Altered States
It’s April 16, do you know where your money is?
Click on image for access to ProPublica "The Map of Bailout Recipients"
Orange County Register reporter Matt Padilla called attention to this analysis of Troubled Asset Relief Program fund allocations to date.
You gotta feel for Montana and Vermont, which just can’t seem to get in under the TARP like every other state.
Home Builder Trade Group Goes Public, or Rather, Goes at Its Public Members
Home builders met with only flashes of success after their big, exhausting fight on Capitol Hill for stimulus and business tax programs they believed could help the economy help itself. They won an $8,000 tax credit for first-time home buyers. They wanted as much as $15,000 for new or existing home buyers, and they wanted a mortgage buy-down program to jolt demand. They didn’t get nearly that.
For the moment, the battle for more substantial stimulus measures has run its course.
Now, it seems, some of them are going after each other. For, in the wake of the charged, 24/7 lobbying blitz that concluded with Congressional reconciliation of a $790 billion stimulus bill on Friday, Feb. 13, second-guessing and defensiveness have flared up, opening up chronic wounds among long-polarized parts of the industry group.
This week, National Association of Home Builders leadership broadcast to its 200,000 members an aggressive defense of its strategies and its record of effectiveness among elected officials and new Adminstration policy-makers.
At the same time, the trade group distributed a series of documents and has them posted on the members-only pages of the nahb.org Web site that appear to try to rally member support amid a divisive exchange with a small but powerful part of the home building universe–high production builders.
The documents chronicle a controversy whose most recent focus is a scrap over whether net operating loss carry backs would be extended. It’s an issue that home builders have been fighting for among elected officials practically since many of them started reporting quarterly losses in the second half of 2006. But this latest go-round has had a particular sting to it.
Here’s why. At the 11th hour in lobbying and deliberations, on Wednesday, Feb. 11, NAHB President and CEO Jerry Howard wrote to Speaker of the House Nancy Pelosi saying that, as crafted, a measure that would extend NOL carrybacks from 24 to 60 months would give public home builders an unfair advantage at the expense of small home builders. Howard attached a Wall Street Journal article that appeared that morning, which focused precisely on the issue of how extension of the NOL provisions to five years could damage smaller builders’ chances of survival in an already hostile market.
A letter dated March 2, 2009, from NAHB Chairman Joe Robson to High Production Home Builders Council chair and Centex CEO Tim Eller, asserts that the timing of the appearance of the Wall Street Journal article and the case Jerry Howard wanted to put before the Speaker of the House was coincidental.
Robson
The article by Mr. Corkery in the Wall Street Journal on Wednesday, Feb. 12 [editor's note, Wednesday was Feb. 11] highlighted this potential for abuse in the NOL legislation. This was not a onetime occurrence by Mr. Corkery. Attached is a series of Mr. Corkery’s articles on NOL and housing since January, 2008.
NAHB had information about the potential for an article by Mr. Corkery, by way of his inquiry to interview some of our members and asking for a quote from Jerry Howard. We did not know what angle the article would take, who he would quote nor the timing of the article. NAHB has numerous and similar press requests on a regular basis. Obviously, Mr. Corkery’s article was published on the very day the Conference Committee on the Stimulus Bill was to begin.
The events of Wednesday, February 11, 2009, were unprecedented, ending in a four hour Conference Committee on the largest spending Bill in the history of this country.
The morning began with Mr. Corkery’s article. On your regular FHF conference call, Bill Killmer, as replacement for Jerry Howard, who had another engagement, discussed the article and a possible fix to the NOL legislation to prevent abuse. Clayton Traylor in your office volunteered to help write the legislative fix. Jerry Howard in his capacity as President and CEO of NAHB wrote the letter to Speaker Pelosi supporting NOL but requesting a fix to potential abuse which could result in further deterioration of real estate values.
There was not time to review or edit as the events of the day were unfolding at such a rapid pace. I saw the letter after it was sent. If I had the opportunity, I would have edited the tone and order of the letter but not “the ask” as I believe there was an opportunity for abuse.
