The Housing Chronicles Blog: Comments from my post at LALand, Part I

Friday, April 11, 2008

Comments from my post at LALand, Part I

Yesterday I was asked to provide a guest post on the LA Times blog "LA Land" to offer an opposing view to a recent article by Daniel Gross in Slate magazine lambasting the proposed tax break for homebuilders. My point was that it didn't seem fair to punish an entire industry of nearly 5 million workers for the actions of a much more limited number of executives, sales people and lenders who contributed to the housing bubble and, ultimately, the bust. I have a brother who's a subcontractor to builders, and he, like many others, wouldn't necessarily have the staying power to wait for new builders to emerge should a large portion of an entire industry go bankrupt.

From the 17 comments currently posted, my post was certainly controversial, with almost all of them calling me everything from "naive" to "idiotic." But these aren't nut cases spouting out emotional rhetoric -- many comments are very well written and take me to task with a number of valid points. One thing is clear -- builders have a huge PR debacle on their hands that will follow them for years, and if they hope to regain the trust of the public they're simply going to have to change the way they do business. Because when your own suppliers and subs hate you, it's time for something different.

Some of the best comments so far:

1. Even if they weren't greedy, that's not the question. Firms that make bad business decisions aren't entitled to ex post protection because they had good motives.

2. See 1

3. This is the crux of his argument and really all it amounts to is two wrongs make a right. He offers no evidence for why "the risks to the economy outweigh those clucking on about 'moral hazards.'" It's simply assumed: circular argument at its worst. All large homebuilders do is reduce the building cost for new homes. They employ very few people directly, and they don't generate many jobs. The people they contract with to actually do the building will be out of work with or without these tax breaks because there is simply an oversupply and lack of demand for their services. If these companies go bankrupt, when demand for new construction homes returns, people would simply have to pay a slightly greater price for them, or in the very unlikely event demand were to return anytime soon to 2002-2005 levels new companies of exactly the same sort could be formed--and hopefully the new ones could do a better job managing the risks of the business. Same goes for the everyman worker he is disengenously pitching as the beneficiary here. Times were good for many people the last few years and now they're not. If they didn't spend recklessly they should have been able to save some money to get through times. If anything, this is a much better argument for extending unemployment benefits to all, than just giving a break to home builders.

4. Yes, we all feel for these people but see 1 again and see 4. Industries go belly up from lack of demand. It happens.

5. In theory yes, Congress could extend it to any company, but they're not, and why is that? Could it be because of the concentrated interest of the builders lobby, disproportionate to their size and importance in the overall economy? Many people have gotten fired this year, and would surely love to get a break against past income from the years when they had a job, but only homebuilders are getting it. Why? Because they have a lobby.

It's good to have an open exchanged on this, but it's still total dreck anyway you slice it.

Posted by: baruza | April 10, 2008 at 05:43 PM


"Firstly, the argument that all builders overbuilt to simply assuage their own greed is simply inaccurate”

Not all... They know who they are.

"Secondly… It’s because of the issues with the credit market that nonspeculators can’t sell their homes either…”

You’re cartin’ before da horsie on this one. They can’t sell because the homes are WAY overpriced and folks are finally wising up. You should be telling the banks to be transparent, keep proper books and deal with this “issue” asap.

"Thirdly… Remember… $15 billion…? Or the $3.6… the $4.5… the $1.5…? Although there was plenty of outrage accompanying the $124-billion bailout of S&Ls during 1986-1995, the potential consequences of doing nothing were far more serious.”

All those examples except the last were chump change (is Keating over there?). Oh… those “potential consequences” again. The interconnected, lattice work of counter party interests… pull out this string and the tapestry unwinds to a pile of worthless thread. Right. Seems a little thinning of the herd would be a good thing at this point. Way, way, way too many businesses operating as speculative investment banks, overleveraging to the absurd and making dishonest profits off of hard working citizens.

