Behind the Dire New-Home Sales Headlines: The Stimulus Factor

Yesterday’s new-home sales headlines, complete with their indication that they’d hit a half-century lowpoint, cry for perspective. So let’s take a look, clear up a few issues, and move on to focus on an operational/financial matter of interest.

Here’s a key data point, thoroughly lost in the noise and negativity from yesterday’s reports about new home sales. Absolute new-home inventory rose by 1,000 homes to 234,000 new homes, a .4% nudge upward. JP Morgan home building equity analyst Michael Rehaut notes that, on an absolute basis, 234,000 new homes of inventory is down 31% from the year-ago level, and down virtually 60% from its peak.

So, yes, with all the volatility and noise in the month to month, self-reported, small sample data, the 309,000 new-home sales number for January 2010 does extend the months’ supply number beyond where it was in December. We’re back up over 9 months’ supply, up from 8 months in the month earlier, thanks to the fall-off in pace.

Remember, seasonally, we’re talking about January, and we’re talking about a month where at least in some places like the Northeast, the weather was pretty inhospitable.

So yesterday we have everyone’s asking “how can this be?” Many of the public home builder CEOs just paraded through weeks of earnings seasons calls, reporting that they’re seeing better sales in January. Now these data points come in, and we’re seeing that they dove off an 11.2% cliff from December 2009, down 6% from January 2009, amounting to a 13% miss from what Wall Street analysts were expecting.

Were the CEOS incorrect in their sunnier reports from their business units, or perhaps gilding the lily for the benefit of their Wall Street investors? If they said things had picked up momentum in January 2010, how is it that the Census Bureau number could so sharply belie that encouragement?

Let’s think about this.

First off, who was it that was saying things were better in January? Public home building company executives, right?

The first point of insight is this. We look at the national or public home builders as a group that should mirror or stand for new-home building at large, but it doesn’t. The dozen-plus public players represent a variation on the 80-20 rule, where a few players produce the most output.

Clearly, shrinkage in the national new-home sales number can occur at the same time expansion in the new-home sales number of the public home builder players. The universe can be getting smaller, and at the same time this dozen-plus companies’ share of it can be getting larger faster.

So, one of the important take-aways from the January new-home sales figure by itself is an acceleration of the market share shift to the 15 to 20 largest, best-capitalized players.

For other important take-aways in the numbers, let’s trail back in to 2009 a bit to get our insight. If the expected sunset of the $8,000 home buyer tax credit was initially Nov. 30, 2009, let’s ask what would have happened to spec building right around Sept. 1. If you could start and finish a spec after Sept. 1 and deliver it to a home buyer before Nov. 30, then you might have done that, but how many home builders have a less than 90-day construction cycle-time?

So, we’re guessing this–from Sept. 1 through the first week in November, a lot less specs were started, which means there were fewer specs ready for January 2010, which accounts for some of the reason new-home sales were lower. There were fewer ready-to-deliver homes at that more affordable, more-readily finance-able level in January, so sales shrunk.

Also, what else occurred as Congress and the President enacted legislation that extended and expanded the home buyer tax credits to April 30, 2010, for sales, and June 30, for closings?

You got it, the extension of the NOL tax carry back period up to five years. Now, how might that figure into the new-home sales data? Well, if you had a sell-at-any-price push, particularly among public home builders, which would clear inventory out as long as it occurred by the new deadlines set up by the five-year carry back  period, then you might have generated quite a few sales right at the end of 2009. This is what happened.

This is why there’s such a contrast between the December number and the January 2010 number.

So, to review:

The situation: 15 national home builder powers report solid order data for January 2010, while the Census Bureau reports record low new home sales on a national basis for the same period.

So what happens next? Well, we think February may suffer a bit from the same issue, since, again, in October 2009, many companies may have been very reluctant to start a lot of specs until they got assurance that the home buyer tax credit extension was a go.

But once the credit extension and expansion got passed, spec building got back underway in a big way, so that may show up in February sales, and certainly, will be in full force by March.

The big question (enough mentions of 800-lb. gorillas, already) is what happens when home buyer tax credit and highly supportive interest rate policy support goes by the boards.

