More on the tax break for builders

A number of you have questioned whether a tax break for home builders is accurately described as a bailout. Let me make a few points as we continue the discussion.

--The New York Times calls the proposal "a break for struggling home builders, allowing them to claim current losses against taxes paid in earlier, more profitable years. This provision, intended to aid home builders, would cost about $15 billion in the first year."

--Senators Baucus and Grassley, in their housing proposal, estimate the cost of these "refunds" -- their word, not mine -- at $6.1 billion.  You can find a link to the Baucus/Grassley proposal on Market Beat columnist Tom Petruno's new L.A. Times blog, Money & Company.

--Let's remember that most big home builders are also lenders. What's being discussed here are multi-billion dollar tax refunds for builders and lenders, refunds they are not entitled to under existing tax law.

--Lastly, let's remember that the builders made a ton of money in the bubble. Executives were paid very well. Then they overbuilt, and now they're stuck sitting on inventory of unsold houses. My vision is not great, but I can't see why it would be a bad thing to let the builders reduce prices until they sell off the inventory, without any special help, encouragement, or refunds from the federal government.

Enlighten me. Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com.

Comments

[jb]

private gains, public losses - the whole system is crooked and we should not put up with it. It is time to put these politicians out of business.

[anonymous]

I agree! If we consumers are expected to save for a rainy day contingency, corporations should be expected to as well. They did, in fact, make a bundle in the bubble.
I don't think tax payers should have to foot the bill for the fraud and the greed.

[JW]

Peter Viles wrote:
"My vision is not great, but I can't see why it would be a bad thing to let the builders reduce prices until they sell off the inventory, without any special help, encouragement, or refunds from the federal government."

Peter, the overwhelming majority of politicians are nothing more than professional panderers who are involved in politics strictly for the contributions that they can suck off special interest groups like the NAHB. This bailout was soooo predictable. It's disgusting to see these politicians throwing away our tax money on projects like this. All I can say is.............vote the incumbents out of office every time they come up for election.

[CD]

We the rich people of the United Stated Of America have decided to stop paying taxes.We no longer feel like it.
"Only the little people pay taxes" as Leona Hemsley said.
So from now on just charge the little guys and don't bother us anymore with such trivialities.

[Patrick Duffy, HousingChronicles.com]

Why is it ok to bailout airlines (after 9/11), car makers (Chrysler back in the day) and lenders (Continental Illinois, the S&L mess) but not builders? Whereas I can see the logic of helping out the airlines after 9/11 -- after all, they have huge fixed costs that remain no matter their level of traffic -- the Chrysler bail-out was to help save jobs. If we're going to let the market let the chips fall where they will, we should do so for ALL industries.

As for builders who built $500,000 homes in the high desert without completing accurate demand studies and rolling the dice on how long the boom would last, I have no defense. Unfortunately, consultants like me and who, like bloggers, were raising red flags back since 2003 were simply ignored in favor of competitors who are known for their large staffs, high profit margins and willingness to rubber-stamp anything that includes a paid invoice. In my mind, they're just as guilty as the builders and lenders.

[ken z]

This is getting to be really funny.All these corporate crooks from the CEOs of morgatge companies to builders and investment banks ...etc made hundreds of millions by creating this mess and now finally it is going to be us the proud honest tax payers who is going to get shafted !!! While we are at it why don't we pay some reimbursment to the realtors too. Because if the market had not crashed during the past few months they could have each dumped another 5 or 10 of these overpriced shacks on the poor souls who really believed that we are running out of land!!!

[puckhead]

Peter,

Your blog on these tax breaks for builders do not tell the whole story and just infuriates readers that do not understand the current tax laws.

Per your blog, Congress is proposing that homebuilders can use their losses in the current year to offset taxable income in previous years and in essence get a tax rebate from taxes paid from those previous years.

What your blog does not point out is that under current tax laws, homebuilders can carryforward their operating looses in the current year and apply these losses to future tax years when they can make a profit.

