House Blend: March 2007

New Tax Break

Builders who cater to entry-level buyers with moderate incomes have another tool available in 2007 to help make a home a little more affordable. Just before the 2006 holiday break, Congress passed legislation that allows homeowners with an adjusted gross income of $100,000 or less to deduct mortgage insurance premiums on their tax returns. The deduction phases out above that income level and is eliminated completely for those with incomes above $110,000.

Mortgage insurance typically is required by lenders when the borrower's down payment is less than 20 percent of the home's appraised value. In recent years, borrowers with less than a 20 percent down payment have increasingly bypassed mortgage insurance by taking out two loans—a primary mortgage for the first 80 percent of the loan and a secondary, or piggyback, mortgage, to cover the balance. The interest on the primary and the piggyback mortgages is deductible; mortgage insurance premiums were not.

But piggyback loans aren't problem-free. They're usually at a higher interest rate than the primary loan and they're adjustable, which means that buyers won't know what their payments will be later on. Plus, rising interest rates are making it harder for some moderate-income buyers to qualify for the piggyback loans, says Sue Stewart, president of Melbourne, Fla.–based MHI Mortgage, the financing arm of Mercedes Homes. That makes it valuable to have another option to offer customers. Her company is telling buyers about the tax deduction as one more reason to buy a home in 2007.

PROS AND CONSHere are some benefits and drawbacks of mortgage insurance and piggyback loans, courtesy of Andrew Housser, co-CEO of the consumer finance Web portal Bills.com:

“We're pushing [the mortgage insurance tax deduction] as a home buying benefit,” she says. “All of us want a deduction from the IRS.”

For builders, the mortgage interest deduction gives their buyers another financing option, says Heather Howerton, director of the national builder division for GMAC Mortgage in Horsham, Pa. “Up to this point, no one wanted to do mortgage insurance,” she says. “It was the white elephant in the corner that no one wanted to talk about.”

The biggest drawback is that, for now, it's only a one-year deal. Congress only approved the deduction for mortgages that are taken out in 2007, and the deduction can only be taken on the buyer's 2007 tax return. Even if a buyer pays for the policy in advance, he can only deduct the portion that's applicable to the current tax year, says Phoenix-based CPA Sandy Abalos. The only exception is for qualified mortgage insurance issued by the Veterans Administration or the Rural Housing Agency, she says.

It's not unusual for Congress to do a deduction on a one-year basis, and then assess the impact, says Glen Corso, group senior vice president for Walnut Creek, Calif.–based The PMI Group, one of the country's largest mortgage insurance providers. “We are hopeful that the reasons for [the deduction] will be just as strong then as they are now and they'll see fit to renew it,” he says.

—P. Curry

A Florida circuit court in January awarded Pulte Homes $1.16 million for impact fees it paid to cover school construction in Osceola County. Pulte, which paid the fees upfront and did not pass them along to its home buyers, had sued the county over its procedures for refunding the fees. The refund was made necessary when in 2005 a judge invalidated part of an earlier 240 percent impact-fee increase. The Orlando Sentinel reports that as many as 860 buyers of Pulte homes failed last year to petition the county for their partial refund, which shows that “they implicitly agree that this is Pulte's money,” the company's attorney asserted.—J. Caulfield

Builders looking to get out from under pricey inventory build-ups must be more aggressive in liquidating finished units, according to a report from Wachovia Capital Markets. Though gross inventories are declining (down to 545,000 in November 2006 from an all-time peak of 573,000 units in July 2006), the number of completed new unsold homes hit an all-time high of 169,000 units in November. Finished inventory, which Wachovia estimates costs three times as much to carry as unfinished, now makes up 31 percent of the inventory total, the highest mark since February 1998. With Wachovia projecting a dip in the adjusted home building operating margin from 8.6 percent in 2006 to 5.2 percent in 2007, home builders will need to sell off finished and unsold inventory to keep their operating margins up.—E. Butterfield