With stimulus out of the picture, do the markets begin to clear and correct on both a homeowner and a commercial real estate level?

Even as 15 home builders accelerate their gains in market share, leveraging their ability to access construction capital to meet what need continues in the market, less well-heeled private home builders need a plan.

We think that product value engineering and redesigning to make homes more affordable and finance-able has gotten the lion’s share of the attention. But there’s another approach to value engineering, which is to focus on where the waste and dislocations are in the development layout.

For instance, if you’ve got to build a street and infrastructure into a project that involves upfront costs, you’ve got to figure out how to move revenue generation–going vertical–into the equation much sooner, so that you’re not left holding the bag with all the pre-vertical costs.

In terms of cost management on the project, and better management of the timing of your return on capital invested, we believe that land value engineering could be as important an opportunity area as stripping costs out of the home that customers today just don’t want to pay for.

Where does land value engineering (or re-engineering) fit into your plans to better manage your capital and risk exposure over the next six to nine months?

February 25, 2010 | Filed Under Financial Crisis, Home Builders | Leave a Comment 

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.

November 23, 2009 | Filed Under Financial Crisis, Home Builders | 1 Comment 

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 

Capitol Hill’s Patron Saint of Housing

Dalton, Ga. is known as “Carpet Capital of the World,” home to 150-plus mills, plants, and 100 carpet outlet stores, and is the birthplace of Marla Maples.

Mohawk and Shaw Industries are among the biggest names in floor covering with headquarters operations there. When times are right, the industry employs about 30,000 people in Whitfield and Murray Counties in Georgia.

But times aren’t right. In the latest Bureau of Labor Statistics unemployment data for metro areas released last week, Dalton, Ga., stands out … in a bad way.

In the 12 months since July 2008, Dalton’s rising tide of unemployed swelled by 3,500 workers. That’s not where its real point of distinction lies, however.  It is its percentage unemployed that is an eye-catching 13.2%, which is well above the state of Georgia’s 10.4%, which itself is higher than the national average of 9.7% unemployment. 

In January, Dalton’s The Daily Citizen reported:

North Georgia is reeling from the slumping floor covering industry. The housing market, which has slowed significantly in both new construction and existing sales, has also hurt floor covering sales. Although the cost of oil has dropped recently, high raw material costs are affecting companies. Those combined factors have led to job losses and cuts in workers’ hours.

Some estimate that for every new home built, it takes 276 jobs in businesses ranging from carpets, to carpenters, to copper manufacturing, to tree nursery workers. Too, word is that for every dollar spent on direct costs of a new home, seven additional dollars go into the economy on consumer and commercial spending. The BLS notes that the economy has shed 7.4 million jobs since the start of the recession–1.4 million of them in “construction,” many more of them in “construction-related” manufacturing and services.

Click image for Isakson Web site.

Click image for Isakson Web site.

In early September–as members of both houses of the United States Congress returned from a late-summer recess to address some of the most profoundly transformative policy issues the nation has faced since the period of Reconstruction following the War Between the States–Republican Senator Johnny Isakson puts it even more bluntly than the Dalton Daily Citizen.

“The carpet mills are basically shut down,” says Isakson as he calls to mind a lurid example of the collateral damage perpetrated by a housing crisis that’s rounding the bend into its third painful year.

“No other industry has so many businesses built on top of it as housing does,” says the 64-year-old freshman senator, who was for decades prior a residential real estate maven in the Atlanta area.  Isakson since early Spring of 2008 has doggedly pursued legislation that would extend buyers of all incomes a $15,000 tax credit on the purchase of any primary residence, a program that would run 12 months from its start. “We’re 20-some months into the worst housing economy we’ve had in our lifetimes,” says the Senator. “That’s how long I’ve been working on this legislation, and i just don’t think we’re going to come out of the broader downturn without housing getting fixed.”

His most recent play came in July, as Congress put its finishing touches on the Cash for Clunkers new car stimulus program.

