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

[jb]

I would love to see the profits from all of the exec's at the homebuilders for the last ten years - over-the-top bonuses, great salaries, etc.

If you claim they need a bailout to keep the economy afloat then we want payback. No more bonuses for execs, etc, and when profits return we want a cut until it is paid. It is unfair to have us rescue their companies only to restart the same game again. If the execs/builders do not like these conditions, they are welcome to take the alternative (no bailout)

[sfvrealestate]

"It’s because of the issues with the credit market that nonspeculators can’t sell their homes either..." Patrick is right about this. The market stopped dead in August because lenders stopped making loans. Now that lending has picked up somewhat, so has sales activity.

There is a simple reason why builders build homes: consumer demand. Whether those consumers are flippers or not, and even if the reasons for the demand weren't sound, there is no denying that there has been a huge demand, fed by easy credit, that has lead to lots of new homes.

[Zeon]

We should bail out everybody who has ever made a bad decision, and make it retroactive to, say, the 1960s when a lot of bad decisions were made. The first thing I want is reparations for the useless humanities degree I earned. And I'd like to be bailed out for the countless bad investment decisions I've made over the past 20 years. I mean, why did I ever sell Intel, Dell and Microsoft back when they were in single digits? Why was I forced to do that? It was economic forces beyond my control that brought me to my sorry state. Oh, yeah, I'd like a bailout for yesterday's unfortunate decision to order the chicken marsala instead of the Kobe beef.

[pathetic]

ah, ah, ah BULLSH!T!!!!!!! Duffy calls out all the anti-bailout guys such as Gross for the need to "shoot (sic) from the brain rather than the hip" and states these comments are lacking in "rational discourse". This guy is so arrogant it makes me choke. Who is irrational?

Greed, ignorance, stupidity, any way you paint it, it is still not the obligation of the taxpayer to make up for any one of those pitfalls of private commerce.

And tell me again, how LTCM, the S&L bailout or the airlines are analogous to home builders? How is the failure of the weakest home builders going to create a cascade effect into a downward spiral for the US economy? I don't think so. These home builders can't build and sell any more homes regardless of a bailout.

All this would be doing is moving losses from private industry to ME! I got enough of my own losses, they can keep theirs.

[MyLessThanPrimeBeef]

My questions to Patrick Duffy are as the same as those asked of Richard Nxion, what did the building industry know about a coming bailout and when did the building industry know?

If they knew back then, back in 2004-5, this makes it a first degree, premeditated, economy-kidnapping bubble, by a well-known, previously convicted, in public opinion of course, serial bubbler of an industry.

What is the law and order administration going to do about that?

[LA]

His argument falls off in many fronts. First, he tries to resurrect failed bail outs from the past like LTCM and the S&L crisis as if the larger monster under the bed would come out if no one intervened. Those markets collapsed anyways only tax payer money was used to support failing companies a bit longer and give money to those who greased the wheels on the speculation.

He also argues that builders did not overbuild for greed. Are you kidding me? What absolute hogwash. Then why did they build? To create affordable housing for the American public? This is a flat out lie and we need only look at all the McMansion ghost towns in Arizona and Nevada to see this.

Then he argues that what's the difference here if we are bailing out Bear Stearns? This is an elementary argument like saying, "he got away with murder why shouldn't I?"

The fact of the matter is many of these builders rode sky high during the bubble and they not only were players in the market, they were major participants. Incentives trying to get buyers in. Marketing and paying lobbies to be helpful to their industry. That is why we now have record inventory on the market.

His moral compass is off and he might as well say, "we should get tax payer money because other unworthy causes did in the past."

Giving the "mic" to someone like this is like allowing OJ Simpson to right an op-ed piece on marital success. We've heard enough of these people over the past decade.

[NoWayinLA]

Funny... I don't remember the home builders paying extra taxes when the sales pace and profits were breaking all previous records. If we're going to give them a tax break now, that should come with a caveat that we get to tax the hell out of them they start feeding a bubble and destabilizing the entire economy. It's only fair.

[Patrick Duffy, HousingChronicles.com]

Hey Peter:

Thanks again for the chance to offer an opposing view yesterday to that of Daniel Gross regarding the proposed tax break for builders (which passed in the Senate but looks unlikely to pass in the House).

You asked me to provide a view in opposition to that of Mr. Gross, and that's exactly what I did, using the same types of defenses I've heard and read from homebuilders and homebuilding association. Plus, I did think that by focusing exclusively on the largest public builders he wasn't necessarily including smaller builders as well as the army of suppliers and subcontractors that do most of the actual building.

I've been keeping a close tab on the comments, and have been re-posting some of the more impressive ones on my own Housing Chronicles blog -- if I'm going to be raked over the coals it's much better coming from those who know how do it!

You've definitely got a smart and well-educated audience (more so than on some other housing blogs I read), with the best comments coming from 'baruza,' 'JohnnyB,' '150 Multiple Choice Questions,' 'arroyo grande' and 'LA,' with the funniest by far coming from 'bottom line.' And whoever 'Brian' is, you sounded so much like my banker friend Brian that I thought it was his post (it wasn't), but what a great comment!