"Fourthly, ...Today you see multi-generational homebuilders closing their doors not due to greed, but due to market forces beyond their control. At risk? Nearly five million jobs or 3.5% of the U.S. workforce related to residential construction…”

Most of these immigrant construction workers hired during the bubble replaced multi-generations of contractors and hard working folks that like working with their hands and building solid houses for their fellow Americans… young folks working summer construction jobs to make it through college, etc. Point is, there’s plenty of empathy to go around in this mess… but, that doesn’t mean my tax dollars should prop up this current crop. However you want to slice and dice it, all builders combined did create a glut of homes on the market, they all charged too much, they hired cheap labor at American’s expense and they all made significant profits for many years.

"Finally, this tax break oriented towards home builders is in theory available to any company facing current financial losses after years of profits… giving innocent companies… some much-needed breathing room to stick around for the eventual rebound.”

So, us millions of “innocent” individuals/families currently priced out of this over-priced housing market don’t finally deserve some “breathing room” in the form of lower home prices. You want to support bailouts that payout tax dollars to the wealthy few and as part of a larger bailout that seeks to prop up these high home prices as long as possible.

Sounds like typical shill-speak.

Posted by: JohnnyB | April 10, 2008 at 06:41 PM


Wow, Duffy sounds just like a Realtor, which means he's some combination of four things.

1. Seeing only what he wants to see.
2. Lying to try and help his cause.
3. Stupid.
4. Wrong.

And without meaning to he points out the biggest hazard, the implied government bailout for businesses who are in trouble regardless of the reason. (and why don't they help out the car industry? Or travel agents? Or US companies getting eaten alive by free trade?

The fact that has been proven by all the government "action" so far remains, this problem is simply too big for Washington to solve. They're throwing 200 billion at a multi-trillion dollar problem and frankly having a heap of unintended consequences.

Funny how all these financial "geniuses" fail to see the obvious.

Posted by: 150 Multiple Choice Questions | April 10, 2008 at 07:43 PM


Holy moly Duffster, you're cracking me up, LOL. I couldn't hardly get past your 1st point, might we examine it, please?

"Firstly, the argument that all builders overbuilt to simply assuage their own greed is simply inaccurate (some did, most didn’t). In fact, according to Paul Emrath at the NAHB, most builders were trying to meet an artificial demand created by speculators who were lying to sales agents, lying on sales contracts and lying on mortgage applications.

Start off with the 2nd sentence. Whenever anyone says 'In fact,' the whopper may well be coming their way, in this case it sure is, in spades! Let me get this straight, you say good guy builders were trying like all git out to help build homes & phony speculators were lying to sales agents, on sales agreements, & on 1003's to loan officers & brokers. Pat, sober up, back away from the crack pipe, or stop trying to do stand-up comedy.

Your statement is laughable & idiotic because anybody in ANY PART of the home ownership chain, from developer to builder to lender to real estate agent to appraiser to pest inspector to escrow officer to structural inspector to ad infinitum KNOWS that the builder has ALMOST ALL the control, they employ their own hand picked real estate agents on sight, have cut their own deals with two or three APPROVED LENDERS, & control the escrow process down to the last iota.

Let me spell it out for you, folks in the industry that have worked 100's if not thousands of transactions aren't likely to be buffaloed by a newbie flipper, or a speculator of ANY shade, lol, and they'll NEVER fool an underwriter.

I did like you using 'clucking' & 'ranting' though. Can I get a symphony of 200 tiny violins for those poor, deceived, country bumpkin builders that just fell off the lumber truck next to the construction site, please?

Posted by: bottom line | April 11, 2008 at 01:12 AM


Mr. Duffy's argument falls apart completely when looked at closely.

"The argument that all builders overbuilt to simply assuage their own greed is simply inaccurate".

Mr. Duffy then goes on to cite the National Association of Home Builders, certainly an unbiased source. He claims that homebuilders were victims -- of lying speculators. Right. In fact, homebuilders were only too happy to sell to anyone who could get a contract. As was pointed out in earlier replies, the largest of these homebuilders had their own sales and financing arms, so they had multiple incentives to sell at inflated prices to whomever.

