A Wish List for Obama

So far, the President-elect isn’t saying — though the housing industry has proposed wide-ranging relief in the form of tax breaks for home buyers and builders, lower mortgage interest rates, as well as more builder-friendly rules on such issues as labor unions, illegal aliens, growth and impact fees.

That’s not to say that Obama doesn’t care about housing, says Illinois Association of Realtors CEO Gary Clayton. As a state senator in Illinois, Obama worked to stop predatory lending and supported tax credits for homeowners; after he went to Washington as a U.S. Senator, he voted to increase mortgage limits for high-cost cities. His Presidential campaign platform advocated a mortgage tax credit for 10 million homeowners who don’t itemize deductions and a plan to let judges reduce the principal owed on loans in bankruptcy proceedings.

But during the transition, the President-elect has played his cards close to his chest, neither endorsing nor opposing proposals by current government officials to lower interest rates and modify loans for financially troubled homeowners.

Nevertheless, given the extent of the economic crisis, and housing’s central role in it, it’s likely that fresh initiatives will be announced soon after Obama takes the oath of office. Here’s how builders hope some of these issues will play out on some critical issues, and how housing experts are responding to these proposals.

Last year, some 2.4 million jobs were lost, according to the U.S. Department of Commerce. More than 10.3 million people were unemployed in November, the highest number in a quarter of a century, and experts predict more losses in the months ahead. The construction industry has been particularly hard-hit, having lost more than 780,000 jobs since peaking in September 2006.

Fortunately, on this issue, Obama has already announced a new stimulus package that will include the largest public-works building program since the Eisenhower administration. His goal, he says, is to give a “jolt” to the economy and create or protect 3 million jobs.

TAXES: A coalition of dozens of builders, suppliers and others involved in the industry have issued a manifesto called Fix Housing First that calls for temporary universal home buyer tax credits of up to $22,000. Some builders would like an even bigger credit. David Fry, interim president and chief executive officer of WCI Communities, a Bonita Springs, Fla., builder that’s reorganizing after filing for Chapter 11 bankruptcy in August, champions a credit of up to $30,000, based on a home’s purchase price. “Buyers are on the sidelines, either lacking confidence or unable to sell their existing home,” he says. “We need a temporary stimulus that will give buyers a reason to get off the fence and make the home buying decision.”

But Leesburg, Va.-based housing economist Thomas Lawler isn’t a fan of tax credits for buyers, calling them too costly and maintaining that they wouldn’t address the needs of the truly needy nor solve the current problems with mortgages and foreclosures. Implementing them would be “bad policy,” he says.

Meanwhile, Jerry Howard, president and CEO of the National Association of Home Builders, says he will “carefully watch” the new administration’s proposals to increase the capital gains tax from 15 percent to 20 percent for high-income earners. To help builders preserve capital, the trade group will also push for the expansion of net operating loss carrybacks to allow builders to offset taxes paid during the boom years of this decade against losses expected through 2009 and possibly 2010.

INTEREST RATES: Although the Treasury Department is currently considering a plan that would temporarily reduce fixed interest rates for home purchases to 4.5 percent, the Fix Housing First coalition would like deeper cuts. Its plan calls for a 2.99 percent rate for contracts closed by June 30 of next year and a 3.99 percent rate for the rest of 2009.

Economist Lawler is skeptical that this action will fix the housing problem because it won’t help consumers who are struggling with excessive debt or getting loans for cars or education expenses — nor will it help small businesses having trouble getting loans. Moreover, he argues that the government is already providing massively subsidized mortgage financing relative to the market, through the Federal Housing Administration.

Cleveland-based housing analyst Ivy Zelman counters that lower mortgage rates for home purchases are necessary because “builders are on death row and are desperate.” Even some of the biggest builders have been hurt: D.R. Horton, of Fort Worth, Texas, reported a nearly $800 million loss in its fiscal fourth quarter and $1 billion in charges, while Atlanta’s Beazer Homes had a net quarterly loss of $475.2 million, more than triple the loss of a year earlier. In November, Louisville, Ky.-based McStain Neighborhoods announced that it was closing its bricks-and-mortar office, becoming a “virtual operation” and reducing its staff from 90 to 21.

But Zelman also believes that lower fixed rates should be made available not only to home purchasers but also for those who are refinancing. By helping owners reduce their payments to more affordable levels, the move would help stop foreclosures and lower inventory levels.

SUPPLY: The government reported that the rate of sales of new homes dropped more than 35 percent in November, to 407,000 from a year earlier, the slowest pace in nearly 18 years. Only 28,000 homes sold in November. Although new home inventory levels dropped slightly in November from a month earlier, some economists believe that that’s because builders have simply stopped building or are renting out homes they’ve already built until conditions improve. Inventories of existing homes rose to a 11.2-month supply in November, up from a 10.3-month supply a month earlier, according to the National Association of Realtors.

For builders like Perry Bigelow, chairman of Bigelow Homes in Aurora, Ill., sales of new homes won’t improve until the government gets a handle on foreclosures, which are swelling the market of available homes. His target market — first-time and first-time move up buyers — are purchasing those right now rather than new homes — and even if he cuts costs to the bone, he can’t compete with their prices. “I can’t afford to build,” says Bigelow, whose houses range from about $175,000 to $250,000.

Peter Morici, a business professor at the University of Maryland, says that although the Obama administration and Congress will probably enact plans to help stem foreclosures — ”what is politically feasible to help the little guy” — builders themselves are unlikely to get any bailouts. One of the roots of the current economic problems, he contends, is that builders created more houses than people needed during the boom years and now are suffering the consequences. “It would be madness to subsidize the creation of more housing,” he says.

LABOR: Howard says that NAHB wants to make sure that the government doesn’t hold builders responsible for illegal immigrants employed by subcontractors and that standards are set for verifying the legal status of workers they employ directly. Moreover, an administration and Congress that’s controlled by Democrats is likely to be more favorable to unions, and big builders are a target for those who want to unionize workers. “We have to be on guard,” he says.

But business professor Morici says it isn’t realistic for builders to expect anti-union initiatives from the government at a time when unemployment is growing rapidly. In his view, “the idea will get no mileage at all.”

GROWTH: Obama made his support of green issues a centerpiece of his campaign, and Howard wants to make sure that doesn’t translate into protective regulations that hamstring the housing industry. “The fear with a Democratic administration is that those who oppose growth will be given carte blanche,” he says. NAHB favors peer-reviewed regulations that will be cost-effective and will balance environmental concerns with affordability. However, Morici believes any change that weakens environmental regulations won’t get very far with the new administration or Congress.

Of course, another way that municipalities control growth is by increasing impact fees for schools, roads, sewers and parks. Because these costs must be passed along to home buyers, they also reduce affordability. Stephen Nardella, senior vice president of Winchester Homes in Bethesda, Md., says impact fees in his area can be as high as $30,000 a house and are equivalent to raising taxes on corporations and home buyers. He understands cash-strapped municipalities may be tempted to raise impact fees to offset revenues that are reduced when home assessments fall. But he hopes that Obama will use his clout to convince local governments that now is not the time to do that. “I hope the administration will send a message to local governments to give impact fees a 'time out’,” he says. “It will lighten the load on everyone.”