Homebuilders Reap Uncle Sam's Largesse

Back in the heady days when junk bond were the “new kid in town”, there was a euphemistic descriptor known as “yield to sales commission” which really just meant that all of the bond salesmen would focus on the bonds they could earn the most on if they were able to consummate a trade.

Congress seems to have picked up on this idea as in some cases it would appear it’s now “law by lobbyists funding” as the latest bill to extend the $8,000 first time home buyers credit not only increased the salary cap to $125,000 but also added a $6,500 tax credit for those who want to trade up and have lived in their existing home for at least 5 years.

These measures will help keep the American delusion alive that it is your right, not merely a privilege, to own a home, or a bigger home, in this country with the side effects of moving the glut of unoccupied homes off the market.

What didn’t seem to get a whole lot of notice was a clause in this bill that will provide a windfall for the homebuilders which the WSJ estimates could amount to hundreds of millions of dollars for the largest companies in the residential construction industry. In short, it allows firms to claim refunds on taxes paid up to five years ago vs. the two year time period allowed before the bill passed last Friday.

J.P. Morgan estimates that the top 10 builders now have cash on hand of about $1.2BN vs. $616MM in late 2007. Rob Stevenson, a real-estate analyst with the investment banking firm Fox-Pitt Kelton described this as “giving them free money”.

To put some hard numbers on this for you, Credit Suisse recently estimated that Pulte Home (PHM) could receive upwards of $450MM in tax credits while Lennar Corp. (LEN) would be in line for about $200MM and Meritage Homes Corp. (MTH) roughly $60MM.

I would not single out the home-builders as any more responsible than any other party in the vertical of avarice that caused the current crisis to unfold but this would seem to reward them for some pretty poor business decisions. TBTF continues its slow cancerous creep through capitalism in this country.

All this occurs while Freddie Mac (FRE) reports a $6.3BN loss for 3Q09 and together with his sister Fannie Mae (FNM), continues to see rising delinquencies in their loan portfolios with the share of loans that were 90 days late rising to 4.72% at the end of September from 3.94% at the end of June.

Also not being overly publicized is that with Tim Geithner’s Treasury now funding the two wards of the state, no one has to suffer the rigors of a day in front of a congressional dais to receive a hand-out anymore. (I guess the television ratings must have dropped off.) TG has committed to reaching into his pocket way down to the $200BN mark to take care of Uncle Sam’s errant kids.

So the shell game continues, Blankfein and Buffett get told they will not be able to purchase tax credits from FNM and FRE as congress has to be very careful where and how they pander to Wall St. but while no one is looking they push close to $1BN out the side door to the homebuilders while they turn their heads as Mr. Geithner funds their other indiscretions.

I’m not sure who taught who but with Wall St. and Washington spending more and more time in each other’s backyard, it is getting increasingly more expensive for anyone not represented by a lobbyist.

PHM has suffered the slings and arrows of the economic woes this year with the CDS/equity combo maintaining its negative correlation in both good times and bad. The anticipation of the passage of the bill last Friday started on Monday (11/2) when the PHM’s CDS hit an interim peak of 195bps and the stock closed at $9.01. Those same numbers were 192bps and $9.23 respectively last night.

The same can be said for LEN and MTH with the former moving from 324bps and $12.63 on 10/28 to 290bps and $14.61 last night. For MTH, the numbers were 313bps and $17.68 on 11/2 and 310bps and $20.22 last night.

Enjoy the week.

Comments

[Tom Armistead:]

Ryland (RYL) was quick to put out a press release, estimating their take at 80 to 120 million. I am long Ryland, and as you can imagine I am pleased to see management is wide awake and alert on this issue, promptly responding and getting the word out.

Another possible beneficiary, MBIA (MBI) mentions the passage of the act as a subsequent event in their 10-Q: if they have a NOL as of the end of the year this might be good for 500 million. Because of the peculiarities of mark to market accounting, it appears that their perceived credit-worthiness will need to increase in order to get them into the proper NOL status. As a shareholder, I am still scratching my head to see what that means.

I have previously suggested a tax credit for unfortunate investors who were badly burned in the meltdown: no, I don't mean a deduction, I mean a credit. After all, this is America, everybody deserves a slice of the pie, or a slab of pork, or some share of the largess being distributed in Washington and on Wall St.

Nov 10 07:42 AM

[Nick Rao:]

Johnny Issacson, the senator from Georgia was a co-sponser with Dodd of Connecticut. Issacson made his fortune in the real estate business and still has a close relationship with developers. He should have been discouraged by the senate republican leadership. These tax credits were not needed. Low interest rates will provide incentive enough for those who are buying a home and have good credit. This will result in transfering money that the government doesn't have to those who would have purchased homes without the stimulus.

Nov 11 04:06 PM

[fireball:]

government largesse is paid for by those who pay taxes. i carefully make sure i legally pay no taxes. starve the federal glutton. get mad at the waste.
we must live within our means. let govt. do no less. the spending and progressive marxist tax have been ridiculous now they are ludicurous. get mad.

Nov 14 12:52 PM