A Home Buyer Tax Credit, Version 3. For or Against?

Another tax credit for home buyers? Not very likely, but if it were to come trundling down the pipeline when our dear Congressional representatives punch back in from their Summer vacays and try to get reelected, would home builders support it?

Again, would home builders “just say no” if the government asks nicely whether it’s okay to stimulate the “engine of the economy,” to stabilize home prices by stoking home buyer demand yet again?

We’d bet on it.

Yet, trundle down the pipeline the proposal may, for after the lagging indicator rout that has been existing- and new-home sales data for July, and the widening gyre of high-anxiety the data has set in motion, the powers-that-be in Washington won’t discount a home buyer tax credit redux as a preposterous notion that would result in summary political extinction.

Here’s HUD Secretary Shaun Donovan’s non-denial denial to CNN yesterday, as reported by Reuters.

“It’s too early to say whether the tax credit will be revived,” Donovan said in an interview on CNN’s “State of the Union” program. He said the administration would “do everything we can” to stabilize the shaky U.S. housing market.

So that’s different, isn’t it?

Actually, Mr. HUD Secretary may only be being polite in answering the question of a mainstream media reporter who thinks Washington must continue to try to fix everything that’s broken.

We know that a few short months ago, on the ramp-up to the expiration of the credit April 30, nobody with a prayer of getting a seat in the wake of mid-term brush up this November would have “gone there.”

That’s partly a function of things having gone pretty okay pre-April 30, as far as talk of a housing recovery. If housing rebounded, could the broader economic recovery get even more traction and eventually translate into job growth? There was a collective inhale, which turned out to be pre-mature.

Clearly, now, things continue to compare modestly better than the worst of times just after the October 2008 cataclysm, which is probably as good as anyone could hope. Remember, then, everything looked as if it could and would only get worse.

What surprises us now is that so many are surprised about the numbers that came out last week–especially among folks who say their operational m.o. is to expect the worst and hope for the best. Recall that, until April 30, Uncle Sam was giving buyers a little giftie to spur them on, and giving sellers at least some of that giftie to get just a bit of a cushion in their asking price. All in all, a kind of housing Dyson vacuum cleaner.

So who would not have moved on that $6500 or $8000 opportunity when the getting was good? Wouldn’t every last one of the critters out there who could ante up the downpayment and secure the loan have done it?

How would there not be a dramatic, even a historic, fall-off in sales for a month or two after the program expires?

Still, to hear even some of the smarter business analysts, you’d think their only familiarity with how housing works comes from buying, selling, or refinancing their own places. The tax credit expiration dates–both last November and this past April–have been the only catalysts of action in the market place for more than three years. Other than that, it’s virtually been a no-bid environment.

Those two deadline dates in November and April did a couple of things–they resulted in diminished absolute inventory of new-homes, and they moderated home price declines across a protracted period of time.

What the market lacks now is any force of conviction or moment–such as fear of missing out–that can create real demand out of the raw materials of demand. While “absolute vacancies” is a real number, and a daunting one, demand, everyone knows, is a highly variable number. Demand varies. The proverbial adult child in the basement, and the aging parents in the spare bedroom are part of our stereotype for pent-up demand.

Housing starts versus anti-depressant and anti-anxiety medication sales must be a pretty telling inverse curve relationship for the past few years.

Yes, prices will give ground in many markets, and those declines will continue to make headlines. Foreclosure sales will speed up, and the fact that private sector hiring–Friday’s all-important data release this week–continues to be tepid to non-starting throws a wet blanket over any number of drivers toward household formations.

What we’d observe is that over-reacting to data–which may be a key cause of over-reaching on the house price correction–takes two forms. One, over-reacting to technical data versus looking at the real-world factors–such as household formation and job formation–that directly impact the data. The other is over-reacting to nearer-term, and one-off data points rather than looking beyond the next three to six months and looking at longitudinal trends for insight. As a result of such shortcomings, analysts and journalists jump on the bus of negativity because it sounds smarter and more counter-intuitive to be negative, which is what analysts and journalists want.

