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.

December 11, 2009 | Filed Under Financial Crisis, Legislation | 3 Comments 

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.

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:

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.

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.

November 19, 2009 | Filed Under Financial Crisis, Home Builders, Legislation | 2 Comments 

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:

  1. 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.
  2. 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.
  3. 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?

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.

November 9, 2009 | Filed Under Financial Crisis, Home Builders, Legislation | Leave a Comment 

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:

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.

October 29, 2009 | Filed Under Financial Crisis, Legislation | 4 Comments 

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.

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.

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.

October 8, 2009 | Filed Under Financial Crisis, Legislation | Leave a Comment 

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.

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.

October 5, 2009 | Filed Under Home Builders, Legislation | 2 Comments 

Home Buyer Tax Credit Econ 101

If American taxpayers get a bill for $43,000 for the sale of every home to a first-time buyer who would not have bought if he or she didn’t get an $8,000 credit, is the program, which is set to expire in 60 days, worth it?

This estimate comes from our preferred calculator of risk, Calculated Risk, but we contend that this is a miscalculation of risk. Follow CR’s original logic here:

The NAR recently reported:

NAR estimates that about 1.8 to 2.0 million first-time buyers will take advantage of the $8,000 tax credit this year, with approximately 350,000 additional sales that would not have taken place without the credit.

You can calculate the new $15 billion projection; 1.9 million times $8,000.

But this only resulted in 350,000 additional sales. Divide $15 billion by 350 thousand, and the program cost is about $43,000 per additional buyer. Very expensive.

Now the National Association of Home Builders estimates that expanding and extending the credit through 2010 would generate 500,000 additional sales at a cost of about $30 billion. So this is approximately $60,000 per additional house sold. And I think the cost will be much higher.

Since that original post, the $43,000 price tag per incremental home sold thanks to the $8,000 tax credit under the terms of the American Reinvestment and Recovery Act of 2009, has gotten wide play among economists who generally posit that Americans would spend their tax money in better ways.

Recently, using that same calculus, CR goes so far as to assert that the 350,000 incremental home buyers in 2009 is 1) wrecking the apartment rental market, and 2) very likely to exert a deflationary fieldforce on the Consumer Price Index if a home buyer tax credit gets an extension.

The rental vacancy rate was already at a record 10.6% in Q2 2009. Some quick math suggests the tax credit will push the national vacancy rate above 11% soon.

And that means even more pressure on rents (rents are already falling). This is good news for renters, but this will also lead to more apartment defaults, higher default rates for apartment CMBS, and more losses for small and regional banks.

And falling rents are already pushing down owners’ equivalent rent (OER), and my guess is OER will probably turn negative soon. Since OER is the largest component of CPI (and almost 40% of core CPI), this will push down CPI for some time.

CR can continue to build a fabulous series of scenarios from his original assumption, but we believe that original assumption is a miscalculation.

Paul Krugman writes below, not about the home buyer tax credit, but about calculating accurately, the cost of proposed cap and trade legislation. But his logic on that issue is what leads us to believe that Calculated Risk’s $43,000 figure is an erroneous  benchmark of the program’s cost:

Beck got his number from someone who learned about a guesstimate of what the auction value of permits might be (way higher than current estimates, by the way), divided by the number of households, and proclaimed this the cost of the bill. In effect, he looked at a guess about the size of the blue rectangle, which does not represent an economic cost, and called that the cost to the economy.

In a way, though, what Martin Feldstein did was worse. He took the CBO’s estimate of “compliance costs”, which was $1600 per household in an early report (it’s now down to $900, but who’s counting?), and implied that this was the economic cost of the legislation. But “compliance costs” are basically the sum of the blue rectangle and the red triangle; the true economic costs are just the triangle, and are much smaller.

Another way to say this is that under the Feldstein method, any time you try to correct an externality, which necessarily means changing relative prices, all of the negative effects of the price change will be counted as a cost — but none of the positive effects will be counted as a benefit.

Bad stuff. And what you should bear in mind is that all I’m doing here is conventional neoclassical economics, quite literally basic textbook material. What does it say when the people who claim to believe in this stuff throw it out the window as soon as it leads to policy conclusions they don’t like?

I.e. It is possible to do the arithmetic correctly and get the math wrong. (It should be noted though, that Krugman has voiced opposition to tax credits for new home buyers as well, so this example is not to say that he supports our view about the potential extension of the program).