“We reintroduced the bill as an amendment to the CARS legislation, and it won support from both the Senate Banking Committee chairman Christopher Dodd (D-Conn.) and the chairman of the Budget Committee Kent Conrad (D-N.D.), and that was an achievement,” says Isakson. The amendment, however, didn’t get enough support to go with the clunkers program, so it’s back to the political grind, operating face-to-face with his colleagues throughout Capitol Hill out of his first-floor digs in the Russell Building there.

“They know when they see me on the second floor what I’m coming to talk to them about,” he says unabashedly. “This issue links to all of the economic and social issues on our agenda right now.”

He says he’s going to keep at the legislative pursuit for as long as it takes. He imagines plenty of opportunities between now and the end of the year to get the bill included as an amendment to other taxation, budget, or finance legislation.

“Ideally, we’d love to see the bill come out of committee and win support by itself. The last thing we need right now is for November 31 to come and go, and then you slip in to the slowest period of the year for real estate in the months of December, January, and February. Without the catalyst of the tax credit, I’m afraid to imagine how bad things could get.”

Nevertheless, with the $8,000 credit that came into effect this year with the passage of the almost $800 billion stimulus package, he contends that the measure got it only part way right.

“The $8,000 program has proven that a stimulus will work to get home buyers off the sidelines and into the market, but what I’ve been saying all along is, we don’t have a first-time buyer housing recession, we have a move-up buyer recession. It’s those people who can’t sell their current home in this environment and move into more of the home of their dreams that have unfortunately caused such a slowdown in the entire economy.”

Isakson knows whereof he speaks. Selling homes is in his DNA. He’s the grandson of Swedish immigrant Andrew Isakson who by trade was a stone-mason and plumber, and who went into home building when he arrived on this side of the pond. Senator Isakson’s father Ed went into the real estate business as well, selling homes and commercial properties after first having spent time as a butcher.

In 1967, Isakson himself joined his father’s Northside Realty company. A consummate salesman’s personality blended with basic business instinct, and as a 33-year old, Isakson became president of the company.

Before he did that, though, came the deep recession of 1974, which featured a 36 month supply of homes for sale. Congress legislated a $2,000 credit for home buyers, and the effect was legendary. Many, including Isakson, believe that jolt to housing went far toward lifting the entire economy out of recession.

“He’s run a business, made a pay roll, paid health benefits for his employees, been there and done that,” says John Wieland, a long-time friend of the senator. “I can guess that the first time we met, it was probably about a commission that he didn’t get on the sale of one of our houses. Still, from the minute you meet Johnny, you get the feeling that ‘this is your kind of guy.’ He’s very approachable.”

Isakson, like 35 other senators, and 435 members of the House of Representatives, have a lot on their minds these days as they confront the issues of a continued challenge on the jobs and economics front, as well as health care reform, a transformative cap and trade energy bill, and financial services reform. Many of them can’t help but think of one thing in the back of their minds as they consider their positions on each of these huge issues: reelection.

Senate Majority leader Harry Reid (D-Nev.), who hails from another state decimated by housing’s convulsive trajectory, is also up for a difficult bid to reclaim his seat if things don’t improve on the jobs and real estate front. Through a spokesperson, Reid says, “We believe we can extend the current credit for first-time home buyers, and we need to do it by the end of the year.”

Although Isakson may not encounter serious opposition in his bid for a second term in the senate, his friend John Wieland thinks it would send the right message for home builders, manufacturers and real estate people to show financial support for Capitol Hill’s patron saint of home builders, as well as those other members of Congress who specifically support the housing industry and are seeking another term. 

Where ever each stands philosophically on free-trade vs. government stimulus policy, every one of them will have to account for his or her constituency’s jobs picture by the time Nov. 2, 2010 rolls around. Like as not, reelection and action on behalf of getting the economy rolling toward job creation are going to have more effect than meets the eye.

September 14, 2009 | Filed Under Financial Crisis, Home Builders | 1 Comment 

Long Absent, the Word “Frenzy” Resurfaces to Describe Home Buying

The fingers type the words “buying frenzy” with zest. Possessed of their own emotional impetus and trajectory, the digits that ply their trade on the keyboard most of the day realize that they have sorely missed typing out the terminology of our now utterly bygone risk-a-philia and profligacy.

