. You can fill in the blank.
Now, the fact is, where ever you might come down on the side of Red or Blue, bigger or smaller, liberal or conservative, Smith or Keynes, there are three take-aways from the outcome of this particular vote:
- In one year’s time, housing rose from its rank as an also-ran issue–among health care, energy, immigration, and financial regulatory reform–to one at the center of focus for a nation determined to work its way out of more than a decade of recklessness and wrongheadedness.
- The bill is a wake-up call, recognizing that housing is not just a function of the economy but an engine–albeit not the only engine of the economy. It’s a job maker.
- Congress’s across-the-aisle embrace of the bill mirrors an uncommon degree of unanimity among companies and associations and other parties who more often conflict, and diverge, and polarize around their own self-interest.
We applaud the year-long seven-days-a-week efforts of Fix Housing First executive director Ken Gear, and the National Association of Home Builders’ leadership, and the high production home builder leadership that forged a forceful stand to tell Congress the story, and make the case for the bill. Even earlier this year, the issue divided and ultimately conquered home builders’ best interests because large and small companies split on what was good for whom.
Now, the future landscape and story of home building divides itself into two parts. The first part is now through April 30, 2010.
Policy–which serves as our best-known proxy for what American voters have placed their faith in–now supports housing, real estate, and home building to a star-aligning extent. Housing, and in particular, the home building part of housing, is an agenda wild card because it is an organic creator and sustainer of what we need most right now. Jobs.
Think about the elect-ability of every incumbent having to run in the 2010 mid-term elections, including every seat in the House. Now think of how momentum on the jobs front could possibly turn from so negative to better in the least amount of time.
So now through April 30th, policy will support home builders. With interest rate support, the new, more inclusive terms of tax credits for home buyers, and the ability to transact assets at a loss to claim taxes paid on company profits going back to 2004, policy will support those in residential real estate and construction.
After that, it’s up to you. Inflation pressure will build. Finally, the help of tax credits for home buyers will have run their course.
It’ll be your ability to price and produce homes at a quality and cost that captures prospective buyers from a resale market flooded with forced sales.
Amid all that’s uncertain and all that’s doubtful, you can bet money on that.
Now, here’s where we–at Big Builder–can help. You’re finalizing your 2010 budget right now, and you’re probably presenting it to your boards these days. No doubt, whether you’re planning for a year that’s flat with 2009 or slightly better (given that the first few months of 2009 occurred in the gravity-free twilight zone that came after Wall Street melted down last year), chances are there’s some guesswork in your projections.
And, probably, if you’re like us, you’re being overly optimistic about how you’re going to make your numbers.
The balance of ideas and execution, creativity and teamwork, motivation and focus, determination and leadership has never been more delicate. Which basics will you get back to?
- There are about 140 working days between now and April 30, 2010–do you have at least one idea per day to constantly improve your operation to both avail of the tax credit and then keep on plugging when it sunsets?
- About 80% of the workforce will dodge the bullet of the deteriorating jobs environment–and some of them will be able to sell their homes now, with a tax credit that allows for a step-up buyer level. Do you know who they are and how to target those seller/buyers?
- You’ve got to get more out of fewer players, replacing headcount with teamwork and focus. Where are the disconnects in your team and how can you build trust, efficacy, and morale?
You and every one of your associates should register for the Big Builder ‘09 Virtual Event. Whether you’re in leadership, management, or in the trenches, in the headquarters or in the field, in design or in finance, there’s something in our program that will help you do better.
Sign up now by clicking on REGISTER FOR BIG BUILDER ‘09 VIRTUAL. It’s cost-free and we assure you it’ll be worth your time. We’ve worked hard to make this event unique and valuable.
The unique part is that we’ve made the learning fun by putting together five reality TV-like Dream Teams of executives from different companies to engage in a challenge in each of five markets. The challenge is to take a land parcel and create a plan for it. Simple, right? Well, now try to do it in just five weeks–on top of your day jobs.
At the very least, you should tune in and register to support and challenge them. They are your peers, your competitors, and where your next best idea to get your company back on track through April 30, 2010, and beyond.
Again, press here to REGISTER. It takes seconds. You and your team should plan to join us as we unveil the first programs of Big Builder ‘09 Virtual for a week-long best practices academy, from November 16 through November 20, every day next week.
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.
Late Update on Home Buyer Tax Credit Status
Here’s the latest update we can get on possible extension or expansion of a tax credit for buyers of primary residences.
- Today, anyway, informed sources on Capitol Hill indicate that the Nov. 30 “sunset” of the American Reinvestment and Recovery Act tax credit for first-time home buyers, will more than likely lead to the “sunrise” of at least an equal measure through at least the Spring of 2010.
From the time the abysmal August employment numbers came out last Friday, talk of more stimulus intensified on Capitol Hill. Of course, the cost-benefit analysis becomes a classic exercise in political economics, or economic politics.
Still, when the raw unemployment numbers came in and even the second-derivative remained at a worrisome rate of deterioration, it seemed that more elected officials would be willing to look anew at home buyer tax credits and their effect.
- Some looked simply at the absence of the current $8,000 credit for first time home buyers with restricted household incomes, and fretted about what might happen to the fledgling economic recovery minus this helping wind;
- Some began to look beyond the unit cost for each incremental home sold under the current tax program and began to connect the dots to how so many other businesses growth if demand among home buyers grows.
- A few even started to pencil out the real implications of expanding the program to include buyers of all primary residences, not just new home buyers, from all incomes.