At the end of the day, I do not believe the article, Jerry’s letter or anything our lobbying staff tried to do could have saved NOL in the Stimulus Bill.
Here’s what the Wall Street Journal reported the following day, on Feb. 12. “Stimulus Bill Deals ‘Major Blow’ to Big Homebuilders.”
The final version of the bill, hashed out in conference between the House and Senate Wednesday night, dropped a tax measure that would have allowed large corporations to claim write-offs on taxes they paid five years ago, instead of a two-year carryback allowed under the current law. The stimulus bill only allows for a five-year carryback for companies with under $5 million in revenue, leaving the larger builders out in the cold.
Big builders are expected to use the current tax law, allowing a two-year carryback, to reap as much as $2.4 billion in cash this year, far more than they will generate from selling houses. But small builders complained that the law, if extended to five years, would encourage their large competitors to dump land to obtain tax write-offs. That would continue to depress values across housing markets, they argue.
The stimulus also axed another home builder plum: a proposed $15,000 home buyer tax credit. The bill includes an $8,000 credit that does not have to be paid back, up from the current $7,500 credit that did have to be repaid, which builders have declared entirely inadequate at spurring demand. In a research note, housing analyst Ivy Zelman called the downsized credit in the bill “a major blow to builders.” Share of the large builders had slipped in morning trading by as much as 10%.
We can only regard the appearance of Corkery’s piece on the polarizing effects of the NOL issue, and the way it was presented as an attachment to Jerry Howard’s letter to Pelosi as highly intriguing timing.
Interestingly, when you do the math on which “small companies” wound up qualifying for the extended NOL provision–those with annual sales of less than $15 million–it takes 60 houses a year at $225k to get there. So, there are quite a number of home builders, even in the broader NAHB universe, that lost out as a result of the ultimate dollar threshold contained in the stimulus that passed.
It should be noted that HousingCrisis.com and sister publication Big Builder are in a delicate situation that we should disclose. Our parent company Hanley Wood has ongoing business relationships and long-standing association with the NAHB.
Our questions have to do with the need for aggressiveness and clear antagonism toward the large companies in the association’s membership. For example, association leadership and the Fix Housing First Coalition leaders were said to have had a daily 9 a.m. call most days a week for months. Still, according to Robson’s letter, the NAHB felt that larger company members of the coalition were pursuing their own agenda.
From the beginning, NAHB was to take the lead on strategy, lobbying and the media. You mentioned instances where by the leadership of the HPHBC were miffed by NAHB’s negative reaction to some efforts to promote the Coalitions goals.
In any effort of this magnitude, coordination of efforts is key. Sending the right message at the right time by the right people keeps the message and ask consistent. We all knew a perception problem existed. Many members of Congress, the media and the general public believe that home builders, most notably the large national builders, created the housing bubble and subsequent bust. I certainly do not agree with that, but perception is reality in most instances.
From the outset, FHF was to have a broader appeal than just the home building industry. The message was to stem the further devaluation of most American’s largest single investment, their home, by curtailing more distressed inventory from coming on the market and stimulating demand so that a floor in prices could be achieved and the free market in homes could begin again. When Mr. Hovnanian, without prior approval from the Coalition, went on Fox Business News and CNBC, it had the appearance and was perceived by many that those who caused the problem were asking for a government bailout. This was the exact opposite of the message FHF was trying to send.
Subsequently, Mr. Miller’s presentation to the National Association of Realtors(NAR) to join the FHF, again without approval of the Coalition, did not follow trade association protocol of not interfering in each other’s business and created a credibility and relations problem for NAHB leadership and staff with the NAR. We live in America and everyone is entitled to free speech. However, when a coalition is formed, ground rules set and then not adhered to, frustration sets in and more damage than good is the result.
Again, if there’s a sincere hope on the part of the association to work through these issues in a sincere, good faith way, one would think there might be more politic ways to talk about differences and misunderstandings that may have arisen. We called Jerry Howard to discuss the tone and substance of these communications to NAHB members, 200,000 of them, and he declined to talk, saying it was an “internal discussion.”
This comes across as a shot-across-the-bow not intended to offer olive but to inflame.
Here’s how Robson’s letter concludes:
We have many challenges facing our industry and I fear many more with this Administration and Congress. The High Production Builders are a significant and an important segment of our industry and of NAHB. I hope this letter will set the frame work of the HPHBC and NAHB leadership discussions in the near future. We, the leadership of NAHB, are available by either conference call or a face to face meeting at your earliest convenience.
The documents from the NAHB leadership to its membership represent chronologies of events and assertions as factually correct and true. Clearly, though, there is another side not represented in these chronologies of events and assertions. That of the companies and individuals mentioned.
From what we hear, a meeting under the auspices the NAHB’s High Production Home Builders Council will take place within two weeks. Senior management from among the top home building companies will be individually keen on a framework of discussion that may find common ground or not.
Here’s Centex CEO Tim Eller’s only response for the moment to questions about the controversy:
“We’ve have been having and continue to have an active dialogue with the NAHB leadership on industry issues which has been one of the roles of the High Production Home Builders Council from the start.”
We do know that there is anger and aggrievement among CEOs of a number of the companies, who believe they’ve been wronged in the way they’re represented in these materials.
Is NAHB chief Jerry Howard on the hot seat? Not likely. His board and the minions of committees and executives that comprise association leadership support him. But if 20 to 30 of home building’s largest companies had their say, it might be a different story.
We could go so far as to speculate that long-standing differences may just cause a split-off of the biggest home building organizations from the NAHB, an agreement to disagree, and perhaps to part ways. So many of the ways the industry has already consolidated bifurcate the interests of the largest companies from the rest.
And the next round of consolidation has not even begun yet.
Time Knights Nouriel Econ Icon
It wasn’t so long ago our funky culture conferred celebrity status on the likes of Bobby Flay, Mario Battali and Mr. Pick-it-up-a-Notch Emeril Lagasse.
Photo: Courtesy of CNBC
Now it seems, it’s out with the five-star chefs, and in with–of all people–academic and applied economists. And the most vaunted of the moment is New York University’s Nouriel Roubini, whose insomniac eyes, Chaplinesque shrug, machine-gun verbal style, and preternatural sense of gloom have made him a none-too-reluctant cover-boy for the End-of-the-Beginning-of-the-Global-Recession.
Time magazine–which we continue to believe should hand over all business and economic news coverage to its more capable sister media channel Fortune–affirms Roubini’s star status with a feature Q&A set in Hong Kong between the NYU prof and correspondent Michael Schuman.
Here’s the interview’s piece de resistance, with a fillip of Roubini dure.
What do you think of President Barack Obama’s progress so far?
I have to give [the Obama Administration] credit. In about six weeks, they have done three major things: the $800-billion stimulus package, a mortgage program that is much more than the previous administration did and a bank plan that, however flawed, at least has the benefit of not having another bailout of the banks. The glass is half full. But for each one there are some flaws … the bank plan wants to pretend that the government is half pregnant with the banks. The debate is between partial and full nationalization, not between nationalization or no nationalization. Go and do the job and do it right by taking over the banks and restructuring them and selling them back to the private sector.
What’s the best-case scenario?
If you do everything right, you avoid an “L,” and that’s really good news. But you still have a situation in which global growth this year is negative. GDP growth in advanced economies is going to be negative through the fourth quarter of this year, and next year growth will be anemic, probably 1% or lower. Job creation is going to be negative. Even in the best scenario, there will be job losses through the end of next year. In the best of circumstances, we have a two- to three-year recession in advanced economies.
Another Play to Stabilize Home Prices: Uncle Sam Buys 2 Million
The scary part about this idea is that it’s one of the more heavy-handed policy intervention notions one can imagine–the government buys 2 million existing for-sale homes at a mean national pricetag of $170K per, or a total of $340 billion. Only its author claims that it is a free-market plan, because the U.S. Treasury makes its money back from the resale of homes into a putatively stronger selling market.
Here’s the gist:
The US commits to purchase up to two million homes (beginning with the 770,000 currently foreclosed) at the current market price.
This purchase will reduce the inventory of homes on the market to just 1.7 million, which is the correct number for a healthy market (3-4 month supply). Ending the supply glut and removing foreclosed homes from the market will restore the balance between supply and demand, and so restore real estate values and mortgage security, permitting refinancing or sale of homes as necessary. The current median home price nationally is about $170,000, which is a healthy price when measured by both historic trends and median household income. So now is the right time to correct inventory. Purchasing two million homes will cost about $340 billion at the median price, but the homes could be sold again into a healthy market over several years at a likely profit that covers management, maintenance, and policing. Correcting the inventory will also put builders back to work answering renewed demand. Meanwhile, having a reserve of up to two million homes will forestall another round of speculation while we enjoy record-low interest rates.
The theory intrigues one and its designer –Kevin Parcell, who pasted his idea in as a comment to NY Times’ columnist, Princeton economist and Nobel prize winnter Paul Krugman’s “Stress Test This“ blog post yesterday–has a data-rich position that makes this straightforward plan seem almost too simple. Which it is.
It doesn’t count for the stampede of foreclosures that would erupt the moment Uncle Sam started trolling the real estate landscape looking to buy up the deeds, first of foreclosed homes, then of buyers bent on getting out of their obligations.
Our problem is that we need ground-up positive psychology to counter negative sentiment due to worsening economic conditions. What’s coming into focus is that the “if we don’t do something now” line has lost its urgency and bailout fatigue is broad-brushing every initiative that comes along. People can’t keep track of all the programs, and they know that what they’re adding up to is tax Armageddon at some point sooner than later.
Still, ideas shared, and, hopefully, competent execution of one or more of them may begin to ping against the ediface of doubt and uncerainty about a free-falling house price environment. However, it should be noted that Paul Krugman sounds as if all he’s seeing from the new Administration is rearranging deck chairs on the Titanic. Buying 2 million homes, he’d probably say, is one of those deck chairs.
One of the President’s Men: Shaun Donovan Faces the Nation
U.S. Housing and Urban Development Secretary Shaun Donovan Sunday defended the president’s proposed housing bailout.
In an appearance on CBS’s “Face the Nation” program, Donovan said President Barack Obama’s plan contains controls that would prevent speculators and others from taking unfair advantage of the situation.
“We have designed this plan to make sure that the folks who did take advantage of people — whether it was lenders or speculators or flippers — that they’re not eligible for this plan,” Donovan said. “We’re going to have a very strict program to make sure that people who participate are what they say they are. We’re not going to benefit those who took advantage before.”
Great Expectations
Word is Treasury Secretary Timothy Geithner will speak next week to address details of the bailout plan that have remained in a cloud of uncertainty since early Presidents’ Day week.
Calculated Risk’s advice in three words or less.
Stress Test. Explain.
Clamor for nationalization — temporary, shock-and-awe style “pre-privatization” — grows. Expectations soar. So many who know so much will swoop like the feathered hord in Hitchcock’s “The Birds.” We won’t hear the end of what’s wrong with every idea, every program, every strategy out of Washington, D.C., until these people who either never sleep or don’t have employment right now can get something to take their brains out of suggestion-box mode and get out and do something.
Credit President Obama for elevating expectations to unreachable heights. We haven’t elected anybody in recent history who we’d permit to disappoint us so deeply.
So, we turn for solace and a smile to Indexed–life amplified to stick figures for the hard of doing-the-math. X and Y axes are your friends here.
This one's called: "And that's not always so bad."
Roll Up the Arm Chair QBs
The Wall Street Journal posted this blog item on its Real Time Economics page.
