PASS A STIMULUS PLAN “Congress needs to enact legislation that would give home buyers a tax credit of $10,000 to $22,000, as well as a government subsidized 30-year fixed rate mortgage at 2.99%, with a six-month introductory rate of 1.99%,” says Ara Hovnanian, president and CEO of Hovnanian Enterprises. This legislation, he adds, should address all primary home buyers and not include a repayment provision, unlike the existing $7,500 tax credit, which essentially acts as a loan and is only available for first-time buyers of new homes, excluding buyers of resale and foreclosure properties as well as move-up and move-down buyers.
Hovnanian admits that the industry has had a hard time presenting its proposal on Capitol Hill due to the election season and other industry bailout plans in the works—which is why he urges his fellow builders to contact their appropriate representative or senator in support of the cause.
While others remain more cautiously optimistic, Hovnanian says the proposed stimulus plan would lead to a bottom in the first quarter following its enactment.
GET THE BALANCE BACK While the call for a new housing stimulus is one heralded by many, a key component that must be figured out is foreclosures.
“Market by market and submarket by submarket, we need to get inventory equilibrium; and to get there, we need to understand foreclosure exposure,” explains Taylor Morrison president and CEO Sheryl Palmer.
In October, 84,286 REO properties were listed nationwide, a 22 percent decline from the previous month, according to Foreclosures.com. Industry analysts caution against optimism, however, as the numbers are down due to legislation enacted to stave off foreclosures—which suggests a future wave is most likely waiting in the wings.
MOTHBALL PROJECTS Standing on the sidelines until the market comes back is hardly an option for builders with excess land burdening their balance sheets. But selling off assets at a loss for a tax carry back may not necessarily be the best bet for the future.
Standard Pacific Corp. is moving to mothball projects as opposed to selling land at depressed prices, and other companies have adopted this strategy as well, according to CEO Jeffrey Peterson.
“If you aren't motivated to sell for a tax benefit, the cost of selling at distressed values and exiting the market, plus the cost to re-enter the market might trump the cost of mothballing,” he says.
LIQUIDITY, A MUST TO SURVIVE Palmer says liquidity is not available for builders to move land and that “unsecured financing isn't even on the radar. Amendments [to existing loans] are difficult, and some institutions won't even lend [to home builders] as a matter of policy.”
Which gets to the crux of the issue: Worries over an eventual market turnaround are meaningless if you haven't found a way to ensure your company's survival through the correction.
“The world is divided between those who have the right capital structure and those who don't,” Hovnanian says. “A lot of builders won't be around. When the market turns around, half of those competitors will be out.”