Thus, zestily noted from Calculated Risk last Thursday.

I’ve talked with several people – and there is a buying frenzy right now. First-time homebuyers, especially those with a limited down payment, are desperate.

From the Chicago Tribune: First-time buyers race to beat credit deadline

With a growing sense of urgency, first-time buyers are searching for homes, worried that time is running out on an $8,000 federal tax credit.

Real estate agents say they’re seeing a surge of first-timers who want to close on a property by Nov. 30, the deadline for the credit. The rush has set off bidding wars and stirred up a normally quiet August market.

“We’re inundated,” said Paula Clark, an agent with Coldwell Banker.

To meet the Nov. 30 deadline, buyers need to have a contract by around Sept. 30, because inspections, mortgage approvals and other details typically take about two months.

Also from Reuters: Race is on as U.S. home buyer tax credit nears end

“I am willing to settle for something” to finish buying quickly, said 20-year old Kielar, who works at the Denver County Jail, and is a part-time student. The tax credit carrot “is speeding up the process,” she said, adding that “$8,000 could help remodel the house, redo carpets and cabinets.”

For loans backed by the Federal Housing Administration (FHA), which require a minimum 3.5 percent down payment, the $8,000 can be also be applied upfront toward the purchase rather than later on tax returns like other mortgages.

In addition $8,000 to the Federal tax credit, there are some state programs, as an example from Newsday.com: NYS rolls out tax credit for first-time home buyers – but most of the frenzy is being driven by the Federal Tax credit.

We’d contest some of Bill’s conclusions on Calculated Risk.

He asserts that the level of demand is unsustainable at the low end, even if there’s an extension for the current first-time buyer tax credit — there are proposals in both Houses of Congress to extend, enhance, and boost the tax-credit program — beyond the Nov. 30 deadline. He says once you get rid of “pent up” demand from among the 43% of buyers who are first-time home buyers, you’re done with the momentum boost.

We believe that conclusion doesn’t take into consideration a normalized demand from among first-time buyers from among those people who’ve been working on their credit, saving for a down payment, and want to flow into the dream of homeownership. Not to mention “pulling forward” first-time buyers who might jump off the sidelines a bit earlier than they might have because stars–prices, interest rates, and tax credits–are only aligned for just so long.

The other point we’d take issue with–although we believe Calculated Risk probably can show supportive data, and we’re playing devil’s advocate here–is that his analysis is that the high rate of REO and short sale/distressed deals means that those homes that are purchased by buyers using the tax credit are not producing any demand for “move-up” homes.

Even if the distressed purchase rate is near half, that means that the other half–many thousands of sellers–are completing their deals in the teeth of the market, and would be on the market for a higher priced home, either new or existing.

I.e. our conclusion is that the boon in first-time buying does not confine demand to the lowest end homes, and can favorably benefit move-up, and second time move-up sellers.

Still, the fingers do relish typing the words “buying frenzy.” But now they have it out of their system.

August 17, 2009 | Filed Under Financial Crisis | Leave a Comment 

Orange County Green Shoots

Housing recessions don’t end when starts, sales, and pricing data say they’ve ended.

Everybody who’s been through them knows it’s different than that. Bob Toll, Toll Brothers’ patriarch and CEO, has put it this way:

“Somebody gets up on a Saturday or Sunday morning and decides it’s a good day to buy a house, and a reporter for the New York Times finds out and reports in a Monday headline that it’s a good time to buy a house.”

It has gone like that enough times that veterans of residential development and home building swear that’s what happens.

In an isolated number of markets–including ones that were doing nothing good six months ago–people are starting to say, “the light’s back on.”

Here’s a note from the Orange County Register’s real estate writer Marilyn Kalfus.

“Orange County is continually trending to inch up month over month,” said Kristine Thalman, CEO for the Orange County chapter of the California Building Industry Association.

She said the $10,000 tax credit for new home buyers is continuing to spur demand since it went into effect in March.

“As one of my builders called it, somebody turned the light on,” she said.

Statewide, builders pulled permits for 2,203 single-family homes in May, down 7 percent from April but 40 percent lower than in May 2008. On a seasonally adjusted basis, CIRB reported that May’s figures were down just 1.6 percent compared to April.