"Secondly, if we simply had speculators leaving the scene and dumping their existing inventory onto the market, we wouldn’t be seeing the 60% reduction in building activity that we have today. It’s because of the issues with the credit market that nonspeculators can’t sell their homes either..."

What does that have to do with a tax credit for homebuilders? The reason people can't qualify for mortgages now is that sanity has returned to lending. No longer can fog a mirror, stated income, no documentation, pick a payment financing qualify you to buy a home. Now you actually have to prove you have a job and will be able to make payments, as well is put some skin in the game.

"Thirdly, even before the Fed-supported Bear Stearns buyout, this country had a long-standing policy of propping up industries when the risks to the economy outweigh those clucking on about 'moral hazards,'"

The argument here seems to be five wrongs make a right. I don't happen to agree with any of the bail out the sites, but for arguments purposes -- the airlines business was affected by a terrorist attack, not their own greed; Long-Term Capital Management and Continental Illinois were not bailed out, they disappeared; Chrysler got a loan, which they paid back early; and Savings & Loans also disappeared -- in the bail out was to protect depositors.

"By only considering the financial strength of large builders such as Lennar or Pulte, he completely dismisses the fates of the tens of thousands of builders and remodelers..."

But in fact, it is precisely these large builders that will get the tax break. First, they are the ones that speculated, buying land and sinking money into thousand home plus developments that have now cost them hundreds of millions of dollars. Second, they're the ones that are required under accounting rules to mark these assets down. Your local homebuilder who may have bought land has no such requirement. He has two choices, sit on the land and wait until things improve, or sell it. It is these large public homebuilders who have to mark their assets to market, that will be able to take advantage of this tax loss carry back.

"Nearly five million jobs or 3.5% of the U.S. workforce related to residential construction, filled by people who had no say in how the large public builders ran their businesses". As other respondents have pointed out, the home building industry achieved a remarkable feat. They were able to outsource their workforce without ever leaving home. Nearly three quarters of all jobs in the home building industry have been filled by immigrants, mostly illegal. Don't ask me to cry for Argentina (or Mexico, or Guatemala, or Honduras). Ask the Americans that used to hold those jobs, at good wages, whether they think the homebuilder should be bailed out.

"Finally, this tax break oriented towards home builders is in theory available to any company facing current financial losses after years of profits, and had been done before as part of an economic stimulus package enacted by Congress in March 2002 to address fallout from the attacks of 9/11/01..."

Again, he conflates self caused problems with a terrorist attack. But his point about this being available to other companies is correct. But who are the companies that are now having huge losses, after years of stupendous profits? Those who caused this bubble, and its subsequent pop! So in addition to homebuilders -- mortgage lending companies, banks and investment banks will all be able to share in the riches. Meanwhile, the deficit burden on our children and grandchildren grows and grows.

Finally, let's look at what the effects of a wave of homebuilder bankruptcies be? What do these homebuilders consist of? They usually have a small administrative staff, a staff of construction managers, and a sales force. They outsource most of the building cavities to subcontractors. Many of them are "virtual builders", with only administrative and sales staff.

Their assets consist of raw land, improved land, and housing inventory. It's not like they have factories. If they went bankrupt, what happens? The lenders seize their land and inventory, and look for buyers. A number of people lose their jobs, but whoever buys it and eventually develops the property will hire those experienced people.

There is virtually no barrier to entry in the home building industry. Anybody who can scrape up the money can buy land and hire staff to develop and build. So if Pulte, KB and Lennar went out of business tomorrow, somebody would be there to purchase foreclosed assets from the bank, and eventually develop the property.

Methinks Patrick Duffy should take his DVD set of Dallas and watch his namesake, rather than penning superficial op-ed pieces.

Posted by: Brian | April 11, 2008 at 04:39 AM

No comments: