Defending the tax break for home builders

This blog has been teeing off on the proposed tax break for home builders, and this morning I gave the blog over to Daniel Gross' rant that the tax break is "perverse" and "absurd." I thought it only fair to invite someone from the other side of the debate to weigh in. That said, here is guest blogger Patrick Duffy, who blogs at HousingChronicles.com:

"While I can understand and sympathize with bloggers, readers and journalists such as Daniel Gross who remain adamantly opposed to any alleged special treatment of home builders at potential taxpayer expense, such emotionally wrought arguments conveniently ignore both rational discourse and historical precedent.

"Firstly, the argument that all builders overbuilt to simply assuage their own greed is simply inaccurate (some did, most didn’t). In fact, according to Paul Emrath at the NAHB, most builders were trying to meet an artificial demand created by speculators who were lying to sales agents, lying on sales contracts and lying on mortgage applications. No matter how many safeguards they put in place to clamp down on speculative activity –- borne out of a similar scenario in the late 1980s when flipping houses in between phases became a new sport –- speculators knew that builders weren’t really in the business to enforce such contractual provisions, so they took the risk anyway. And other than a few lonely voices in the blogosphere, the conventional wisdom at cocktail parties was that such activity was a surefire way to build long-term wealth. Lesson learned: Never trust people drunk on either alcohol or their own supposed genius.

"Secondly, if we simply had speculators leaving the scene and dumping their existing inventory onto the market, we wouldn’t be seeing the 60% reduction in building activity that we have today. It’s because of the issues with the credit market that nonspeculators can’t sell their homes either, which is a serious handicap in a country that was built on freedom of movement in between job opportunities.

"Thirdly, even before the Fed-supported Bear Stearns buyout, this country had a long-standing policy of propping up industries when the risks to the economy outweigh those clucking on about 'moral hazards,' which seems a specious argument considering the chronic epidemic of morally questionable behavior of Wall Street, pop culture and U.S. politics in general. Remember September 2001, when Congress approved $15 billion in aid to the airlines? Or the $3.6 billion for Long Term Capital Management in 1998, the $4.5 the FDIC provided for Continental Illinois in 1984 or the $1.5 billion in loan guarantees for Chrysler in 1980? Where was the outrage then? Although there was plenty of outrage accompanying the $124-billion bailout of S&Ls during 1986-1995, the potential consequences of doing nothing were far more serious.

"Fourthly, in his piece 'A Tax Break for Bubble Heads' in the online Slate magazine, Newsweek writer Daniel Gross’ opinionated rantings run a bit loose with the facts. By only considering the financial strength of large builders such as Lennar or Pulte, he completely dismisses the fates of the tens of thousands of builders and remodelers who can’t, as he says, 'look to the capital markets first' and can’t 'dilute the shareholders, not the taxpayers.' In fact, according to the most recent Builder 100 ranking in 2006, nearly three-quarters of homes sold that year were not built by big public builders, but a variety of small and large private companies, to whom the capital markets are now largely closed. Today you see multi-generational homebuilders closing their doors not due to greed, but due to market forces beyond their control. At risk? Nearly five million jobs or 3.5% of the U.S. workforce related to residential construction, filled by people who had no say in how the large public builders ran their businesses. From his comfortable writer’s perch, however, Mr. Gross would simply label that 'market capitalism.' I wonder if he repeated that same phrase to the group of longtime Newsweek writers recently forced to take a buyout and leave?

"Finally, this tax break oriented towards home builders is in theory available to any company facing current financial losses after years of profits, and had been done before as part of an economic stimulus package enacted by Congress in March 2002 to address fallout from the attacks of 9/11/01, giving innocent companies –- such as the country’s 155,000 building industry suppliers and the 58,000 home builders not in the top 10 -– some much-needed breathing room to stick around for the eventual rebound. In fact, perhaps Mr. Gross should take a hiatus from his writing duties and work for that fictitious builder of affordable housing he cites in Wichita, Kan. Such an experience would likely help him start shooting from his brain instead of his hip."

Patrick S. Duffy
Principal
MetroIntelligence Real Estate Advisors

Thanks, Patrick. Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com
Photo Credit: AP

Comments

[brettdl]

Patrick S. Duffy makes a great point: Why aren't we bailing out newspapers? It would be far more affordable too.

[Fred]

Ok, so homebuilders weren't greedy, they were just stupid. NO MARKET INTERVENTION. Let the homebuilders solve their own problems. It will create better, more efficient companies in the future, which is good for the long-term economy.

Same goes for troubled homeowners. I don't really care if you were greedy or stupid, immoral or just unfortunate. You lost. This economy is founded on the principal of winners and losers, and that is healthy and necessary.

[baruza]

1. Even if they weren't greedy, that's not the question. Firms that make bad business decisions aren't entitled to ex post protection because they had good motives.

2. See 1

3. This is the crux of his argument and really all it amounts to is two wrongs make a right. He offers no evidence for why "the risks to the economy outweigh those clucking on about 'moral hazards.'" It's simply assumed: circular argument at its worst. All large homebuilders do is reduce the building cost for new homes. They employ very few people directly, and they don't generate many jobs. The people they contract with to actually do the building will be out of work with or without these tax breaks because there is simply an oversupply and lack of demand for their services. If these companies go bankrupt, when demand for new construction homes returns, people would simply have to pay a slightly greater price for them, or in the very unlikely event demand were to return anytime soon to 2002-2005 levels new companies of exactly the same sort could be formed--and hopefully the new ones could do a better job managing the risks of the business. Same goes for the everyman worker he is disengenously pitching as the beneficiary here. Times were good for many people the last few years and now they're not. If they didn't spend recklessly they should have been able to save some money to get through times. If anything, this is a much better argument for extending unemployment benefits to all, than just giving a break to home builders.

4. Yes, we all feel for these people but see 1 again and see 4. Industries go belly up from lack of demand. It happens.

5. In theory yes, Congress could extend it to any company, but they're not, and why is that? Could it be because of the concentrated interest of the builders lobby, disproportionate to their size and importance in the overall economy? Many people have gotten fired this year, and would surely love to get a break against past income from the years when they had a job, but only homebuilders are getting it. Why? Because they have a lobby.

It's good to have an open exchanged on this, but it's still total dreck anyway you slice it.

[Winfield J. Abbe]

There is no limit to the number of arguments for bailouts or social welfare for this special industry or that is there? As far as the loan to Chrysler is concerned that loan was paid in full with interest. I am not sure about the others or how the Bear Stearns bail out will turnout.
While the housing industry is a great and very important one, would they ever be able to fill the shoes of say, General Motors or Ford or Chrysler should we ever become engaged in another world war? Do you remember who very quickly converted to military production of tanks, planes, ships, engines, etc. etc. etc. during WW II? Yes, it was GM, Ford, Chrysler, Packard primarily. Packard, the greatest automobile company in America at the time, made enormous contributions and unselfish sacrifices to the war effort which actually delayed it from returning to ciivilian production after the war and indeed shortened the time to its demise by about 1960. Today. GM, Ford and Chrysler are on the ropes and face the same fate Packard faced 50 years ago. Most other "hard" industries have been moved out of the U.S. or sold to foreign investors. Who is going to provide the war materiel should we need to defend ourselves again? Are we going to have it provided by China, Mexico, Korea (Africa?), (Israel?) or where? The Pentagon even recently ordered planes, not from an American company like Boeing, but AirBus of France. And only the other day it was reported that many airplane parts and engineering is now manufactured in Mexico, even by Canadian companies. I think the people running our country never took history in high school or college and they should not have received any degree. It appears from their decisions they were high school drop outs.
I think the inmates have taken over the asylum as in the movie "One Flew Over the Ku Ku's Nest". I think those running our country are lunatics and belong in a mental institution, not as officers running the greatest powerhouse on the face of the Planet. GM and Ford and Chrysler are on the ropes, regardless of whether they deserve it or not based on their past performance. Perhaps the do deserve it. But if one is going to make arguments about who or whom should receive bailouts, should not GM, Ford and Chrysler be first in line? Or can it be proved we will never be involved in a world conflict again, like World War II? Or doesn't the security of the United States matter any more since some speculate that when the economy tanks far enough, that will be the time the dumbed down masses of the U.S. will agree to unification with Mexico and Canada, with a new currency the "Amero".