“This is very good news,” said Robert Rivinius, the California Building Industry Associaton’s president and CEO. “As this continued strength in new-home construction shows, the credit is indeed working.”

The Franchise Tax Board has reported that nearly all of the $100 million for the program is spent. The homebuilding industry is trying to get it extended.

Based on the strength in the single-family market, CIRB for the first time this year has adjusted its annual forecast upward this month. The Board now expects single-family housing starts to total 24,900 and total housing starts to be 40,200 for the year.

Those familiar with the plotline of housing downturns know that recovery isn’t a single event, but a process. It’s the light going back on in multiple markets, when enough prospective buyers believe that the market has made enough prospective sellers capitulate.

The constant flow of policy has slowed down and added complexity to the process. Big, noteworthy players have capitulated, but only in isolated instances. The heavy hand of a corrective market has not driven enough property holders to their knees for potential buyers to believe their moment has come.

The policy game has favored sitting tight in hopes of some form of bail out as opposed to cutting one’s losses and moving on. That’s probably why the bottom, so to speak, is proving to be elusive.

June 30, 2009 | Filed Under Financial Crisis, Home Builders | 1 Comment 

Home Buyer Tax Credit Update

We’ve posted a couple of times on Senator (R-Ga.) Johnny Isakson’s latest proposal to bump up a home buyer tax credit from $8,000 to $15,000, change it to include all home buyers, remove income caps, and extend the timeline on it through at least the middle part of next year.

It’s far from being a sure bet, and isn’t expected to get real traction publicly until closer to the November sunset of the current Federal first-time buyer $8,000 tax credit. Any hope for the measure at all lies in convincing opponents in the House of Representatives that a big buyer incentive is not simply a home builder bailout. Clearly, two votes this past Winter showed that’s exactly how many Congressmen and women view the Isakson measure.

CNBC’s Diana Olick noted in her blog an informed estimate on the taxpayers’ price tag to fund the program, intended to jolt the economy by spurring a flood of demand for housing, setting off multiplier effect economic activity and hiring. Here’s her source on the cost of an expanded tax credit program.

A letter to Sen. Isakson from the Joint Committee on Taxation provides a revenue estimate for Isakson’s bill, S.1230, the “Home Buyer Tax Credit Act of 2009.”  Assuming an enactment date of July 1, 2009, we estimate that your proposal would have the following effect on Federal fiscal year budget receipts:

  Fiscal Years [Billions of Dollars]
2009 2010 2011 2012 2013 2014 2009-14 2009-19
-0.3 -23.5 -13.3 -1.6 0.1 — -38.5 -38.5
For More Information:
Existing Home Sales/Prices, New Home Sales/Prices, Housing Starts/Permits, HMI

Isakson is busy working the Senate for support to his big jolt plan, which back in February got a yea from Senators before being nixed into oblivion during the reconciliation process that led to the actual $790 billion Stimulus bill that became law.

Here, from his own press statement, is who’s lined up with him so far:

Isakson immediately picked up a bipartisan group of co-sponsors for his legislation, including Senators Lamar Alexander, R-Tenn., Jim Bunning, R-Ky., Saxby Chambliss, R-Ga., Chris Dodd, D-Conn., John Ensign, R-Nev., Joe Lieberman, ID-Conn., Lisa Murkowski, R-Alaska, James Risch, R-Idaho, and David Vitter, R-La.

In addition, the National Association of Realtors and the Housing Working Group of Business Roundtable today endorsed Isakson’s efforts to expand the current home buyer tax credit as part of recommendations to help return stability and growth to the U.S. housing market.

As with many of the initiatives under consideration to help set the nation back on course toward recovery, a bigger, bolder tax credit for home buyers sparks vehement debate. It’s the free-marketeers vs. the Keynesians who believe that the private markets won’t work efficiently without a little public sector TLC.

Hence, the recurrence of a proposal to kickstart the broader economy by firing up its engine: housing.

Here’s a story that sums up various tax-credit initiatives kicking around committee in Congress.

