Twin Deadlines for Home Builders
As the ink dried on President Obama’s signature on November 6, formalizing passage of the Worker, Homeownership, and Business Act of 2009, the world that is the big business of home building shifted once again into deadline mode.
Now familiar to us all, the more inclusive terms of a home buyer tax credit have been extended through April 2010. As home builders learned from the prospective sunsetting of the current $8,000 first-time home buyer tax credit at mid-night Nov. 30, 2009, the new deadline means that effectively, they’ve virtually got to do all their business with home buyers by the end of February.
One can see from existing home sales’ breakout month of October that the threat of the end of the stimulus program, along with affordability such as it is, and interest rates continuing to benefit from the government’s mortgage backed securities purchase program, together fed the tide of demand for home purchases. One can also see that this demand didn’t help new home builders appreciably, since unless they had spec homes ready to deliver as the rush occurred, they were not going to be able to deliver in time to make the Nov. 30th deadline.
We’ll see more of the same when we look at March sales–except this time, more new home builders will be putting up more spec homes to have them ready by the time the next craze occurs, when people will feel compelled to act on a home purchase to avoid the risk of missing the last chance of a lifetime to to get the government, the banks, and the builders stars to align in such a supernova.
After that moment, who knows what all will occur as far as pressure on interest rates, especially if the Federal Reserve concludes is planned MBS purchase program?
So that accounts for the deadline mode of both public and private home builders, some of whom will be taking on a life or death risk to pour what remains of their private cash reserves into building homes speculatively to generate cash for another push through the lean months of 2010.
There’s another deadline that’s causing gyrations in home building these days since the passage of the bill to extend unemployment benefits, which included the home buyer tax credit expansion.
This deadline has public home builders’ regional and divisional presidents and their respective land pros on a mission to get rid of lots. Funny they should be clamoring to unload lots even as they clamor to secure other lots, but that’s exactly what’s happening.
To avail of the Net Operating Loss tax carry back extension that was also part of the unemployment benefits measure enacted Nov. 6, many home builders will be meeting fiscal year deadlines to transact — i.e. sell — lots essentially for what they can get for them, 10 cents, 20 cents, 30 cents on the dollar, because if they do, they’re eligible for Uncle Sam to refund them tax money they paid during previously profitable years, right back to 2004.
When a two-year clawback rule was in effect, a fair number of home builders took advantage of the government bounty on taxes paid during 2006 and 2005, but now they can put markers on a refund for payments made to the Internal Revenue Service for another record-profit year: 2004.
One division president I spent time with last week said he was under orders to sell lots “at any price,” just to get them off the books and eligible for the tax refund–which, in aggregate for this company, may total $100 million before the end of the year.
For buy-and-holders, this is a moment where people will pay for lots that were overpriced in the early part of the decade, but are probably underpriced now. At that same time, the push to unload, particularly among public home builders, will further clarify what is under the hood of their operations, and will allow them to focus on operational improvement, product design and development, and greater alignment of their enterprises.
By the time each company’s fiscal year deadline comes up for the 5-year tax look backs, public home builders will have tapped out every possible means of generating cash that is not from home building operations. They’ll have their cash troves maxxed out, and all that “path of growth” land that they overbid on during their reckless days, will be written down, written off, and in somebody else’s grateful hands.
The deal making has begun in a big way. Those who are buying are also selling. Those who are selling really need to sell. This is a moment that we can look back on as an opportunity for those who have two luxuries–cash and time–in hand.
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