Everybody knows the immediate pressing issue is we need to get the public sector out of the grill of the private sector. That’s going to take jobs. First jobs have to stop going away, and then they–private sector ones–have to start coming back.

We need an extension of the home buyer tax credit to keep the economy headed toward where it will begin to expand jobs sooner than later. Let’s talk about the program from a realistic cost and benefit analysis.

September 30, 2009 | Filed Under Financial Crisis, Legislation | 1 Comment 

The Home Buyer Tax Credit Crunch Bunch

Cartoon by Randy Bish, Pittsburgh Tribune-Review

Cartoon by Randy Bish, Pittsburgh Tribune-Review

Make no mistake, any extension or expansion of the tax credit after the current program’s hard sunset on November 30 will reflect venal political motivation (i.e. reelection bids) more than it does Congressional math skills.

Still, why are so many people getting the math wrong as they voice pro or con about whether more home buying stimulus is worth our tax money or not?

We know that Calculated Risk–a solid economics analyst–believes the policy should have never happened and should go away. He’s done much-quoted arithmetic that puts a U.S. taxpayer pricetag of $43,000 on each house sold under the program that would not have sold if the program did not exist.

Today, he says “most economists–left and right–oppose” the tax credit. He links to a J. Patrick Coolican Las Vegas Sun article that quotes a slew of right- or left-leaning economists who give myriad, often conflicting reasons the current measure is bad.

We’ve heard economists who contend that a home buyer demand stimulus can act as an adrenaline dose that can stabilize home-price declines, slow foreclosures, get people working, and steady the economy for a sustainable period.

Maybe they’re actually a minority of economists, but we think the claim that “most economists oppose” the credit may be pushing the truth.

Thing is, who do economists employ, anyway? They don’t make jobs happen or even household formations, so why should a bunch of economists–the majority of whom did not, like Tom Lawler or Robert Shiller, call the housing bubble nor anything else in the past 10 years–have any say at all? Venal political motivations cloud most of their best economic judgment anyway, so they’re really no different than the politicians.

In this case, best trust people who actually run companies large and small that put people to work. Ask them whether or not it’s worth taxpayers’ money to give housing a bit more of a bump to keep some momentum going.

September 22, 2009 | Filed Under Financial Crisis, Legislation | 1 Comment 

Taking on Risk

Calculated Risk wants his audience to know what the $8,000 first-time-home-buyer tax credit program costs, and why not?

There are at least four proposals and resolutions with varied amounts of support in both Houses of Congress, awaiting the return of our esteemed representatives for further consideration among the urgencies of healthcare, energy, and financial system regulation. Huge stakes. Already, it looks like our grandchildren will take the brunt of the pain for federal programs flying at the financial system’s woeful state today.

We only know the author of the Calculated Risk blog by his first name, Bill.

We know that his blend of economic analytical discipline, common sense, and a deadpan, just-the-facts-maam writing style make his observations work as insights. Often enough, Calculated Risk’s analysis leads to mind-changing, light-bulb-illuminating, calls to action.

Where CR does the math, it’s alway in English, not Numblish. A reader doesn’t need an advance degree in economics or finance to grasp the point. For instance, on the cost to American taxpayers of the $8,000 tax credit, his tally goes as follows:

Here is the math: 1.9 million buyers qualify for the credit (the NAR estimates between 1.8 and 2.0 million) = $15.2 billion.

The NAR estimates the tax credit resulted in 350 thousand additional purchases. So divide $15.2 billion by 350 thousand = $43,000 per additional home.

The conclusion we’re to draw from the analysis is that the cost of the program outweighs the benefits. CR’s own conclusion is this:

And the numbers will get worse if the program is extended.

But to be fair, we don’t think “the numbers” here are correct.

CR’s math assumes National Association of Realtors data on sales of “existing homes” and NAR estimate of the incremental boost to sales during the term of the $8,000 tax credit to first time home buyers.

NAR “existing home sales” do not include new home sales; so there’s a factor, albeit maybe only 10% of the “existing home sales” market, that has been left out of the addition.

NAR’s home builder counterpart, the National Association of Home Builders, estimates the incremental jolt from this year’s $8,000 tax credit for first time home buyers is not 350,000, but 383,000, or 33k more than the NAR estimate.

Let’s say that delta of 33,000 home sales–a little less than 10% of the 350,000 boost in existing home sales NAR says the tax credit program stimulated–represents the number of new homes sold that would not have sold during that time period without the $8k tax credit.