[tony]

On your first point, you are being naive. Many public builders had divisions that were writing mortgages (Centex, and Lennar, for example). If they did not thoroughly investigate the lendees, that is really their problem and they have no excuse.

Also, excuse me if I have no sympathy for the builders on another point - They TURNED THEIR BACK ON THE AMERICAN CONSTRUCTION WORKER. I have spoken to many people who used to make a nice living working construction for houses. Those jobs are now of the 7 dollar an hour variety and are performed nearly exclusively by illegal immigrant labor. Now these American workers don't have the jobs they were skilled at, and the American government gets no income tax from these under-the-table laborers. Oh, and on top of that, all of the board members paid themselves handsomely as well as took generous amounts of stock options. If these companies need help, then they should have a private offering and the well paid board members can reinvest in their dreary business.

[Tex]

Mr. Duffy: please explain why inflated home prices that average 10X the median income in the community are good for the community and/or the local economy.

Duffy says: "It’s because of the issues with the credit market that nonspeculators can’t sell their homes either..."

Um, I thought the reason nonspeculators couldn't sell their homes is because they have them priced too high. Isn't that basic supply & demand -- if it doesn't sell, the price is too high?!

[JohnnyB]

"Firstly, the argument that all builders overbuilt to simply assuage their own greed is simply inaccurate”

Not all... They know who they are.

"Secondly… It’s because of the issues with the credit market that nonspeculators can’t sell their homes either…”

You’re cartin’ before da horsie on this one. They can’t sell because the homes are WAY overpriced and folks are finally wising up. You should be telling the banks to be transparent, keep proper books and deal with this “issue” asap.

"Thirdly… Remember… $15 billion…? Or the $3.6… the $4.5… the $1.5…? Although there was plenty of outrage accompanying the $124-billion bailout of S&Ls during 1986-1995, the potential consequences of doing nothing were far more serious.”

All those examples except the last were chump change (is Keating over there?). Oh… those “potential consequences” again. The interconnected, lattice work of counter party interests… pull out this string and the tapestry unwinds to a pile of worthless thread. Right. Seems a little thinning of the herd would be a good thing at this point. Way, way, way too many businesses operating as speculative investment banks, overleveraging to the absurd and making dishonest profits off of hard working citizens.

"Fourthly, ...Today you see multi-generational homebuilders closing their doors not due to greed, but due to market forces beyond their control. At risk? Nearly five million jobs or 3.5% of the U.S. workforce related to residential construction…”

Most of these immigrant construction workers hired during the bubble replaced multi-generations of contractors and hard working folks that like working with their hands and building solid houses for their fellow Americans… young folks working summer construction jobs to make it through college, etc. Point is, there’s plenty of empathy to go around in this mess… but, that doesn’t mean my tax dollars should prop up this current crop. However you want to slice and dice it, all builders combined did create a glut of homes on the market, they all charged too much, they hired cheap labor at American’s expense and they all made significant profits for many years.

"Finally, this tax break oriented towards home builders is in theory available to any company facing current financial losses after years of profits… giving innocent companies… some much-needed breathing room to stick around for the eventual rebound.”

So, us millions of “innocent” individuals/families currently priced out of this over-priced housing market don’t finally deserve some “breathing room” in the form of lower home prices. You want to support bailouts that payout tax dollars to the wealthy few and as part of a larger bailout that seeks to prop up these high home prices as long as possible.

Sounds like typical shill-speak.

[allen gillespie]

The pro tax credit for builders argument assumes that with a little government help, builders can keep on building houses as before and save the millions of jobs. This is absolute nonsense. All this building for flippers and indigent liars is over and proping up the builders won't bring these markets back for a few years, thankfully.

[sunsetbeachguy]

Patrick Duffy has a second career in magic.

He is a master at mis-dierction and sleight of hand.

No where did he broach the topic of the bubble that feed the Washington's voracious need to do something.

Never mind the elephant in the living room of the housing bubble that inflated prices beyond the means of 95% of everyone in LA.

If you don't believe my 95% number go check the Wells Fargo/NAHB affordability index.

To channel Tanta at CR, "Look over there!".

[Hugh]

Frankly, it would be a lot less headache if instead of special interest bailouts, we all got *big* tax rebate checks.

[firesale]

"It’s because of the issues with the credit market that
nonspeculators can’t sell their homes either."

Patrick Duffy makes the argument for "good" vs "bad" builders.
Dumb pity play. It doesn't matter what their motives were,
they were all chasing the inflated price of the market making
higher and higher profits per square foot of building. Now they
simply need to sell the unsold square footage in its traditional
profit range.

The price of building a home between
2000 and 2007 didn't increase much more the
general inflation. If builders chased the price of
land (which many did) then they were taking risks
that weren't prudent. They can now sell for the
actual cost per sq.foot and the actual value of land
and accept no profit or even a loss. Why is this so
difficult to understand? People lose money in
investments, everyday. This is exactly the same
scenario, just on a bigger scale. I say, let all markets
correct and only pour on Fed liquid to put out resulting
fires, not threatened ones. And when the trouble
actually hits, bailout those affected who had no part in
this RE run-up. Let the speculators get on the back
of the line.

[150 Multiple Choice Questions]

Wow, Duffy sounds just like a Realtor, which means he's some combination of four things.

1. Seeing only what he wants to see.
2. Lying to try and help his cause.
3. Stupid.
4. Wrong.

And without meaning to he points out the biggest hazard, the implied government bailout for businesses who are in trouble regardless of the reason. (and why don't they help out the car industry? Or travel agents? Or US companies getting eaten alive by free trade?

The fact that has been proven by all the government "action" so far remains, this problem is simply too big for Washington to solve. They're throwing 200 billion at a multi-trillion dollar problem and frankly having a heap of unintended consequences.

Funny how all these financial "geniuses" fail to see the obvious.

[brad]

Hey 150 multiple choice questions: Not to go off point but I have been looking for you. The sale of the 1500sf foot duplex for $150k over the asking price of $1.1MIL closed last week. It is located at 332 Brooks Avenue. There's your backup punk

[eternal summer]

"......most builders were trying to meet an artificial demand created by speculators who were lying to sales agents, lying on sales contracts and lying on mortgage applications"

uh, helloooo? have the builders never seen "property ladder" or "flip this house"? i mean, those shows have been on for years....what a lame a$$ excuse. please.

[bottom line]

Holy moly Duffster, you're cracking me up, LOL. I couldn't hardly get past your 1st point, might we examine it, please?

"Firstly, the argument that all builders overbuilt to simply assuage their own greed is simply inaccurate (some did, most didn’t). In fact, according to Paul Emrath at the NAHB, most builders were trying to meet an artificial demand created by speculators who were lying to sales agents, lying on sales contracts and lying on mortgage applications.

Start off with the 2nd sentence. Whenever anyone says 'In fact,' the whopper may well be coming their way, in this case it sure is, in spades! Let me get this straight, you say good guy builders were trying like all git out to help build homes & phony speculators were lying to sales agents, on sales agreements, & on 1003's to loan officers & brokers. Pat, sober up, back away from the crack pipe, or stop trying to do stand-up comedy.

Your statement is laughable & idiotic because anybody in ANY PART of the home ownership chain, from developer to builder to lender to real estate agent to appraiser to pest inspector to escrow officer to structural inspector to ad infinitum KNOWS that the builder has ALMOST ALL the control, they employ their own hand picked real estate agents on sight, have cut their own deals with two or three APPROVED LENDERS, & control the escrow process down to the last iota.

Let me spell it out for you, folks in the industry that have worked 100's if not thousands of transactions aren't likely to be buffaloed by a newbie flipper, or a speculator of ANY shade, lol, and they'll NEVER fool an underwriter.

I did like you using 'clucking' & 'ranting' though. Can I get a symphony of 200 tiny violins for those poor, deceived, country bumpkin builders that just fell off the lumber truck next to the construction site, please?

[Brian]

Mr. Duffy's argument falls apart completely when looked at closely.

"The argument that all builders overbuilt to simply assuage their own greed is simply inaccurate".

Mr. Duffy then goes on to cite the National Association of Home Builders, certainly an unbiased source. He claims that homebuilders were victims -- of lying speculators. Right. In fact, homebuilders were only too happy to sell to anyone who could get a contract. As was pointed out in earlier replies, the largest of these homebuilders had their own sales and financing arms, so they had multiple incentives to sell at inflated prices to whomever.

"Secondly, if we simply had speculators leaving the scene and dumping their existing inventory onto the market, we wouldn’t be seeing the 60% reduction in building activity that we have today. It’s because of the issues with the credit market that nonspeculators can’t sell their homes either..."

What does that have to do with a tax credit for homebuilders? The reason people can't qualify for mortgages now is that sanity has returned to lending. No longer can fog a mirror, stated income, no documentation, pick a payment financing qualify you to buy a home. Now you actually have to prove you have a job and will be able to make payments, as well is put some skin in the game.

"Thirdly, even before the Fed-supported Bear Stearns buyout, this country had a long-standing policy of propping up industries when the risks to the economy outweigh those clucking on about 'moral hazards,'"

The argument here seems to be five wrongs make a right. I don't happen to agree with any of the bail out the sites, but for arguments purposes -- the airlines business was affected by a terrorist attack, not their own greed; Long-Term Capital Management and Continental Illinois were not bailed out, they disappeared; Chrysler got a loan, which they paid back early; and Savings & Loans also disappeared -- in the bail out was to protect depositors.

"By only considering the financial strength of large builders such as Lennar or Pulte, he completely dismisses the fates of the tens of thousands of builders and remodelers..."

But in fact, it is precisely these large builders that will get the tax break. First, they are the ones that speculated, buying land and sinking money into thousand home plus developments that have now cost them hundreds of millions of dollars. Second, they're the ones that are required under accounting rules to mark these assets down. Your local homebuilder who may have bought land has no such requirement. He has two choices, sit on the land and wait until things improve, or sell it. It is these large public homebuilders who have to mark their assets to market, that will be able to take advantage of this tax loss carry back.

"Nearly five million jobs or 3.5% of the U.S. workforce related to residential construction, filled by people who had no say in how the large public builders ran their businesses". As other respondents have pointed out, the home building industry achieved a remarkable feat. They were able to outsource their workforce without ever leaving home. Nearly three quarters of all jobs in the home building industry have been filled by immigrants, mostly illegal. Don't ask me to cry for Argentina (or Mexico, or Guatemala, or Honduras). Ask the Americans that used to hold those jobs, at good wages, whether they think the homebuilder should be bailed out.

"Finally, this tax break oriented towards home builders is in theory available to any company facing current financial losses after years of profits, and had been done before as part of an economic stimulus package enacted by Congress in March 2002 to address fallout from the attacks of 9/11/01..."

Again, he conflates self caused problems with a terrorist attack. But his point about this being available to other companies is correct. But who are the companies that are now having huge losses, after years of stupendous profits? Those who caused this bubble, and its subsequent pop! So in addition to homebuilders -- mortgage lending companies, banks and investment banks will all be able to share in the riches. Meanwhile, the deficit burden on our children and grandchildren grows and grows.

Finally, let's look at what the effects of a wave of homebuilder bankruptcies be? What do these homebuilders consist of? They usually have a small administrative staff, a staff of construction managers, and a sales force. They outsource most of the building cavities to subcontractors. Many of them are "virtual builders", with only administrative and sales staff.

Their assets consist of raw land, improved land, and housing inventory. It's not like they have factories. If they went bankrupt, what happens? The lenders seize their land and inventory, and look for buyers. A number of people lose their jobs, but whoever buys it and eventually develops the property will hire those experienced people.

There is virtually no barrier to entry in the home building industry. Anybody who can scrape up the money can buy land and hire staff to develop and build. So if Pulte, KB and Lennar went out of business tomorrow, somebody would be there to purchase foreclosed assets from the bank, and eventually develop the property.

Methinks Patrick Duffy should take his DVD set of Dallas and watch his namesake, rather than penning superficial op-ed pieces.

[Landless]

The home construction busiiness relies upon illegal aliens. Construction workers use to be able to support a family, but wages in construction have declined. There are no apprenticeships. Black men should have gotten those jobs at living wages. Why should we workers bail out an industry that has lowered our standard of living? Do we get a promise for wage increases? Affordable housing? Let the businesses fail. They failed us.