Ok, here's what I REALLY think from a more balanced perspective: from a PR standpoint, many builders have been their own worst enemies, and if they want to re-earn the trust of the general public it simply can't be 'business as usual' anymore.

Firstly, if they want taxpayers to help them through this cash crunch, there should be some strings attached, namely stop avoiding subcontractors and suppliers to whom you owe money and don't insult them with offers of 25 cents on the dollar (which is something I heard last night after my original post).

Secondly, you'll probably have to disband these in-house mortgage operations that in many instances forced buyers to assume loans that weren't competitive so they could grab the incentives being offered. That trust is now lost and unlikely to be regained anytime soon.

Incentives should be offered on their own and not tied to anything else. Beazer Homes, which got into a lot of trouble with their in-house mortgage arm, now refers loans to Countrywide and, according to a design consultant I met the other night, says they don't attach incentives to a Countrywide loan.

Thirdly, they're going to have to provide far greater transparency (and education) throughout the entire sales process, including firing lazy/greedy/uninformed sales agents who were simple order takers during the boom. I can't tell you how frustrated I'd be listening to a sales agent attempt to explain mortgage terms to potential buyers without telling the full story.

Fourthly, we really need to license mortgage agents and brokers, force them to act as fiduciary agents for their borrowers and provide more funds to regulators so they have the muscle to pursue those who deliberately steer clients into the wrong types of loans (such as Option ARMs) because they pay a higher commission.

Fifthly, we've got to recognize that one reason this boom got out of hand was the Bush Administration's 'hands-off' policy towards regulating the housing and mortgage markets; by blindly chasing higher ownership rates they lost sight of just HOW that was happening (i.e., speculators, sub-prime mortgages, fraud, etc.). The fact is we may need some more regulation for this industry and builders may have to accept that if they expect any special treatment by the taxpayers.

Finally, one commentator said that it doesn't matter what the Fed or federal government will do, since this problem is simply too large to contain, and that may be true. The best we can hope for is a somewhat orderly realignment of housing prices against incomes and associated rents, and strict penalties for those who perpetrated fraud on sales contracts and loan documents.

There is still a lot of pain ahead, but for those who keep informed and stay on top of trends, there will be good deals now only now, but certainly in the future. It just depends on your individual circumstances.

[tew]

There's no there there. Where's the argument? Nothing here makes the point that the builder should get a special temporary carry-back. I for one don't find the carry-back all that big a deal (though I would like losses carried back to exclude expenses for top 5 executive compensation)

[brad]

150 multiple questions: I never said the market was great only that some areas are holding up better than others and I offered the duplex in Venice as an example (it had 8 offers and sold for $150k over asking price). You asked for backup and I gave it to you. So stop distorting my words. By the way, I'm not buying now that would be premature. I just wonder of you have ever even owned property. It sounds to me like your just another armchair whiner with little or no real experience in the world of real estate. Good luck

[dilbert dogbert]

Patrick Duffy,
The lions took some good bites out of you but you escaped with your life and humor. We are going to need a lot of good humor to get thru this mess.
I hope RE bottoms in 2009 but expect 2012 as a better estimate.
We have children with houses that are "underwater" and are very concerned about how that will impact their economic lives. BK and walk away is not an option for them.

[Dankster]

I don't see the value added by THESE home builders as opposed to the home builders that will spring up when demand increases again.

When there has been demand for homes there has never been any shortage of companies that are willing and able to develop land and build homes.

Homebuilder companies don't have big factories or warehouses full of equipment, or even large numbers of employees. As pointed out by other commenters, they hire subcontractors to do all the labor. The homebuilder company is a planning, management and marketing system, that's all. Their role probably increases efficiency but they're by no means "too big to fail."

I really fail to see how Lennar, DL Horton or KB Homes is some kind of iconic, irreplaceable company that's needed for the national economy. There is no danger that the US will have less homebuilding capacity if any or all of them fail.

The homebuilder tax break is a lobbyist-driven political giveaway and kudos to Bill Gross and others calling Congress out o it.

[eternal summer]

i am not sure what will be written about this time in history, but there is no shortage of corruption, greed, and exploitation. the problem is so many people are involved from ordinary people whose eyes grew large with fantasies of easy riches siphoned from artificial house appreciation to morbidly obese compensation packages for ceo's of failing banks. i watch the interest on my savings dwindle down to nothing month after month as i listen to mouthpieces of the home building sector whine about how giving the builders a bailout is the american way. i am just sick to death of hearing about these greedy jacka$$es whining for a handout. they sound like my kid when he asks for some ridiculous toy he saw on tv for no reason at all....tell these idiots what i tell my kids-put it on your x-mas list and ask santa.

[LeavinLA]

Dankster: Tell that to the employees, their families, and their suppliers' employees and families. It's better to keep a business going than to start from scratch.

[Home Builders]

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