Joe Nocera, a top-flight New York Times business journalist by way of Fortune magazine, who writes, reports, and analyses with the best of them when it comes to corporate business stories, just doesn’t appear to get it as he tries to put two and two together about housing’s current travails.

Essentially, every participant in the housing market has a reason to be afraid. And that fear is paralyzing.

Nocera litanizes how “every participant” is curled up in a fetal position now, but neglects to note that this is all about money and value. Fear becomes greed in short order as soon as somebody puts a floor under the value of properties. It surprises us that Nocera could write:

At the same time that the administration was offering a hefty tax credit to spur home sales, the government’s wholly owned subsidiaries, Fannie Mae and Freddie Mac, were imposing rules that made it increasingly difficult to buy a home. And Fannie and Freddie have the ultimate say these days because without their guarantee, Wall Street securitizers won’t buy a mortgage from a bank — because Wall Street is just as fearful as every other participant in the market.

It’s scary when a guy who’s been known to go for the jugular when he’s going after corporate hanky-panky can portray Wall Street’s titans as “fearful” about anything. They’re not fearful, Joe; they’re simply waiting for the blood in the streets to get deeper before they move into the market.

The point is, most reaction to the grim data reports on housing in August is over-reaction. It seems that government officials and aspiring denizens of Capitol Hill are ready to run with the over-reaction of economists and journalists as some populist standard.

But home builders and developers have had enough of tax credits for home buyers. Home builders and developers want two things. They want government to stop spending programs that trigger heavier tax burdens on those in households and businesses that are paying taxes. And they want government to remove bureaucratic barriers and costs that get in the way of businesses carrying on business.

So we’d bet that any initiative to resurrect a home buyer tax credit will get vehement opposition from an industry are that wants nothing more than for private sector dynamics to reestablish a footing among people who’ve made improvement in repairing their houshold balance sheets.

That may take a while, and it may take longer than it would have if Washington had never introduced its barrage of housing supports dating back to 2008. We’ll never know. That’s past. But the new Congressional season is the future, and it paves a campaign path straight to the first week of November.

What are you going to support?

August 30, 2010 | Filed Under Uncategorized | Leave a Comment 

Home Builders Need One More Unifying Issue — Why Not Energy Efficient Home Loans?

Two years ago at this time of year, the new housing industry had a rallying, unifying issue, complete with its own misnomer slogan, “Fix Housing First.”

The theory went that if you stimulated the demand side of the home purchase equation, many good things would happen.

What took place during the months leading up to the February 2009 Congressional vote and enactment of the American Recovery and Reinvestment Act was a show of solidarity we’ve rarely seen at work across an industry sector–the tax credit for home buyers was in, and it would be extended and expanded in November to stay in force for contracts through less than two weeks ago.

Perhaps it was desperation that brought home builders and building materials suppliers of all sizes, shapes, and business models together behind the measure that aimed to stimulate home purchases, both to reduce the count of available homes on the market and to keep people in jobs who were building new homes.

Across two administrations and across sharp partisan differences, the initiative gained traction because it would help stanch the free-fall in home prices that was set in motion as the leverage underpinning homeownership came undone from all directions at one time.

Arguably, the stimulative tactic did what it was supposed to have done. Did it “fix” housing? No, of course it didn’t fix housing. There’s still too much on the debt side of every balance sheet you look at, and not enough coming in to pay for it all. To fix housing, you’ve got to fix jobs and household formations, which means fixing consumers’ capacity to spend money on goods and services, which means fixing debt and income, which leads back to jobs.

What the program did–especially for those who make and sell new homes–was to kick the can down the road. This sounds like a bad thing. But is it?

“Sometimes, kicking the can down the road is more than kicking the can down the road.” Joe Kernen, the CNBC Squawk Box co-anchor who would argue he’s the “real” morning Joe, said that today during his early morning program. “Sometimes it really gets something done.”

Meaning that bail-outs are not all bad if they provide time for markets to regain their legs and start working the way they should.

He was  referring in this case to the European Union’s Trillion-Dollar bailout of its troubled economies in Greece, Portugal, Ireland, Italy, and Spain, which could be said to have averted a global liquidity lock-up the likes of which we’re only too familiar with in spite of our short memories.

The Euro bail-out reminds one and all of the reality of the era we’re stuck in for at least as long as it takes household balance sheets to draw back into their norms and for both private and public debt to reach equilibrium with the capacity to service it–the era of pain management.

Home builders–and remodelers–know all about pain management by now. After months of privatized profits, a ton of losses on the backs of the public, the price for fantasy-cheap capital, and the consequence of three or four years of 300,000 to 400,000 new homes a year beyond the market need.

Still, home builders and their partners need to seize on another common rallying point. What the tax credit stimulus did or didn’t do for the housing economy and the broader economy will only really be known from a future vantage point. What large and small companies who are in new-home construction need is a focal point to align and coordinate their efforts around.

And there is at least one: energy efficient mortgages. Or if you prefer another misnomer slogan: green mortgages. Plus, energy efficient appraisals.

What this could do, if home builders and their partners would seriously align behind the issue, would be to kick the can down the road in a good way.

It’s all about household check-book management. Instead of only looking at principal, interest, taxes, and insurance as the key building block of underwriting a mortgage and the ability to pay it back, energy efficient mortgages and appraisals would presume adding an “E” to the PITA, to factor in what people pay for utility costs.

Together with a pervasively accepted third-party energy efficiency ratings mechanism, homes with greater monthly utility bill efficiency would be worth a premium in appraisals, and would enable the borrower to carry a loan beyond what the current finance-ability ceiling would be.

This means a buyer could opt in at no penalty for greater levels of energy efficiency in their home, and pay off the cost of the often optional “energy package” of upgraded windows, heating and ventilation system, and hot water heater with credit that would cost the same as a less expensive home without the energy package.

This would be good for home builders, because it would give them an even greater edge over resales–and the foreclosure tsunami–in a market that will only gradually improve for several years to come.

So, home builders and their supplier partners should rally around this issue, even as the dozens of proposed energy bills gather and lose steam in the current legislative session. Once financial and immigration reform get checked off on the Obama Administration’s extraordinary agenda, energy and climate measures will get their turn in the spotlight.

We think it would be a worthwhile issue to push a unified call to action, because sooner or later, the financial ramifications of climate change and energy independence will be huge for the sector.

Consider it part of your pain management strategy for the next six to 12 months.

May 10, 2010 | Filed Under Financial Crisis, Green Home Building, Home Builders | Leave a Comment 

Real Money Returns to Real Estate as Government Support for Housing Ebbs

Yes, believe it or not, what you’re starting to hear and see are the sound and sight in the very near distance of a phenomenon utterly absent for years–market-influenced residential real estate. 

We think many in our audience will cheer the end of at least some parts of the government stimulus programs for housing. For one, it’s a significant vote of confidence that the private sector is healing. Secondly, it restores a healthier balance between fear and greed to the housing marketplace.

Compared with last year’s all-pervasive sense of doubt, this year’s sense of uncertainty has to be acceptable.

If what drove residential real estate crazy through the first half of the past decade was funny money, compliments of an unregulated Wall Street, then what has driven it nearly koo-koo in the past couple of years was even funnier money brought to you by Uncle Sam’s use of $1 trillion-plus present and future tax bounty resting on this and the next generations’ shoulders.

After midnight tomorrow (April 30), consumers, lenders, builders, investors, land holders, products manufacturers, materials suppliers, and subcontractors, will begin to learn how to behave when real money actually changes hands.

For new-home enterprises, will that mean average selling prices will have to come down even more? It could well mean that. The now-nearly-concluded federal programs that supported housing were a methadone clinic, not an addiction-free solution. They bought time to adjust that a cold turkey treatment would not have tolerated.