All Congress is trying to do is let the homebuilders carryback these operating losses to get a tax rebate instead of carryforward the losses to reduce their tax liability in future profitable years.

Unless the homebuilder goes bankrupt or never has a profitable year going forward, the homebuilder will pay the same amount of taxes over time. They are just getting a rebate on their taxes today AND they’ll have to pay more taxes in future years.

We can argue whether or not it’s fair that Congress should allow homebuilders to carryback their losses. But you should also inject into the argument that assuming the homebuilder does not go bankrupt, over the course of several years, the homebuilder will pay the same amount of taxes even with this plan.

BTW, I do not recall such an outcry among readers when the govt announced the 2008 tax rebate for individual filers. People who paid NO income tax are eligible as long as they made $3K. I will receive NOTHING because the govt considers me “high income”. So basically, I worked my ass off this past year and the govt rewards me with nothing while some schlub works and Micky D’s and gets rewarded by the govt. How is that fair?

[allsouledout]

puckhead wrote:

"Unless the homebuilder goes bankrupt or never has a profitable year going forward ..."

EXACTLY.

(In other words, many will suffer this fate - which is a good thing. Visit the Galapagos for more information.)

[Jane Doe]

It's highly offensive that anyone in the housing and finance industry is getting a dime of tax payers' money, whether it theoretically might be paid back in the future or not. This is the same industry that helped invent and push toxic loans and said home buyers who got ensnared "should've done their homework." Why didn't the industry do ITS homework? Is the industry, with its "professionals," unable to predict that boat loads of bad loans that are resold as 'investments' and the increase in foreclosures would cause economic damage?

While I don't sympathize with home buyers and flippers who went along with liar loans or chose to take a risk I sympathize even LESS with the industry. It makes me wretch to think of my taxes contributing to bailing out morons and criminals. This punishes responsible consumers, and rewards dirt bags. Guess which we'll have more of in a few years as a result--responsible people or dirt bags?

[steveRB]

Poor puckhead. If everyone chips in and makes you queen for a day will that make you feel better? All of those "schlubs" making minimum wage and getting discount hamburgers are living high on the hog while the rest of us slave in our cubicles. Excuse me but I have to cry myself to sleep now.

[John]

Did you read that Baucus/Grassley proposal?

Talk about the "Titanic Deck Chair Rearrangement Act of 2008"!

Good lord is that proposal worthless.

Thank goodness. The housing collapse can continue unimpeded, the greedy and stupid can get their just deserts, and those of us who try to be responsible may get to own homes in CA sometime soon.

Now if we can just do something about the 45% HS graduation rate of LAUSD so we don't have to move out of state when its time to raise kids.

[tony]

This is just more taxation without representation. The public is adamantly against these bailouts by a wide majority, but the politicians pretend not to notice.

If these homebuilders need money because their business is hurting, they should look no further than the company board members who gave themselves huge amounts of options which they cashed in at every turn. For a laugh, see how much Robert or Bruce Toll pulled out of their company (and they were much worse in 2005). And now they need a handout?

http://finance.yahoo.com/q/it?s=TOL

[IToldu2CashOut]

I don't think this bailout will effect California. Our prices are way too out of whack.

[jb]

IToldu2CashOut,
What makes you think this will be the last one? Another will follow, then another, they are smart enough to do it in baby steps.

Someone needs to start a "hit-list" website of politicians who most support bailouts, with the most egregious at the top of the list. We then focus on that individual and have them removed.

I dont have the know-how, but I will send a $100 check to support whoever sets this up. How about others - would you contribute? C'mon, we need to make politicians realize there is a cost to whoreing to the bankers and builders.

(note, I have never voted republican in my life but I will jump to the "dark side" over this...)

jb

[tew]

Peter,

When you say "let the builders reduce prices until they sell off the inventory, without any special help" I think you're misunderstanding the impact of this carryback tax deduction. Generally speaking (subject to the points below) the presence of this cash flow from prior year tax payments does not influence the rational business decision regarding the pricing of the houses in inventory. If I gave you $1000 would you decide to sell your jacket for more or less money? If you're rational and not in financial distress it shouldn't matter...