Given the ferocity of the foreclosure rate and the Sherman March-like effect foreclosures have on home prices and peoples’ ability and willingness to pay their mortgages, it’s no surprise that even the densest of our Congresspeople might begin to link demand for housing with stabilization of prices.
If one plays out the negative feedback loop of destabilized home prices through its endgame, the toll on earnings, jobs, consumer spending, and recovery is sickening. It took us a while to understand that these forces aren’t each a discrete, decoupled phenomenon, but rather a strand of triple, quadruple, and quintuple helices that relate to and effect the others at every instant.
So, as talk of new Stimulus, job formation credits, small business tax credits, etc. gathers steam in the corridors of the House and Senate office buildings, we hear that Speaker of the House Nancy Pelosi (D-Calif.) has been quoted in Roll Call about the presense of a home buyer tax credit making its way forward in the House.
Too, we hear that Senator Christopher Dodd (D-Conn.) may “attach” an expanded, more inclusive, and increased (to $15,000) tax credit for primary home buyers to an emergency unemployment insurance extension measure that could magic carpet its way through both Houses and Presidential approval.
American tax payers have already taken on a huge price tag with the funding of public sector jobs that are just barely keeping the economy’s head above water. Investment in sustainable private sector activity, to keep and grow the ranks of workers employed by small, medium, and large companies would also seem to make sense.
The connection between housing, particularly new housing, and the health of the economy sometimes gets forgotten. Now, it’s getting remembered.
So, when sunset of the current tax credit for home buyers occurs, it’ll be more than just another new day on Dec. 1.
However, it’d be a mistake to take a favorable outcome for granted.
Home Buyer Tax Credit 2.0
Many believe that every facet of the housing boom of the early part of the 2000s was pure economic pathology, a loosely knit series of white-collar crimes perpetrated by those unrestrained by scruples upon those undeterred by sound judgment.
Ones without principles stray into evil with impunity. The unknowing ones swept into the “everybody wins” jetstream are hardly more innocent–ignorance alone is never an excuse, especially when many of those “taken for a ride” leapt at the illogical “opportunity” to get something wonderful for nothing.
There being no innocents, the conclusion of those who regard the financial and real estate bubbles as pure malfeasance is that fire, brimstone, and cathartic correction must level the place and start afresh.
Nobel laureate Princeton economist and New York Times columnist Paul Krugman writes about those who believe in the economy as if it were an self-filtering ecosystem that–left untouched–would find its quickest route to recovery.
It’s all there: mass unemployment is necessary, because you have to shift resources away from sectors that got too big, stimulus is a bad thing because it slows the necessary adjustment. And now as then, the whole notion falls apart when you ask why, say, a housing boom — which requires shifting resources into housing — doesn’t produce the same kind of unemployment as a housing bust that shifts resources out of housing.
And this has exactly what to do with high volume home builders just now? There’s one critical measure we’re going to be looking at for the next several months as job numbers keep getting worse. That is “temporary” hours. Once hours among temporary workers start to expand, the recovery will really have started. So far, that metric is still getting worse.
So, here at the intersection of Smith and Keynes, big builders need to choose their lane. The problem here is that “big builders” are not a homogeneous bunch. They are different in magnitude, geography, business model, and just about every other characteristic you can talk about, except that they together account for six out of every 10 of the half million new homes being bought these days.
Today, a public home building company CEO’s looking at another year ahead of mostly finding ways to value-engineer product and swap out land enough to drive volume, turns, and cash. Most privately capitalized companies are trying to find lenders who’ll bankroll going vertical on land that can more and more be gotten for a song.
They’re different as day and night from one another, but if they’re going to have a business to build on during 2010, they’re going to need to speak with the same conviction for the same goals, and it’s past time now to decide what those goals should be.
If only this once, home builders from Tampa to Tucson to Tacoma and from Orange County, California to Orange County, New York, should pick a lane and unify.
The issue is this: people do not get the the theory behind the home buyer tax credit. Many voters see it as a hand-out to “haves” in society paid for in great part by people not fortunate enough to cross into homeownership. Many elected officials see it as that, or as a hand-out to big builder companies that helped build too many new homes in bubble markets, inflating the price of homes everywhere. Many economists see it as an extravagant means of depleting the pool of renters to “shift the deckchairs on the Titanic.”
What’s not clear, after all, is that a home buyer tax credit stimulus–the one that would really work if it included all buyers of primary residences–works in multiple ways on the economy. It works not only on stoking demand and removing vacant and for-sale units from the stock of homes regarded as excess inventory.
- It creates jobs
- It builds communities where owners have a greater stake in taking the baby-steps toward developing a new local economy
- It creates demand for consumer goods and services
- It creates positive impact on earnings
- It creates more jobs
Calculated Risk’s big argument against the extension, expansion, or continuation of the tax credit for home buyers as part of the ARRA stimulus program is that he asserts that it’s a hugely expensive way to get incremental home purchases, and ones that rob the rental universe, to boot.
What Calculated Risk discounts is a housing tax credit’s impact on the broader economy. To get household growth back to where it needs to be, it’s going to take jobs. But first, it’s going to take more temporary hourly wages as the need for inventory grows.
Stimulate demand in home purchases at all price ranges, and temporary hourly wages will start climbing again.
Fact is, government policy and private sector market forces are going to have to work with and around each other for another couple of years as the economy recovers from the past two years’ shock.
It’s a tough dilemma. Do you support further intervention in the economy? Or dropping it in favor of letting the market correct itself?
Are you guys together on this issue or no? Do you have the voice in Washington you need to make your case, or no? On this issue, home builders — large and small, Rust Belt and Sun Belt, public and private — should find a way to pressure Congress to do the right thing.