We don’t know how the correction will go; we only know that it will continue. Historical norms are called that for a reason–whether we’ll revert to them now, no one can say with certainty. Just as easily as you assert that prices need to go down more to reach a norm, you might also claim that they’ve already overshot a normalized benchmark, especially as real demand in the form of rising household formations, and a continued domestic migration of populations to Sun Belt states play out.

The zillion dollar question among those who are vested and invested in home building right now is this: Is what builders paid for lots in the past 12 months through the present low enough, and can their direct costs and overheads come down far enough to sustain viability even as wages stagnate, credit remains scarce, and the political, social, and business bias toward expanded homeownership remains a dirty term?

We’re seeing public home builders’ 1st and 2nd quarter numbers come in, largely illustrating operational improvement over prior quarters and in year-on-year comparisons. If new orders don’t meet expectations, then it’s to do with one home builder’s model and strategy versus another’s.  In general, spec builders drove greater unit volume during the tax credit period, and order-then-build builders sought greater net profits on each unit.

Imagine, housing economics with real skin in the game, and hard-earned money getting put to work for gain or loss. It’s the closest we’ll come to this notion for a generation, and we may wind up finding that we like it.

An exageration? Probably, a bit of one. But to some great extent, we need a post-policy cushioned world to tell us all what we’re working with. Without artificial government support and without  Fabulous Fab and his silk-tied ilk’s mischievous play in some global game of financial chicken , the house price, both new and used, will find its level.

Estimates from solid sources are that national house prices still need to and will decline something on the order of 5%  to 10% from their current level–down some 45% from their 2007 peak–to reach equilibrium. Equilibrium would be defined in part historically, and in part by virtual of home prices’ ratio relationship to household incomes, or cost-to-rent, or on a more macro basis, as a percentage of GDP.

As much as there are forces and sources of great anxiety in the global economic pool, the unmistakable signs of economic recovery have pronounced themselves as real and present.

Here, Barry Ritholz’s The Big Picture blog outlines the, well, big picture, which the thesaurus apparently told him translates into “macro overview.” Here’s his take on real estate.

Real Estate (Commercial and Residential): We do not believe that residential real estate has found its natural price level yet. It remains over-valued. This is due to artificially low mortgage rates, foreclosure abatements and mortgage mod programs. We are probably 10-15% over valued, when measured by Median Sales price to median Income, Rent vs Ownership Costs, and Home Value as a Percentage of GDP.

Stable home prices are destabilizing for those who either paid for their homes (or building lots) at bubble levels or who have borrowed too heavily against existing homes at over-appreciated bubble levels.

Housing finance–the Government Sponsored Enterprises and the Federal Housing Administration–umbilically relies on the federal government, and is enormously susceptible to politicization. So, while we’d like to think that market forces can finally do their thing to correct real estate, our elected officials have their hands in the soup to a greater degree than we might like.

Still, now that the federal tax credits for home buyers and the suppression of mortgage interest rates have run their course, private sector liquidity–which many believe is substantial–can go to work, and home buyers themselves can go to work to arbitrage what they can really pay for what they still dream they want.

April 29, 2010 | Filed Under Financial Crisis, Home Builders | 3 Comments 

New Home Sales–Surprise, Surprise, Especially for the Tax Credit Naysayers

New home sales for March blew away consensus expectations among Wall Street analysts. Their models were broken before and they still are. But if you’re listening to us, you already knew that, and you’re busy not paying attention to the media noise about what it means.

You’ve declared a six month moratorium on mainstream media coverage and daily Wall Street mumbo-jumbo, and your focus is operational. Like ours is.

We heard Tom Lee, chief equity strategist at JP Morgan, respond recently to a question about why his 2010 forecast on the equity markets is much more optimistic than that of most of his peers. In so many words, he’s predicting continued strong recovery in equities because that’s what his analysis tells him. “It sounds smarter to be a bear,” he added.

