Jun 19 2007 1:01PM | Permalink | Email this | Comments (1) |
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Large homebuilders and their suppliers are scrambling to find a way, anyway, to boost their volume. They got a good run from nontraditional mortgages but that bubble burst so something else is needed to bring buyers priced out of traditional mortgages back to builders’ sales offices. And the quicker the better. The June NAHB Housing market Index slipped 2 points to 28, dragged down by a decline in builder survey reports of both home sales and sales office traffic.

Builder margins are being devastated by unused capacity and a surplus of both homes and land. Changes in home sale prices flow directly to the value of land. Since their profit comes more from the dirt than the sticks, large homebuilders need to boost housing volume to shut off the distress sales of surplus land that are reducing their company asset value and share prices.

Builders are pushing for all of the usual ways to bring additional money into the housing market. But none of them have the potential to generate the 35-40% rise in housing investment in two years that came from looking the other way when mortgage brokers brought builders buyers who realistically could not afford to buy a home. Sure, lots of builders got stung when the nontraditional mortgage market collapsed but most of the cost of defaulted mortgages will be borne by mortgage — backed securities bondholders and general taxpayers.

All of the ideas that were considered earlier in this decade and many times before whenever the housing market was depressed are back again. This includes more public housing, more public mortgage subsidies, more affordable (from a subsidy) housing, more favorable income tax treatment of monthly housing payments, cheaper access to building lots and shortcuts to speed up the permitting process and/or cut its cost in housing markets that still have a long-term shortage of homes even though there is now a temporary surplus.

Some of these ideas will be enacted locally and probably a few nationally. The impact on money flowing to housing investment will be positive. But, as always, the impact will be modest and much of it will not occur until the housing market is recovering on its own.

The only way to permanently raise investment is housing is to increase real consumer income. Any tricks that cause prospective homebuyers to believe that price of housing is les than it really is can only have a temporary impact. And possible negative long term consequences.

The Housing Affordability Act (SB303), now working its way through the California legislature, illustrates how to boost housing investment by distorting the price. The proposal would require regional planning groups to allocate “quotas” to member cities and counties for housing units at each income level for the next ten years. The municipalities would be required to immediately zone enough land to meet the quotas. If the selected land now has a more valuable commercial use the landowner loses that added value and is required to hold the land available, perhaps for many years, until a builder needs it for construction. The eventual homeowner or landlord perceives a lower cost because the current landowner is forced to bear some of the cost.

Will it work? If it passes it will have a positive, albeit small, impact on housing demand. But only until the new rules collapse from the onslaught of property confiscation lawsuits as well as the additional “public interest” lawsuits the proposal authorizes.