Builders Say Ending Tax Credit Could Halt Home Sales Gains
Home builders in hard-hit markets in Arizona and Nevada voiced concern last week that the tentative signs of a housing recovery they have started seeing in recent months may disappear with the expiration of the $8,000 housing tax credit for first-time buyers on Dec. 1.
With the tax-credit deadline for home closings only a few months away, the builders said that they don’t expect to receive much additional mileage from the current housing stimulus measure, adding that progress in turning around home sales could come to a halt unless the credit is extended for one more year and expanded to cover all eligible buyers of a principal residence.
The builders were participating in an Aug. 13 media teleconference held by NAHB as part of the ongoing “Revive Housing, Restore America” campaign, which is aimed at getting the Congress to focus on housing as a means of creating jobs and pulling the nation’s economy out of a devastating recession.
In a major grassroots effort, builders across the country — joined by their business associates, customers and members of the public — are carrying their message to members of Congress, who are home for their August recess until they return to Washington on Sept. 8.
“It is absolutely critical that every NAHB member lend his or her voice as a constituent in this effort, by personally communicating with their elected officials while they are home this month,” said NAHB Chairman Joe Robson.
Last week, with the campaign barely a week old, NAHB generated more than 1,300 letters to Capitol Hill and was receiving encouraging reports of upcoming meetings with builders and U.S. representatives.
In addition to the extension of the tax credit, builders are focusing attention on the urgent need for correcting a faulty appraisal process, ending the credit crunch for acquisition, development and construction (AD&C) loans and expanding Net Operating Loss (NOL) carryback provisions for businesses.
Each of these actions would generate significant job growth. Extension and enhancement of the tax credit would spur 383,000 additional homes sales, including 80,000 housing starts in the near term, and create nearly 350,000 jobs over the coming year.
An Uncertain Outlook
Citing “recent signs of economic stabilization,” Bill Hoover, president of Pageantry Homes in Las Vegas and president of the Southern Nevada Home Builders Association, said that “the outlook for a long-term sustainable recovery is at best uncertain. Everyone agrees there has been continuous and incredible job loss with no identifiable vehicle for recovery.”
Hoover noted that unemployment rates are approaching the double digits, raising prospects for a jobless economic recovery. “Housing, accounting for more than 15% of gross domestic product, is historically the leading sector for reviving a lackluster economy and putting Americans back to work,” he said.
The $8,000 tax credit has begun drawing in prospective first-time buyers “and making a difference to our industry,” he said; now it needs more time to gain traction.
“Our time frame is virtually over if we want to have the current credit help us,” Hoover said. “We’re in a position where we can’t go out and spec-build homes so that they will be ready in November with the hope that people will be able to buy them with the credit.” He added that the credit has been gaining momentum with its monetization in a growing number of states, allowing it to be used for downpayments and other upfront costs.
Appraising It ‘Wrong’
In markets such as Las Vegas, where foreclosures and declining home prices have been acute, Hoover said that appraisal issues have become detrimental to builders. He cited one local builder who is losing as much as 30% of his sales due to appraisals coming in as much as 25% below the contract sales price. Another builder, he said, received two appraisals on the same home that varied by 28%. “Somebody was appraising it wrong,” he said.
Mick Galatio, owner and president of Desert Wind Homes in Las Vegas, said that getting appraisers to realize the shortcomings of using foreclosed properties as comparables for the new homes he is selling has become a major challenge.
Most of the homes that are being sold by banks, Galatio said, “get destroyed or vandalized or deteriorate in the foreclosure process. People take appliances and cabinets when they move out.” Working to rehabilitate these properties, he said he is “seeing first-hand the conditions they’re in and what needs to be done to make them livable again.”
On the AD&C front, Galatio said that “lenders are working with us, but we are not able to get funding unless the home is presold.”
Not Out of the Woods Yet
Randy Agron, vice president and chief of operations at A.F. Sterling Homes in Tucson, Ariz., said that the home buyer tax credit is working and helping to stabilize prices in his market. “Stopping it now could throw a monkey wrench into the whole improvement we’re seeing signs of. We can still see the economy is not out of the woods yet, and not extending the credit could have a major impact.”
With the tax credit set to expire, when “someone comes into the model center now, we cannot deliver a new home by Nov. 30 to meet the deadline,” he said. “For us, it’s almost ending right now, and we have seen a decrease in sales in the past few weeks.”
Appraisals are also making it difficult for builders to recover in the Tucson market, Agron said. “There are errors in them and they really do harm us when we are working on such skinny margins, or no margins.” In some cases, he said, where his company is having to pay $20,000 to make up for a low appraisal, “it doesn’t make sense even to build these homes.”
The comparables that are being used, he said, typically are homes that are seven or eight years old, are less energy-efficient than new homes, were built under a less stringent building code and “have a lot less value.” He added that it has been “extremely hard to talk to appraisers and get feedback to them.”
And he shared the concern of other participants on the teleconference panel over the scarcity of financing for builders. “We are seeing significant constriction in banks’ willingness to lend,” Agron said. “We rely on this construction financing to build homes, even if we can sell homes. We need to get the pendulum back to a fair place in the risk tolerance” of lenders.
The housing industry currently is seeing “a very low, temporary kind of recovery,” said NAHB Chief Economist David Crowe. “We are very worried that the positive housing news over the past couple of months could be curtailed when the credit is over.”
“We likely will see a tempering in housing starts as we go into the next several months,” he predicted. Housing “has built momentum, but won’t get us past the hurdle. We really need this credit to push us past the goal line.”
“Builders depend on banks to purchase and improve the property and build the house,” Crowe added. “Banks have been unreasonably reluctant to lend to home builders, even those in relatively safe markets who have sales under their belts. This will eventually lead to a housing shortage, and we won’t be able to produce the homes that will be needed to meet pent-up demand coming onto the marketplace.”
Builders from around the country will continue to report conditions in their markets in more than a dozen NAHB state and regional teleconferences slated for the next several weeks.
Members Urged to Participate
NAHB is urging its members to participate in the campaign. Information can be found at: www.nahb.org/ReviveHousingNow.
For further information on supporting this effort, e-mail Molly Murray at NAHB, or call her at 800-368-5242 x8282.