SOURCE: WACHOVIA CAPITAL MARKETS

When home buyers are on the fence about which house to buy, it's often a special function room that snags the swing vote. Which floor plan extras are winning the most kudos these days? Rising gas prices and telecommuting habits seem to be exerting some influence. Home offices topped the list in the latest AIA Home Design Trends survey (49%), followed by home theaters (21%), fitness rooms (6%), hobby/game rooms (6%), au-pair/in-law suites (4%), and child or guest wings (4%).—J. Sullivan

A federal judge recently rejected a motion from the National Association of Realtors to dismiss an antitrust lawsuit filed against it by the Department of Justice. The department filed suit in September 2005, challenging NAR rules that allow traditional brokers to limit Multiple Listing Service access for customers of Internet-based brokers using virtual office Web sites, or VOWs. The lawsuit claims the rules keep consumers from getting the full benefits of competition and allows traditional brokers to discriminate against other brokers based on their business model.—P. Curry

An Albuquerque, N.M., couple is suing home builder RayLee Homes, charging the builder with selling in excess of 50 percent of its homes in the Sundoro South subdivision to primarily out-of-state investors, many of whom rented to transients who brought down the neighborhood's quality of life with loud parties and rude behavior. The couple, Ben and Christine Brooks, alleges that the builder promised to sell no more than 10 percent of the neighborhood's homes to investors. The Brooks moved into their new home last summer.—S. Zurier

SOURCE: ALBUQUERQUE TRIBUNE

The cost of affordable rental housing has risen 28 percent in the past seven years, far outpacing the wages of those who need it most. “Out of Reach,” the annual report of the National Low Income Housing Coalition (NLIHC), found that housing affordability is most difficult for minimum-wage earners but is also tough for those who earned the median hourly wage ($14.57) in 2005. In 2006, what the NLIHC calls the “national housing wage” rose to $16.31 for a two-bedroom rental, from $15.78 in 2005.—N.F. Maynard

SOURCE: CNNMONEY.COM

Building a Better Nail

As a graduate student researching how to make houses more hurricane-resistant, Ed Sutt looked at the damage from hurricanes Marilyn and Opal, which hit the Caribbean and the Florida Panhandle in 1995, and saw that much of it was related to the nails not holding. So, Sutt started working on a new design that would keep the nail shank from withdrawing from framing and the nail head from pulling through sheathing.

After six years of work, Sutt, a Ph.D. in civil engineering who now works for Bostitch, unveiled the HurriQuake nail. Made of a carbon-steel alloy with angled barbs, a twisted shank, and a larger nail head, the HurriQuake Nail can double a house's resistance in high winds and provide as much as 50 percent more resistance to earthquake-type forces, according to independent testing from Clemson University's Wind Load Test Facility. And if that's not enough of a reason to consider them, they are great at reducing floor squeaks, Sutt says.

On a 2,000-square-foot house, HurriQuake nails would cost about $15 more than standard nails, Sutt says. Plus, any nail gun that shoots a 16D common nail will shoot the HurriQuake. Bostitch initially is selling the nails only in the coastal regions from Texas to North Carolina but is adding new production lines to meet nationwide demand. They're also available on Amazon.com.

For all those reasons, Popular Science magazine selected the HurriQuake nail as its 2006 Innovation of the Year, winning out over 100 new technologies from around the world.

While Sutt says he felt a mixture of elation and disbelief at being selected for the honor, he's most excited about the recognition of the critical role of fasteners in construction.

“Through all the research I did, I found that fasteners are the most important part of the structural system of the home, but no one appreciates them for that.” —P. Curry

At Your Service

In some of its new communities in the southeast, D.R. Horton is gaining notoriety by offering a unique technology package that includes a 24/7 “tech concierge” who will take home buyers' calls and either troubleshoot a tech problem over the phone or send out a technician.

The service comes bundled with voice, data, video, and security services in an average monthly HOA fee of $135.