This is what we believe to be the case right now in housing. We know builders who’ve said the soon-to-expire tax credits for home buyers did not create the surge in demand they’d expected. Both public builders and private ones–underwhelmed by the impact of the Uncle Sam inducement–say the first wave of the tax credit from February to November of 2009, had a much bigger impact and that it pulled buyers forward from the home buyer pool of the future.

But it’s hard to compare the two programs. One started last February 2009, and ran through the entire Spring selling season into the Fall.  The surge had nine months to build. The one that’s about to expire straddled the seasonal low-ebb for home buying–the months of December, January, and February.

Many a home builder would have had to roll the dice on spec home building practically the moment in early November 2009 that the ink was dry on the legislation to extend and expand the tax credit.

What’s more, bad weather in the mid-West and Atlantic coast in February may have restrained activity builders may have expected, which pent up traffic until later.

What’s clearer to us is this point, and it’s precisely here that we must again disagree with the consensus on the post-expiration effect: Home buyers are smarter. Waiting–in this case, to the last possible moment before the expiration of the tax credit punch bowl–has been smarter than not waiting. Why? Well, in many instances, they’re getting a better deal than if they bought earlier in the program window.

Now, $8,000 is $8,000, and $6,500 is $6,500. So, if Uncle Sam takes that punch bowl away, will smart home buyers believe for a second they’ve forfeited their opportunity to make June or July or August the best moment in a generation to buy a new house? No.

What the credit extension and expansion succeeded in doing, as M.D.C. Holdings CEO Larry Mizel has pointed out, is to draw the focus on home buying over to new vs. used.

The likelihood that home buyers believe they’re making a smart choice to buy new now is higher because home finance has corrected, and valuations have begun to solidify.

Now, even optimistic JP Morgan strategist Tom Lee posits that home prices have another 6% or 7% to fall on a national basis before the bottom sets in (he’s predicting it’ll be 2022 before we see them regain their 2007 peak pricing levels).

But we’re not recommending home building companies pay any more attention to analysts now than we were a month ago. They just don’t know. If you focus on building smart, and building “finance-able” homes, the analysts’ forecasts can get to be a source of amusement rather than the cause of an ulcer.

April 23, 2010 | Filed Under Home Builders, Legislation | Leave a Comment 

A Surge in Home Buying? Well, What Do You Know?

Case in point (see our previous post). The New York Times has this report leading its business pages today.

Real estate agents say buyers and sellers are hurrying to take advantage of the tax credit, which is worth up to $8,000 for home buyers. But the last-minute rush is also prompting some foreboding about what will happen to the market on April 30 when the credit ends — and whether it is too risky to let it end at all.

The Times reports that “arguments for extending the tax credit for a second time are just beginning.” This is not the case. The argument to extend it yet again cropped up practically the moment it was extended for the first time last November.

Our Hill sources say some Congressional staffers have asked National Association of Realtors and National Association of Home Builders lobbyists to test their constituencies’ pulse on an extension, but smart money would say that an extension would be highly improbable.

November’s mid-term elections loom.

The press no sooner gets finished reporting that the home buyer incentives were having little to no effect, when now we’ll see a spate of media reports on the surge in buying just before the program’s deadline.

Why we wouldn’t surmise that it makes sense for as many people as possible to wait as long as possible until just before the expiration to get the best price ever? While prices in a few markets have started to flick up a bit, most sellers are highly motivated to discount enough to get the deal.

The economy has trained home buyers the way supermarkets once trained double-coupon shoppers to strike at the optimal moment for the deal of a lifetime. So the weather is better and the floodgates are open.

Now, naysayers can go back to calculations on how much the home buyer tax credit program costs taxpayers, and worrying about what happens to the marketplace when the program sunsets.

Nevermind the headlines.