A couple of snippets:
Obama’s plan is an ambitious one, more ambitious than analysts had been led to expect. It goes much further than previous proposals to stabilize housing. It will help reduce the number of “preventable foreclosures.” Whether it will stop the bloodletting, however, time will tell. House prices today have fallen 22% since peaking in June 2006, according to the Case-Shiller 10-city composite house price index. As a result, between 10 million and 15 million homes are “under water,” and the number is growing rapidly because house prices are in a freefall. The key question is how many of these homeowners will opt to walk away from their homes. Unfortunately, the historical data do not help in answering this question. – Patrick Newport, IHS Global Insight
The Obama administration doesn’t understand that there were two types of speculators during the housing bubble: flippers (they are excluded), and buyers who used excessive leverage hoping for further price appreciation. … This plan rewards those homebuyers who speculated with excessive leverage. I think this is a mistake. – CalculatedRisk
Expect the usual grousing about “moral hazard,” especially from Republicans who normally grouse about normal hazard. And under normal circumstances, they have a point. The government should not be bailing out mortgage lenders who should never have lent money to people unlikely to be able to repay, or borrowers who should never have taken out a mortage loan. … But these aren’t normal circumstances. … And a failure to put millions of homeowners on a firmer footing would send more shock waves throughout the economy. – Robert Reich
The new $75 billion foreclosure avoidance plan … from initial reports, continues the misguided efforts of the Bush administration and Congress to “keep people in their homes” at all costs. Such policies only end up disserving taxpayers, the economy, and troubled borrowers themselves. While all foreclosures are difficult, they are sometimes the least bad option for an individual borrower. They allow borrowers to walk away from both the home and the loan, at a cost to their credit rating, but not nearly as big a hit as they would take if they declared a personal bankruptcy. – John Berlau, director of Competitive Enterprise Institute’s Center for Investors and Entrepreneurs
Note that the economists that give their perspective are some of the usual suspects we tap into here at HC. The comments are where there’s real insight and scathing humor. A la …
I really need to stop paying my mortgage, which I undertook knowing the risks that real estate carries risk. I am tired of everyone getting a bailout. Why would the government incent lenders to renegotiate loans they made in order to keep them from having to foreclose a property that is now worth less than the mortgage amount? Isnt’ it already in the lender’s best interest to do so? I really wish I had over-leveraged my house to buy a nice car, then I could stop making payments, get $1K a year to start making them again, and have the lender eat car….what a country
Comment by dnvrjeep – February 18, 2009Oh the irony.Obama also wants to reward subprime borrowers by giving them $1k/year for five years for making their mortgage payments on time.
Umm…dude, they’re SUPPOSED to do that.
How come nobody gives ME anything for saving, being responsible, not buying more than I can afford and making my mortgage and credit card payments on time?
I’m sick of financing irresponsible people’s reckless spending. Let them go bankrupt!
Comment by – February 19, 2009Yeah, let’s just let ‘em all go bankrupt.
They’e your customers, idiots.Comment by – February 19, 2009
12:15 PM ET, We Get the Obama Housing Plan
Here’s the cliffnotes version of what to know and expect from President Barack Obama’s unveiling of a $50-to-$100 billion foreclosure mitigation program.
First have a look at a 10 minute MSNBC “Hardball” analysis on the massive issues the new Administration is juggling.
The Lennon-McCartney of economics bloggers, Calculated Risk and The Big Picture, each bring pithy, cut-to-the-chase commentary to bear on the details of the housing plan that have come to light.
Here’s Calculated Risk riffing off the New York Times’ David Leonhardt preview of suspected elements of Obama’s strategy to stem the tide of failing homeownerships.
The details of the housing bailout should be available tomorrow (who qualifies, etc.). I’m not sure why the government is bailing speculators (aka homeowners) who bought homes they really couldn’t afford during the housing bubble.
That rhetorical indirect question got more than 250 responses from CR’s audience … after 1:49 a.m. ET.
Now, The Big Picture doesn’t want to leave much to his readers’ own aptitude when it comes to understanding what’s at stake in today’s announcement. So Barry Ritholtz, The Big Picture incarnate, explains it all to us.
Today at 12:15 am, we shall learn of the Obama administration’s new housing plan. I suspect it will have many of the same doomed features as all the other misguided housing plans floating around.
