Even before the House of Representatives rejected the Treasury's $700 billion economic bailout package yesterday, many builders were wondering how the plan would help them with the challenges they are facing.
As those in the housing industry know too well, those obstacles include high numbers of foreclosures, all available at prices far below new homes; stringent mortgage lending conditions; continued job losses; and skittish consumers worried about both the value of their current home and the possibility of buying another.
It's an undeniably complicated solution to solve, especially given the larger economic backdrop. "This has more dynamics and variables to it than any cycle we've been through," says Bob Hawksley, president of Fischer Homes in Cincinnati, who estimates that, in combination with boss Henry Fischer, the two of them have been through as many as eight housing downturns.
Larry Webb, chief restructuring officer for LandSource, agrees with Hawksley about the complexity of the current housing and economic crisis. "There is no silver bullet," says Webb, formerly of John Laing Homes. "Foreclosures must be absorbed, inventories must be reduced, financial institutions must be stabilized, and the economy must be strengthened."
So, with the bailout in limbo, the stock market in freefall, and the housing bill's $7,500 tax credit a non-starter ("That was dead on arrival and didn’t help anyone," grumbles David Brown, CEO of Brown Family Communities in Tempe, Ariz.), we decided to go to the experts on the American housing market--builders--and ask them what they would do to stimulate housing demand.
What would BUILDER readers address first? Foreclosures. "What we need is a dramatic program to reduce foreclosures and keep people in their homes," says Arizona builder Brown, who points out that 49 percent of homes currently being sold in Phoenix are foreclosures.
Such homes represent an incredibly difficult source of competition for new-home builders. "Foreclosures have to get back to pre-crisis levels," says John Wieland, founder of John Wieland Homes and Neighborhoods in Atlanta. "In our locations, it is foreclosures that are driving prices down. If a bank which has never seen the house is willing to take $100,000 less than what that (perhaps three- or four-year-old) house costs new, it’s tough to sell new. Impossible, perhaps."
John Walker, CFO for the Seabrook Land Co. in Washington State, agrees. "I would focus on reducing the number of foreclosures. Prices are continuing to drop because we have not been able to reduce inventory. Even though housing starts are way down, foreclosures are way up, which is keeping the inventory levels high."
Walker, like others, believes foreclosures could be stemmed if there was a large-scale program to renegotiate or refinance mortgages for financially strapped homeowners. "I would set up a homeowner workout program, where homeowners could refinance their debt at an affordable rate," he says. Especially if the government plans on buying the debt, it would make sense to set up a program that would ensure the principal gets repaid."
So does Wieland. "I think there should be a way for people who want to stay in their home and who can develop a credible plan to eventually pay their mortgage and be able to restructure their loan and avoid foreclosure. As for the deadbeats who haven’t paid and don’t plan to pay their mortgage--throw them out."
What builders don't want the government to do is buy these foreclosed homes and put them back on the market. "Whether the government buys [distressed mortgage loans] or buys foreclosures from the bank, I can't see how that helps new-home builders," says Hawksley of Fischer Homes."To me, that just looks like cheaper competition for us."
Jim Soules agrees. "I was in Orange County (Calif.) and saw my first 'bank-owned' sign on a home for sale. We must get rid of the excess inventory fast; just transferring the loans to the U.S. will still mean empty, poorly kept homes for sale," says Soules, formerly with The Cottage Company in Washington State, but who recently sold his interest in the business to focus on green building opportunities.
How can the government get this excess inventory off the market? By offering a real incentive to home buyers. "We need to offer something that is meaningful for all home buyers of new homes, not just first-time home buyers who are credit-challenged anyway," Hawksley argues. "How many first-time home buyers are there out there who didn't get down-payment assistance or didn't get a subprime loan or didn't have credit problems [and therefore could have taken advantage of the new tax credit]? That is a pretty shallow market."
He thinks the government should provide a permanent tax credit equivalent of between five and 10 percent of the median home value in a buyer's metro area, rather than a flat amount, as the housing rescue bill did. "In Cincinnati, $15,000 would have a pretty big impact," Hawksley notes. "But in California, that amount would mean diddly."
Thomas Hastings would enhance the current tax credit in two ways. "First, I would give first-time home buyers a one-time tax credit of $50,000 towards their purchase of a new house," says Hastings, president of The Hastings Company in Hingham, Mass. "Second, I would allow withdrawals from IRAs and Keoghs of up to $100,000 for the purchase of a owner-occupied home without an early-withdrawal penalty" for tapping those savings.
Several builders also suggested the government could help housing, stimulate the economy, and address an area of growing concern by investing in the country's infrastructure. “The bigger question is what can we do to create more jobs; that’s the group you have to focus on because they are your buyers," says Joel Carlins, co-CEO of the Magellan Development Group in Chicago, who suggests rebuilding the country's urban infrastructure in a new version of the New Deal's Works Public Administration would have a trickle-down effect on the entire economy.
Adam Patterson, a senior strategic marketing analyst with Centex Homes in Illinois, responded similarly to a BUILDER Online story regarding the bailout. "I would reallocate more funds to capital infrastructure throughout the country – roads, bridges, airports, rail, and energy such as windmills, power plants, etc. Our infrastructure desperately needs improvement. Those jobs have to be created here, and they pay fairly well. This would help address unemployment, and people who are employed will spend more money. Or at least cover their rent. Obviously most people can’t buy a house if they are unemployed."
That may not have been the case during the boom, but it certainly is now. “Mortgage credit restrictions, along with current down payment requirements, are putting almost every prospective buyer on the sidelines," says Tom Lewis, CEO of TW Lewis Homes in Phoenix, who favors loosening of underwriting requirements on conforming and jumbo home loans.
But others believe the only solution for today's housing crisis is time.
“I’m not an economist, but it seems like artificially propping up prices or demand will only prolong the inevitable," says Charles Petersheim of Catskill Farms, a small builder in upstate New York. "I think we have to let the housing market naturally correct itself and find the correct pricing for these homes. The boom was 17 years long and prolonged with a lot of magic tricks. I don’t think any regulatory magic trick is going to shorten the hangover from a very long, prosperous, and speculative boom. And all the smart builders knew this in some compartment in their brain.”
Alison Rice is senior editor, online, at BUILDER magazine. Boyce Thompson, John Caulfield, Jenny Sullivan, Nigel Maynard, and Ethan Butterfield also contributed reporting to this story.