March 30, 2010 | Filed Under Financial Crisis, Home Builders, Legislation | Leave a Comment 

Never Mind the Daily News — For Home Builders, It’s Operate or Perish

The noise level is rising over whether the December-to-June extension and expansion of the tax credit for home buyers was good or bad, effective or not, stimulated new buyers or merely pulled buyers forward, helped or hindered a housing recovery.

It’s going to get louder, more strident, and less clear during the weeks shoe-horned between bad weather and program deadlines.

If there’s a surge in sales in March and April, naysayers will talk about how expensive it was to capture each sale. If there’s no surge, the chorus will be that the program failed to do what it was supposed to do.

We have that same din going on over the merits — or lack thereof — of all the elements of punch bowl economic policy, ranging from Treasury’s mortgage backed securities purchases that have kept home mortgage interest rates at historical lows to loan modification programs aimed at keeping people in their homes.

We haven’t seen any really smart analysis of the impact of the home buyer tax credits yet, because we believe an intelligent, politically neutral analysis would include an opportunity cost assessment of what could have been expected to occur if the tax credit for home buyers did not get extended in November 2009.

Broadly, it seems that the latest batch of stimulus programs, and the cost of them, aimed squarely at second derivatives far more than at actual recovery. It’s just that it’s hard to be content with progressing sideways, and not getting worse, when getting better is where we’ve got our troops focused.

Anticipating the dissonance ahead, we recommend a 90-day all-heads-in-the-weeds operations and selling focus that keeps teams from paying any heed to the flood of data and debate over which sale traced to which policy initiative and was it worth it all.

We feel that a “negative headline moratorium” would do as much to fix housing over the next several months as any policy initiative has done in the past 24. The last thing your folks need as housing “bumps along the bottom” is to get stuck in a bi-polar feedback loop of highs and lows as each new batch of data contradicts the prior batch.

What would be unfortunate now would be associates who lose sight of the overall plan amid controversy over whether government programs helped or got in the way of things going worse or better in the housing market.

What’s plain and clear now is that, even as Uncle Sam becomes a more and more significant GDP player for the rest of many of our lives, it’s the free market that will actually “size” the home building landscape in the next couple of years.

Take away the policy punch bowl, and it’s you and your team’s brilliance against all of the antagonistic circumstances imaginable. One thing for sure is that buyers who bubble up out of the soup of hostile borrowing terms will be among your happiest, most memorable customers when you look back a decade from now–that is, if you take good care of them.

A 110% focus operations and sales — and  a “Damn the Torpedos”  mentality will go far toward leading what remains of high production building companies through the last leg of the marathon downturn.

Two counterintuitive takes that have an operations focus caught our attention recently, and we feel they’re worth mentioning here.

One is Dan Ariely’s “Predictably Irrational” blog. Ariely ruminates here about how decisions made during emotional peak moments tend to set up repeated behavior. A greater understanding of this behavioral pattern can lead to more effective management, especially as regards “learning from one’s mistakes.” 

Too, the April 2010 issue of Harvard Business Review carries this piece on leadership called “The Acceleration Trap,” about companies that burn out their talent by trying to do too much for too long without a let up.

Here’s three “patterns” an over-accelerated company exhibits:

  1. Employees are overloaded with too many activities. They don’t have the time or the resources required to do their jobs.
  2. Multiloading: Companies ask employees to do too many kinds of activities. This leaves employees and the company as a whole unfocused.
  3. Companies get into the habit of constant change, or perpetual loading. This pattern deprives workers of any hope of retreat for recharing their energy. To compensate, they hold back their efforts whenever they can.

The article has some prescriptive — fairly logical — guidance on how to “break free of the acceleration trap.” These involve focus, where less can be more, and discrimination hurdles for new initiatives are set higher.

The market’s havoc for the past three years have left only the strong standing, but even the strong have been weakened. It’s time now to get off the roller coaster of good news-bad news data announcements, and go about the business of building your staff to grin and bear it.

March 29, 2010 | Filed Under Financial Crisis, Home Builders | 1 Comment 

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 

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