[dilbert dogbert]

Peter,
After reading the comments all that I could think of was lions, very hungry lions and Patrick Duffy. Did you warn him of what was to come. Will he read the comments.
Thanks for offering the lions a meal. They enjoyed it.

[LeavinLA]

Landless: And white or brown men here legally shouldn't get those jobs?

[150 Multiple Choice Questions]

Hey, Brad, thanks for the one-off example of how the market is great! You're a feakin' genius. Go buy some new construction in Vegas, the market is on fire!

[arroyogrande]

PD: "Firstly, the argument that all builders overbuilt to simply assuage their own greed is simply inaccurate (some did, most didn’t)"

Most of the mom-and-pop builders that I know, both on the California central coast and in the Inland Empire, overbuilt on spec houses (houses built not to order, but to 'speculate' that there would be a buyer when construction was complete). If you want, I can name names. There are a lot of them.

PD: "In fact, according to Paul Emrath at the NAHB, most builders were trying to meet an artificial demand created by speculators"

And so they should get special tax considerations...why?

PD: "Secondly...It’s because of the issues with the credit market that non-speculators can’t sell their homes either, which is a serious handicap in a country that was built on freedom of movement"

However, it was because of the (loose) credit markets of a few years ago that *anyone* could sell a home...including home builders building spec homes. If it's fair to take profits on the upside, it's fair to take a loss on the downside. Deal with it.

PD: "Thirdly, even before the Fed-supported Bear Stearns buyout, this country had a long-standing policy of propping up industries when the risks to the economy"

Please give me a break...homebuilders are hardly the backbone of the American economy. Are we going to give special tax breaks to furniture store owners as well? How about real estate brokers? Mortgage brokers? Aren't they all suffering? Why are they not a risk to the economy as well?

PD: "Today you see multi-generational homebuilders closing their doors not due to greed, but due to market forces beyond their control. At risk? Nearly five million jobs"

Wow...a company might go under due to "market forces"...hasn't that been going on for, well, since the start of recorded history? Also, for the mom and pop shops I know, see argument #1, re: speculation and greed.

PD: "Finally, this tax break oriented towards homebuilders is in theory available to any company facing current financial losses after years of profits, and had been done before as part of an economic stimulus package enacted by Congress in March 2002 to address fall-out from the attacks of 9/11/01"

Yes, I can see how a terrorist attack and speculative bubble that 'no one could have predicted' can be equated. Actually, weren’t the home builders almost uniquely suited to seeing the price run-up for what it was...a credit bubble? If anyone should have known that the good times couldn't last, shouldn't it have been the home builders, who, during the run-up, told us that they had learned from the last crash, and would be building significant amounts of "spec" homes this time, so "it is all good"?

This is so ridiculous. These companies were uniquely qualified to identify the bubble, yet they chose not to see it, pretending that the massive price run-up (especially in California, Florida, and Las Vegas) was all based on "fundamentals"...and even the mom-and-pop shops decided to pile on to the "spec house" building game, to reap even greater rewards...or so they thought.

- arroyogrande

[Fourth Generation]

We had an artificial demand for a product (houses) and the builders are not to enforce provisions about borrowers and lenders (both liers). OK but the builders saw a boom in the making and went for it (i.e, greed). It is their money it was up to them the house builders to apply due diligence in research the market they were investing in building houses to start with. But NOOOOO! they like many others were blinded by greed and now many are under. You gambled you pay, is that simple. No BAILOUT for the STUPID.

[sheila]

btw, everyone saw that mccain completely changed his tune on bailouts as soon as he got out of LA, right?

http://www.smartmoney.com/bn/smw/index.cfm?story=
20080411111417

yes, friends, the "straight talk express" has made yet another u-turn. at this rate, he should just find a wal-mart parking lot and do donuts for the rest of the campaign. at least that would be "funny, haha" instead of always "funny, sheesh."

[Digitalian]

Mr Duffy, to use a basketball term, you need to come strong in this house. That was some weak "stuff" you brought in here and predictably you are getting it swatted back in your face.

[dunno]

"the potential consequences of doing nothing were far more serious."

The pro-bailout folks are always going to pull this one. Keep the public in a state of fear and you can get them to go with whatever you want... just look at all these terr'ists trying to kill us. Iraq is worth it and so are the homebuilders!