This past year--2010--may be remembered best as the year when many important things didn't happen. We didn't have the big rebound (20% to 30%) in starts that most housing economists forecasted before the year began. Banks didn't start making AD&C loans to builders again. And nothing was done about the long-term status of mortgage market powerhouses Fannie Mae and Freddie Mac.
But plenty of things did transpire to make 2010 an eventful year. First, the home buyer tax credit, which probably commanded the most headlines and attention in the industry and mainstream consumer press, juiced sales in the spring, but left the industry with a summer hangover. Banks imposed a moratorium on foreclosures, after processing irregularities were revealed, yet they still outsold new-home builders for the year by a wide margin. And a handful of builders started reporting profits again, thanks in part to a liberalization of net operating loss carryback rules.
Several vital issues emerged in 2010 that will carry over into next year. President Barack Obama's deficit commission issued a report that jeopardized the mortgage interest deduction. The Obama administration fielded proposals for restructuring the secondary mortgage market agencies and promised to release its own plan early in 2011. And voters gave the Republican Party a majority in the U.S. House of Representatives that immediately reshaped the political landscape.
Meanwhile, distressed land deals made all sorts of headlines. Lennar and Toll Brothers created separate entities to, in effect, serve as land banks for outside investors. Competition heated up for choice parcels even in beleaguered markets such as Phoenix and Las Vegas. Only time will tell how many builders bought land at distressed prices in 2010 that will pay huge dividends in the future.
Other stories that were big in 2009 remained so in 2010. First-time buyers are still the only game in many towns and suburbs; they accounted for half of all homes (new and existing) bought in 2010. FHA continues to command a lion's share of new-home mortgage originations. Many banks are still in peril. And the controversy over Chinese drywall continues.
So, without further ado, here are our votes for the Top 10 Home Building News Stories of 2010.
10. Builders emerge from bankruptcy, as others go under. 2010 was a mixed bag on the bankruptcy front. On an optimistic note, several builders emerged from Chapter 11 with new business plans and financing, including Denver's McStain Enterprises and Gemcraft. But as the year progressed, other well-known companies, such as Simonini Homes in Charlotte and Anderson Homes in Raleigh, either closed their doors or liquidated. In the meantime, most builders continue to operate at a loss, many at the mercy of banks that could call bad loans at any time.
9. Land purchases take center stage. During the first half of the year, sensing that the market might have reached low ebb, big builders began acquiring land with abandon. Many public builders pursued a strategy of selling off old land inventory, taking a loss, and using the proceeds to acquire new land at a lower cost basis. Also, as private equity looked to do deals, two big public builders, Lennar and Toll Brothers, set up separate entities to pursue distressed land deals. Many large regional builders, such as Woodside and Fischer, stepped into the market to make strategic buys at seeming low prices.
8. Housing rebound fails to occur. Going into the year, most housing economists predicted the housing industry would rebound strongly in the second half of 2010, thanks to an expected pick-up in job growth. But most of those jobs never appeared, as private companies held off hiring even as they recorded strong profits. Without a bump from job growth, the negative drag from foreclosures and falling home values held back new-home construction. This summer many housing economists changed their long-term forecasts to postpone a meaningful recovery in housing starts until 2012.
7. Bruce Karatz avoids jail.The former CEO of KB Home was sentenced to eight months of house arrest instead. Karatz, who was found guilty of lying about back-dating stock options, but found innocent of securities fraud, will also have to perform 2,000 hours of community service. That's almost a year's worth of work, based on an 8-hour workday. Karatz was also fined $1 million. Prosecutors had pushed for a six-and-a-half-year prison sentence, which Judge Wright labeled mean-spirited.
6. Rising debt brings mortgage interest deduction under fire. A presidential commission on debt and deficit reduction, looking for ways to curtail a spiraling federal budget deficit, ultimately recommended replacing the mortgage interest deduction with a 12% mortgage tax credit, only available on primary residences and capped at $500,000 in mortgage amount. Economists at the National Association of Home Builders did the math for a married couple taxed at a 25% marginal rate that paid $6,000 in mortgage interest during the year. Instead of a $1,500 mortgage interest deduction, the couple would get a $720 tax credit (12% times $6,000.) The NAHB set up a website to preserve the deduction.
5. Unemployment fails to improve. A lack of jobs, coupled with a lack of confidence in future job prospects, may be the biggest problem facing the housing industry. During the last recession, the country shed 8.5 million jobs, including almost 2 million in construction. In the last year, private employers have only added back about 1.2 million at current rates. Because the U.S. population continues to grow, the official unemployment rate remained at 9.8% in November, compared to 10% in January. U.S. Bureau of Labor statistics show that in December 2007, when the Great Recession began, 7.5 million people were employed in construction. In November of this year, that figure had fallen to 5.6 million, a loss of nearly 2 million jobs. In the last year, even as housing starts rose slightly, the number of people employed in residential construction and residential specialty trades fell from 2.2 million to 2.1 million. Residential construction has lost 1 million jobs since December 2007.
4. Small homes command big attention. Early in the year, home builders rushed to bring some inspired small homes to market, thinking that first-time home buyers would rush to take advantage of federal tax credits. Many of these homes shared common characteristics: flexible great rooms, a lack of formal space, and a value-engineered frame. The timing was propitious: First-time buyers accounted for half of all home buyers during 2010, according to data from the National Association of Realtors. But overall, new-home sales remained tough as home prices fell under the weight of foreclosures and short sales.
3. Banks outsell builders 2 to 1. It's no wonder new-home starts and sales can't get off the ground, when banks are selling twice as many homes as builders. Bank inventory has emerged as a key metric in the timing of a housing recovery. Data gathered by Hanley Wood Market Intelligence shows that banks sell their homes for about 35% less than builders and existing home owners. In markets where bank sales have receded to more traditional levels, builders have enjoyed renewed success. Some have even managed to push prices.
2. Home prices continue their decline. Just when it looked like home prices had stabilized, another wave of foreclosure sales, and the aftermath of the home buyer tax credit, sent them tumbling again. The national index in the S&P Case-Shiller Home Price Index dropped by 2% in the third quarter of 2010, after rising 4.7% in the second quarter, when the impact from the tax credit could be felt. Housing prices are still 4.9% above their trough in the first quarter of 2009. Home values, according to the Case-Shiller index, are down about 33%. Many housing economists expect house prices to stabilize in 2011.
1. Home buyer tax credit fails to jump-start market. Builders and policy-makers had high hopes when a second, more lucrative tax credit--$8,000 for first-timers, $6,500 for repeat buyers--was enacted for home sales. Buyers had to close on their home by the end of April. While the tax credit did improve the spring selling season, particularly in markets that were stronger to begin with, it didn't jump-start the home building industry in the way policy makers would have liked. Instead, starts and sales reverted to former levels, and home prices, which had been lifted by demand created by the tax credit, started falling again.
Boyce Thompson is editorial director of BUILDER magazine.
Learn more about markets featured in this article: Anderson, IN.