Homebuilders Hands in Congress' Pocket?

Senate leaders agreed on a $15 billion bipartisan plan yesterday that does more to aid homebuilders than homeowners.

The most expensive housing provision is a tax relief measure that would cost $6.1 billion over 10 years. Under current tax rules, the “carry back” provision allows builders and other companies to apply current losses to taxes paid two years ago. Yesterday’s bill would extend the carry back provision to four years, allowing companies to offset the taxes they paid during their most profitable years.

After this provision was dropped from February’s economic stimulus package, the political action committee of the National Association of Home Builders stopped donating to Congressional candidates. (According to The Wall Street Journal, the Association denies its decision to drop donations is related to specific legislation.)

Builders claim that without the provision extension, they will have to continue selling land at a deep discount, which will further erode overall housing values and create more foreclosures. But builders and banks don’t like to talk about all the money they made during the boom years. These companies should have saved the profits they made during the good times instead of engaging in continuous stock buybacks along with big bonuses that continue to enrich their top executives to this day. The American people, already overburdened from high taxes and the ravages of inflation, should not be forced to provide financial aid to some of the very companies that enabled this crisis to occur in the first place.

The homebuilder stocks continue to rise on the basis that Congress and the Federal Reserve will take proactive steps to keep housing values propped up. I will begin looking for cheap out of the money long term Puts to purchase, a strategy that was successful the first time the builders stocks fell.

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Comments

[QualifiedBuyer]

The government has now put itself in a position to have to prop up home prices due to the risky assets now on its books. It will undoubtedly let the air out slowly. While this has a positive temporary effect for the economy, it also means that home buyers will not get affordable (and realistic) home prices anytime soon. And in fact will be purchasing a declining asset. Buyer beware if you were considering your new purchase an investment. And now it appears the price gougers (Home builders) will bet even more benefit. So much for a free market economy.

[Jane]

I agree w/"Qualifiedbuyer... comment, "so much for a free market economy." It might not be so repulsive if the industry wasn't being a big whiney hipocrite. This is the same industry that said "keep govt out of our business" when they were being accused by consumers of engaging in price runups and predatory lending. The mortgage mess was predicted but not paid attention to. Now this industry has done serious damage to the country and instead of having to pay the consequences, it is getting a bailout at the expense of those it hurts most--American citizens/tax payers. If this isn't evidence of ineptness and corruption between govt and corporate special interests I don't know what IS!

[SmartDecisions?]

The Basics Identified: Market cycles have been around as long as there have been markets. For anyone to think that the run-up in home valuations seen before the "housing bubble popped" was sustainable had not done their homework - it was never a matter of "if" but "when." The market valuation correction was and always will be the part of the free market system that provides economic equilibration. Therefore, the market has behaved as it should have.

The Problem (three fold) Identified: First, lenders that practice due diligence (and knowing the above basics) should never allow their lending behaviors to support failures to develop into the level that we are now seeing. Second, borrowers (especially for their primary residences) should only borrow to the extent that their cash flow and equity levels allow a high probability that their loan can be serviced (this needs to be driven and guided by lenders too.) Finally, the government has to provide the fundamental limited framework that prevents greed (read mismanagement) from both the lenders and borrowers to distort what should be an efficient market into a national fiscal debacle.

Making of Continuing “Federally Assured Fiscal Debacles”: The current federal government is planning on spending billions (of your and my money) inefficiently and ineffectively to “help solve” the housing crisis. First, by bailing out banks that used poor judgment in their lending practices (they should be treated as any insolvent business and utilize the equity of the firm, and if that is not enough, go into Chapter 11 or 7. Also, with an additional nine billion dollars slated to go to the large home-building companies, the government is supporting an already failed, inefficient key player of the housing problem.

Solutions: We need to understand the problem, have an effective resolution (free market correction) and have limited government-enforced guidelines to prevent this situation from escalating into such an enormous national fiscal risk. The housing market cycle will cycle again – let’s be smart and make good decisions for the future of our children and our country!

[Kayboe]

I too disagree with this obvious bail-out of the homebuilders, Reminds me of the Fed Reserve bail-out of Bear Stearns. On the other hand I'm not so sure I'd be shorting the XHB given the strong, positive action of its chart lately. Sure looks like it's headed up -at least short term.