So, go back to the NAR estimate that 1.9 million home buyers will avail of the tax credit, get the $15.2 billion figure CR arrived at, and divide not by 350,000, but by 383,000, which includes new homes sold [that wouldn't have without the tax credit boost], as well as incremental existing home sales.

A more accurate cost of the program, using CR’s assumptions then, would be $39,686 per home, not “$43,000 per additional home.”

Also, when you factor in the almost $7 billion in revenue produced by just the 33,000 new homes in the equation, and take a look at the multiplier effect of jobs gained or saved, tax revenue generated to localities, business created, etc., the cost per additional home goes down significantly.

CR analysis argues against extending the tax credit for home buyers, which traces back to data that housing supply exceeds demand, and therefore, stimulating demand with incentives only stalls a necessary real estate price correction.

Our argument here is that demand destruction factors have overshot normalized demand, which makes supply look disproportionately excessive.

Congress needs to weigh the “cost per additional home” sold factor carefully and holistically–including the multiplier effect of new homes sold–if it is going to make a sound decision on whether to continue a tax credit or not.

September 3, 2009 | Filed Under Financial Crisis, Home Builders, Legislation | Leave a Comment 

NAHB Calls on Congress [on Recess] for Action

As always, interesting timing for the National Association of Home Builders. Both Houses of Congress are on recess until September 8, but the NAHB picks today to call on Congress “to extend and enhance the $8,000 first-time home buyer tax credit due to expire on December 1.”

The NAHB says that extending the deadline by 12 months and opening eligibility for the tax credit to all home buyers would account for an incremental 383,000 home sales, and an added 80,000 starts in the tough year ahead.

Maybe the optimal time to call on Congress to do anything is when they’re home, away from the malarial marsh that is the District of Columbia in August. Away from the cacaphony of their own voices, perhaps they can hear better, and see better, and witness more truthfully what the hell is going on in their own back yards.

That’s what they’ll need to do.

Maybe the NAHB’s timing is deliberate. If not, perhaps it’s inadvertently brilliant. During time off, our elected [yes, here we did typo the word "exected" a couple of posts ago] officialdom may count their lucky stars that we may not be heading for the same kind of September and October we endured in 2008. They may actually try to take the pulse of their constituents on the issues hovering like massive dirigibles that on-and-off blot out the sun light–i.e. healthcare reform, the climate bill, and paying for it all.

If elected representatives actually listen, we wonder what convictions they will return to Washington with after September 8th.

What a fascinating time to believe in a government like ours. We elect Senators and Congressional representatives to serve our collective long-term interests and then spend all our time–deservedly–not trusting them to do just that.

If Senators and Representatives listen during their recess, what will they hear? Will they hear the NAHB calling on them to extend measures the trade group would succor an industry sector that pumps as much as 15% into the Gross Domestic Product?

Will they listen to people who’ve lost their jobs and have little hope of finding new ones commensurate with their skills and experience? Will they listen at all to small businesses–you know, the ones that accounted for all the new jobs added to the economy during the run from 2002 to 2007, that have now been gutted unceremoniously from the economy?

If Senators and Representatives listen to small and medium sized businesses during their three weeks’ recess, how will they feel about health care initiatives that will weigh so heavily on mid-sized and smaller business employers? How will they assess the impact of cap-and-trade measures that will add cost, time, and regulatory obligation to every turn when it comes to construction of anything habitable?

Oddly, the smartest economists cast doubt on our elected officials for not going far enough with their regulatory powers and responsibilities? Here’s Princeton University professor, Nobel Prize-winner and New York Times columnist Paul Krugman–if economists had tabloids at the checkout counter, he and Nouriel Roubini would be the Brad Pitt and Matthew McConoughey of their covers–waxing on on CNBC today about how the government has only begun the job of righting what has gone wrong with the economy and business.

We find it strange that those who are blessed with the intelligence and technical training to understand the most about how the wheels came off the financial system are mostly ones who say that more government is the answer.

Thing is, more government only means a higher price to pay and more time to wait for regulators and inspectors to finish what they need to do so that business peole can go about the business of repairing what is wrong with the economy, which is that there’s an over capacity of workers and too little consumption.

We find it to be interesting timing indeed that the NAHB–which should  live, eat, breathe, and sleep the small to medium-sized business interests the trade group represents–should “call on Congress” for more government when more government only lades more of the onus on home builders that hire people and build carbon-emitting dwellings of one sort or another.

As we said, maybe the timing is brilliant, unintentionally. 

August 10, 2009 | Filed Under Financial Crisis, Home Builders, Legislation | 2 Comments 

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