One big reason Horton can offer this service is that all the technology is installed and managed by Charlotte, N.C.–based technology provider Your Residential Technology Team (YRT2). When service calls come in, there's no bouncing from provider to provider.

YRT2 lays the fiber-optic cable, installs structured wiring in all the houses, meets with home buyers during the general selections process to explain the technology, offers a service call within the first week of move-in to help buyers set up their systems, and even sells and installs consumer electronic gear such as surround sound and plasma TVs.

“Some integrators will push a $10,000 order on a home buyer right away; that's not what this is about,” says Richard Schwartz, D.R. Horton's Charlotte division president. Some of the homes featuring the service start as low as $109,500.

“What YRT2 does is explain to our buyers that there's a technology plan waiting for them when they are ready to buy that computer or TV they dreamed of when they bought the house,” he says.

Schwartz says the HOA fee goes to YRT2, while Horton receives a percentage of the consumer electronics sales. At press time, the concierge was offered at four Horton communities in the southeast. —S. Zurier

Returning To Its Roots

When The Home Depot retained Lehman Brothers in February to evaluate the long-range future of its $12 billion HD Supply business unit, the home-improvement retail giant may have finally waved the white flag on its quest to gain a stronger foothold with professional and commercial customers.

HD Supply is the legacy of Depot's former chairman and CEO Bob Nardelli, who resigned on Jan. 2 after a tumultuous six years during which he spent more than $7 billion on acquisitions to expand HD Supply. His logic was to create a distribution and service network that appealed to builders, contractors, and commercial accounts, which its 2,159 retail outlets were not attracting in sufficient numbers. Nardelli's goal was to grow HD Supply to 20 percent of corporate sales by 2010, compared to 13 percent of sales in 2006.

At one point this plan seemed as if it would survive its architect. In a podcast with Home Channel News right before Nardelli exited, Joe DeAngelo—who ran HD Supply and is now Depot's COO—said the company still intended to grow HD Supply through acquisitions. But Nardelli's successor as chairman and CEO, Frank Blake, has since stated that the company's primary focus would be “retail, retail, retail,” especially now that it is expanding into China.

With Lehman Brothers, Depot is exploring several options for HD Supply, including its sale, its spin off, or an initial public offering. That division's fate, though, may have been sealed when The Home Depot agreed to add David Batchelder, a principal with Relationship Investors, to its board of directors. Relationship has been at the forefront of urging The Home Depot to sell off HD Supply and concentrate on its retail business to improve the value of its stock price.

On the Record

A revamped Texas ResidentiaL Construction Commission Web site allows consumers to conduct background checks on builders and remodelers with whom they are considering doing business. Visitors to www.texasrcc.com can search the state's online database for the scoop on a builder's registration status, history of construction defects, state inspection reports, and any administrative actions taken against the company. The site also indicates whether a builder has achieved “Texas Star Builder” status, having met certain criteria in education, training, financial stability, insurance, customer service, and adherence to stringent building standards.

Texas home builders and remodelers are required by law to register each new construction job with the commission. Companies that fail to register a project or to remediate defects found during a state inspection (inspections are conducted only in cases where defects are alleged) face fines. But the threat of bad publicity has also proven a motivating factor for good behavior.

“We've had instances where a builder seems recalcitrant in dealings with a homeowner, but when the owner ultimately calls in a third-party state inspector, the builder knows that's a public record that will be there forever,” says Patrick Fortner, a spokesman for the commission. “That record can potentially show two things: that the builder built something defective and that they didn't stand behind their work when it was revealed to be defective. Long term, I think the pressure to keep their records clean will be incentive for builders to do the right thing before these cases ever come to us.”

Since the program's inception in 2004, the commission has registered 26,367 home builders and has conducted nearly 700 third-party inspections for purposes of dispute resolution. The commission Web site drew an average of 39,000 unique visitors per quarter in 2006. Only two other states—Arizona and Oregon—have similar state inspection systems in place.