After a latent period, the NAHB-backed Fix Housing First Coalition is kicking back into action in support of the Isakson proposal, according to the coalition executive director Ken Gear.

“We’re certainly going to work for an extension, and hopefully, even an expansion of the $8,000 program,” said Gear. There’s delicacy in the timing, however.

“We don’t want to disincentivize people from going for the tax credit that’s in place now by making too much noise about something that may not even happen,” Gear said. Right now, the high priority focus is on extending the time-line to beyond November 30th into next year.

“When you look at the May 29 HUD announcement that buyers would be able to apply the tax credit to their down payment, the November 30th expiration doesn’t really allow that to take full effect,” Gear said. “The State Housing Finance Agencies have a lot of work to do on their part to get up and running with the programs to monetize that tax credit, so for that effort to be worthwhile, they’re going to need more time.”

Gear says that indications that Federal and selected state tax credit programs have been working to stimulate demand among buyers should strengthen the lobby to legislators for more.

Meanwhile, Gear updated us on another initiative near and dear to many of the larger home builders, the net operating loss extension.  Per analyst Ivy Zelman quoted in the Wall Street Journal over the weekend,  home builders have availed of about $2.55 billion in tax rebates from Uncle Sam, and if rules change to allow companies to reach back to taxes on profits dating as far back as 2004, there’s a whole other mountain of cash they can put in their coffers.

This has been a divisive issue among home builders. The largest ones–including the publicly traded ones–have been rabidly supportive of extending the NOL carryback period. The NAHB, which needs to represent the interests of the broader rank-and-file builder, has not been so.

But lately, the big builders and the NAHB have agreed to work together in support of NOL, and a big-and-little builder coalition, the Homes For America Alliance, has united behind extension appeals that should surface on the autumn Congressional docket for vote.

Stay tuned to see if strange bedfellows continue to make it through the long dark night of this downturn.

June 22, 2009 | Filed Under Financial Crisis, Legislation | 6 Comments 

Move Ups Missed as Move Outs Abound

You’ll be surprised to learn that fewer people are able to sell their homes to move up into an upgrade.

Luckily, experts like Jim Gillespie, president and CEO of Coldwell Banker, are around to lend insight to how and why the “move up” home buyer market is stuck in neutral gear.

Caculated Risk posted on this this morning, and we’re adding commentary.

Jim Gillespie, Coldwell Banker

Jim Gillespie, Coldwell Banker

The more important ‘move-up’ buyers were absent and that is not encouraging,” said Gillespie, who is based in Parsippany, New Jersey.

Move-up buyers are those seeking to trade in their current home for a larger one, and Gillespie said that group is important for sustaining a healthy real estate market.

Because of the sharp decline in housing prices and the collapse in consumer demand, homeowners are having difficulty selling their current homes to move up to pricier properties.

“They are key to a U.S. housing market recovery,” he said. Gillespie said some of this lack of demand could be alleviated through more incentives.

Gillespie is among CEOs who comprise the Business Roundtable Housing Working Group that is turning up the heat in support of Republican Senator Johnny Isakson’s reboot of a proposed $15,000 tax credit that would include all home buyers, not just first time buyers.

Why are there no move ups? Well, that’s because there are so many move outs. Here’s an article from the Sacramento Bee that explains it all.

“Half to two-thirds of sales in the Sacramento region have not triggered a move-up,” said Andrew LePage, an analyst for property researcher MDA DataQuick. “It was just some lender got its money back and then it ends. When that’s been two-thirds of your market for months and months, ouch.”

Until the move-up sector of the market recovers, housing can’t recover, analysts say. (Everything above $400,000 is almost at a standstill. DataQuick says sales in move-up neighborhoods such as Land Park, east Sacramento and Arden Park are half their 10-year average since early 2008.)

Ok, what the article doesn’t explain is that house prices and household incomes de-coupled temporarily when the Fed decided we needed to take a bye on a healthy economic correction in 2001 and 2002.

Easy-money pilfering, too-big-to-fail home buyers and their lenders took their no-strings free pass from the Central Banks of the world and ran with it. They bought, securitized, packaged, sold, washed their hands of accountability, bought more, resecuritized, and sold more.