Oddly (or not), at the margins, it actually could reduce the urgency to reduce prices and sell. This is due to two reasons: 1) the extra cash from prior year taxes paid may provide a builder with better access to lower cost financiing and thus reduce the cost of carry and 2) the after-tax cost of losses (from carrying a home rather than selling it) are lower since each dollar lost results in a refund *now* rather than a carryforward (as long as the builder had sufficient prior years profits). So, at the margins, this effectively takes supply off the market (reduces financial distress --> reduces pressure to seel --> shifts the demand curve).

This is really a time value of money handout and another way to distribute federal money during a recession. It provides stability to homebuilders (and is thus anti-competitive, since it keeps less skilled and more reckless players in the game).

[Laker]

jb, I will also contribute $100 to such a fund if we start it.
Our politicians are laughing all the way to the bank. It is sad to say and admit, but most of US population is just stupid and ignorant. We, the people, simply don't care, we vote for incumbents, and they know it. The politicians know that if they piss on us, we say it is raining...
Specifically our senators of boxer and feinstein should be sent to clean the sides of the freeways, and voted out of office.

[Cassiopoea]

I can't believe we're talking about bailing these guys out -- this entire mess was driven by greed and while the homebuilders may be suffering now, their top officers certainly aren't. I just did a check of a news feed of earnings reports from 2002 - 2006. Almost every company involved in construction reportered "record" results for almost every quarter.

I mean, if I went out and started, let's say... a T-shirt company. And these T-shirts were the hottest trend... and I charged $100 for one shirt and I'm making money hand-over-fist -- then suddenly fashion tastes changed and I'm left with a bunch of unsold T-shirts -- is the government going to bail me out?

[tony]

Cassiopoea,

Regarding your t-shirt business, the answer is 'yes.'

[anonymous]

tony,

Can I add to your comment? the answer is 'yes' provided you have a lobbyist.

[jb]

Me and Laker are in, I bet a lot of others are too...

Somebody with knowledge of the players make a website that addresses the "most wanted" and lets sack the politicians supporting a bailout. My checkbook or paypal is ready.

jb

[J T]

Hello choir,

Firstly, the information and interpretations being touted are incredible.

"The home builders are at the epicenter of the housing problem", Ara Hovnanian.

The builders and the banks were definitely the beneficiaries of the good times and were at the epicenter, causally. However, that does not in any way lead logically or truthfully to the notion that the current slew of home builders are at all necessary to the financial health of the nation (as opposed to temporary support of the major financial institutions, supported by collateralized loans).

With little cost of entry, homebuliders will simply be replaced.

There seems to be some confusion about that.

Homebuilding is demand driven. Give a homebulider money and they build homes (or pay off debts so thy can carry land for the next cycle). How might this get housing prices back to equilibrium?

Home prices need to reach equilibrium. There is a price at which every property will sell, even in a declining market. How does it help to say, "I paid more than that."

Thankfully, America doesn't have debtors prison.

The fastest way is the best way in this case. Reprice and move on. [I would very much like to avoid the very long and drawn out process that Japan is still going through after nearly 19 years.]

See ya Hovnanian. (Didn't he just buy some at $4?) We will be just fine. Just like Ames, Woolworth, Worldcom, Texaco (that's right they were bankrupt), UAL and Delta. We have laws in place for just that.

We need to clear inventory. Then and only then can the excesses of the boom will become a memory of another bubble/"Greater Fool" scheme gone bust.

The alternative is a long, drawn out process that allows inflation to to do the heavy lifting of home prices.

Secondly, I build web sites. What did you have in mind and where might I find the data you want to present? (I have not looked into this yet.)

--jt

Incredible Bill, this S.AMDT.4387 ! I can only wonder what it cost the NAHB Lobby. The National till is open!