Carry Back Flash Back
Put it this way, home builders would take an extended look-back period for net operating loss tax payment recoupment if they can get it. There’s not much they wouldn’t do to put cash into the till these days as opposed to merely taking costs out of their company.
Like many developments these days, the implications of adding the tax break to Obama Stimulus 1 are probably more significant for removing headwinds than providing tailwinds. In the real world, the financial consequence of giving builders the opportunity to reach as far back as 2004 to get rebates from Uncle Sam, is well-mapped out in J.P. Morgan executive vp and senior home building analyst Michael Rehaut’s inimitable Numblish:
With the builders up 13% since Fri., Jan. 2 (S&P: +0.3%), spurred by the reporting that, as part of the Obama stimulus plan, the NOL lookback period would be extended from 2 years to 5 years, we believe the ultimate impact of this change would be relatively modest. Specifically, we note that, among our universe, builders’ balance sheets have already improved considerably over the last year with net debt down 42% on average. Moreover, we note that until now, the builders have utilized only 46% of the potential tax refunds under the current 2-year lookback, as large land sale transactions, the primary vehicle used to realize the refunds, are difficult to execute and also trigger large impairments and hits to book value. Finally, we note that prior efforts to extend the NOL lookback have failed, most recently in July’s Housing and Economic Recovery Act of 2008, and point out that the incoming administration’s primary goal behind the current package is to create jobs, as stated by transition team spokesperson Stephanie Cutter: “We’re working with Congress to develop a tax-cut package based on a simple principle: What will have the biggest and most immediate impact on creating private sector jobs and strengthening the middle class?”
Rehaut goes on to point out that public company “utilization” of their already extant opportunity to claw back to 2005 has been less than 50%. True, if they got to add 2004 and some of ‘03 to the mix to look back, they’d have another $5 billion (collectively) to go after in Uncle Sam/IRS dollars.
We feel that as time drags on and the stalemate among would-be buyers and would-be sellers of land continues, home builders will be looking at the cash in Uncle Sam’s coffers and saying it looks better and better in comparison to lots they’ll sell who-knows-when?
Of course, Ivy Zelman, ceo of an eponymous research and analysis consultancy, begs to differ with Rehaut on almost every count. CNBC interviewed Ms. Zelman today about the bump builder stocks were getting as talk of the stimulus proposal gained steam.
So some of the issue for home builders as a sector is this. Will they use up much-needed brownie points lobbying and positioning for this benefit as what they really want and need is a stimulus that would make people buy homes–especially new ones?
The Wall Street Journal’s coverage of the business stimulus plan-in-progress from congressional Democrats and the administration doesn’t hesitate to print an idiotic soundbite from, Dean Baker, a clueless economist who claims that extending the carry back rule would reward the perpetrators of our current mess.
“I think it’s ridiculous,” said Dean Baker, an economist and co-director of the Center for Economic and Policy Research. “It’s rewarding the people who messed up.”
No, Mr. Baker, it’s actually about dealing with a “long recession,” which unfortunately won’t put enough irresponsible economists out of their current means of employment–which is actually rewarding the people who messed up.
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