Reality had lots of ground to make up, but then again, here we are. Just think. Now, lots of people who made a killing and didn’t get wiped out are the ones who’ll be around to buy all these almost worthless assets again for a song, and bring them back to the market when there is a market.

What’s more, they have so much cash, they’ll never say lever again.

Where does that leave the move up market? We’d like to see it re-surface as much as the next guy, but we have misgivings when it comes to putting a severely injured player back into the game with a mere shot of cortisone.

I.e. We’re not so sure a $15,000 tax credit for all home buyers really gets at what the measure’s proponents say it will get at: Demand. Demand, after all, doesn’t have to be a big abstract term. It can be real, a function of household growth, income growth, earnings growth, investment growth, and an organic expansion of local economies.

We don’t contest that new housing represents a positive multiplier effect for the economy. We argue that the nature of that specific multiplier effect contributes to a real estate bubble. We’re not saying housing must never be an investment. But clearly, investments come with risk, and only those who are willing and able to deal with the risk should be investors. This counts out most home buyers.

A big red herring is that nameless, faceless financial services entities are “too big to fail.” After all, who is the biggest financial services entity in the universe? The answer is U.S. taxpayers.  One big, bleeping “shadow bank” is what we taxpayers are.

Industry sectors–health, energy, technology, manufacturing, service, consumer goods, etc.– that have a future as the backbones of American business need focus. They’re where demand really starts; they’re what will fix housing organically, substantially, and profoundly.

If there’ll be a genuine crying need for new housing capacity in the next two to three years–whether it’s first time, move up, second move up, or luxury–let’s put a solid economic footing underneath that demand so that household incomes and prices are sanely coupled up again.

We’ll shut up now.

June 19, 2009 | Filed Under Financial Crisis | Leave a Comment 

Isakson Back with Home Buyer Tax Credit Bump

Senator Johnny Isakson hasn’t given up on an expanded tax credit for home buyers as a way to juice up economic recovery. 

The Georgia Republican shepherded a similar initiative through Senate approval in February, only to meet an untimely demise in the stimulus reconciliation bill eventually signed into law in mid-February as the $787 billion American Recovery and Reinvestment Act of 2009 .

Well, now a measure looking eerily akin to a demand-stimulus plan proferred last fall by the Fix Housing First Coalition of organizations including builders, real estate agents and brokers, building material suppliers, home inspectors, and home owners associations is making its way through committee as S 1230. The long and short of it is that it would up the current $8,000 credit to a maximum of $15K, open the deal to all home buyers (not just first-time buyers with a ceiling on incomes), extend the deadline for another year, and maintain historically low mortgage interest rates for that same time period.

Here’s Isakson’s take on the measure.

Johnny Isakson, D-Ga.

Johnny Isakson, D-Ga.

“The first-time homebuyer tax credit has made a difference. First-time home buyers used it and the market stabilized, but we don’t have a recession in first-time home buyers. We have a recession in the move-up market,”Isakson said. “One of the biggest problems facing the American people today is an illiquid housing market, a decline in their equity, a decline in their net worth and a depression in the housing market that we are obligated to correct if we possibly can.”

Isakson has some pretty high voltage backing on this one. A group, formed in April, called the Business Roundtable Housing Working Group, consisting of the CEOs of $5 trillion worth of U.S. corporations with almost 10 million employees is wholly behind Isakson and a bi-partisan support group in Senate.

Here’s a link to the Business Roundtable.

Problem is the House of Representatives, where elected officials thought the Fix Housing First measure and its benefits smacked of a bailout for builders, the ones many voters thought caused the financial crisis in the first place.

One way or another, the Obama Administration and House chief Nancy Pelosi are going to have to get behind the plan for it to go anywhere.

Still, you got to hand it to Johnny Isakson to keep carrying the torch for a “housing-will-be-the-engine-of-recovery” plan. At a time broad economic signals seem to be short-circuiting and mixed, and the best hope now is for an anemic bounce back, a housing-led rebound sounds about as dreamy as anything.

June 16, 2009 | Filed Under Financial Crisis, Home Builders, Legislation | 1 Comment 

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