Before getting to those specifics, let’s revisit and recognize several truths:
• Home prices remain elevated;
• Artificially propping up prices is counter-productive;
• Home owers (No equity, 100%+ debt) who are in houses they cannot afford are going to have to move to homes or apartments they can afford;
• Foreclosures/REOs are often costly to banks; The lenders that made these bad loans to unqualified borrowers will suffer write-downs;
• It is not the responsibility of Taxpayers to bailout borrowers who are in over their heads, or lenders that made bad loans.
What are we likely to see from the White House today? I expect to see an over emphasis at stopping foreclosures; a reliance on foreclosure moratoriums; Involuntary loan modifications a/k/a cramdowns; and last, Interest rate deductions;
We would be much better off if we did 3 things:
Recognize that falling prices will help return the Housing market and the economy back to normalcy. On the basis of either median income to median home price, or Housing value as a percentage of GDP, homes remains significantly overpriced, and need to continue come down in cost; Identify those people who cannot afford to be in their houses (Underwater, overpriced, too little income) and help them move into more affordable housing (rental or purchased); Keeping people in homes they cannot afford is counter-productive Identify those people who can afford to stay in their homes with a modicum of loan mods/work out. These are the best targets for legitimate foreclosure avoidance.
Still, like it or not, as National Community Reinvestment Center president and ceo John Taylor said on CNBC this a.m., “all of us have a dog in this hunt” to stop foreclosures.
There’s a fork in the road, and there’s no choice but to take it.
See you on CNBC at 12:15 pm, as the President delivers the framework to mitigate what some estimate to be a 10 million home foreclosure problem if nothing effective is done. Yes, and we’ll all be watching the stock market fever chart in the background as he speaks.
Housing Plan: Details Slow to Emerge
Today, President Barack Obama will sign into law the the American Recovery and Reinvestment Act of 2009 from Denver. Tomorrow, he heads into one of the several vortexes of the housing storm, Arizona, and he’ll unveil a plan that aims to slow and stop the tide of foreclosures that are so quickly eroding home prices.
Will there be a plan? Or another plan to make a plan, like U.S. Treasury Secretary’s “framework” for trying to stabilize the financial system. President Obama’s rhetoric is not different than the Fix Housing First coalitionists whose claim is that problems with housing are the “root cause” of the economy’s woes.
Where they diverge is on what to do about the root cause of the disease.
Few details have come to light about the housing strategy. Only that the program will draw on already-approved TARP funds of from $50 to $100 billion, and that it will try to turn down the stress level on mortgage loans that are in trouble of getting sucked into the foreclosure maelstrom.
Here’s a New York Times story that maps out the issues and early indications of what will be addressed. Here’s the gist of the article:
The plan to subsidize lower interest rates for distressed homeowners would involve the government and the lender each contributing matching amounts to reduce a person’s monthly payment, possibly by several hundred dollars a month.
Supporters contend that the measure will be comparatively simple to execute and less expensive than many other options that have been considered. Mr. Obama’s top advisers have vowed to spend at least $50 billion to help homeowners keep their houses, and they already have the authority to tap the remaining $350 billion in the Treasury Department’s financial industry bailout fund.
The President is between a rock and a hard place on three levels. 1) Time is of the essence–things will get much worse if nothing is done to stem the flood of home foreclosures; 2) A misstep can go wrong in several ways–having no effectiveness and wasting huge amounts of money, and contributing to the moral hazard mentality that somebody will be there to backstop even egregious examples of greed and ignorance in the name of homeownership; and 3) If nothing is done, the problems may get worse, but eventually they’ll sort themselves out, find their bottom, and begin to improve.
So, in a sense, the President is in a race with the likelihood that sooner or later this mess will become less of a mess inevitably. He and his team want to have something to do with things getting better faster if they can.
We’ll see about that tomorrow when he pulls the curtain up on his housing recovery strategy.
Bottom’s Up
The New York Times headline:
Stocks Slide as New Bailout Disappoints
Stocks dive post Treasury Secretary Tim Geithner's pitch. Click image for New York Times story.