Home builders pull support of tax cuts over mortgage interest deduction

A group that may be viewed as generally in favor of fewer taxes – the National Association of Home Builders – is not happy that the mortgage interest deduction could disappear in the Trump tax cuts:

That’s because one day before, House Ways and Means Committee Chairman Kevin Brady (R-Tex.) informed NAHB that he would not be including a homeownership tax credit as part of the new tax legislation, which will be released on Wednesday.

NAHB’s chief executive, Jerry Howard, had spent months working on this new tax provision with Brady’s aides, but House leaders wouldn’t allow its inclusion, Howard was told. The next day, Howard and other NAHB officials gathered on a conference call and debated what to do. They agreed unanimously — kill the bill…

The home builders are seen as among the most influential Washington corporate forces, not only because they have members everywhere but are often big fundraisers for politicians and have a close connection to the economy, development, hiring and economic growth.

They are incensed about proposed changes to tax law that, they believe, would eliminate the need for almost all Americans to itemize their tax deductions, an adjustment they think would nullify the need for middle-class Americans to deduct their mortgage interest from their taxes. They are also incensed that the bill would strip away the ability of Americans to deduct their state and local property taxes from their federal taxable income. Both these changes, NAHB argues, would raise the cost of buying and owning a home.

This part of the tax code has been debated in recent years (ranging from fiscal cliff issues to 2010 post-housing bubble discussions). And, more broadly, the United States is the only developed country that subsidizes mortgages in the ways that we do.

It is not a surprise that certain interest groups would oppose changes to the tax code that they perceive could affect their business. At the same time, any perceived effect on housing – not only a major part of the economy but also symbolically important as a marker of the middle-class lifestyle – is going to draw a lot of attention. And this area also involves the interests of fairly wealthy Americans:

But this national wealth-creation policy has several negative side effects. Since tax benefits are most useful for people with taxable income, U.S. wealth-creation policy is predominantly for people who already have wealth. These high-income households don’t consider their tax benefits to be a form of government policy at all. For example, 60 percent of people who claim the MID say they have never used any government program, ever. As a result, rich households can be skeptical of public-housing policies while benefiting from a $71 billion annual tax benefit which is, functionally, a public-housing policy for the rich. As Desmond writes, “a 15-story public housing tower and a mortgaged suburban home are both government-subsidized, but only one looks (and feels) that way.” In short, an asset-building, wealth-creation, or welfare policy that’s run through the tax code can hurt the overall push for more direct forms of welfare—like simply giving money to the poor…

But more generally, people need money to buy houses. The United States still lags almost every advanced economy in the amount of money transferred from the rich to the poor. One major reason is that the tax code has become a vehicle for incentivizing wealth-creation among households who already have the most wealth, even as the government has soured on policies that spend money directly on the poor. It’s hard to find a better exemplar of this sorry fact than the juxtaposition of America’s affordable housing crisis and the untouchable sanctity of the mortgage-interest deduction.

In other words, the interests of the NAHB are not necessarily with the Americans who most need housing but with those who can purchase more expensive new homes. Thus, the mortgage interest deduction is just another piece of evidence regarding a bifurcated American housing market.

Could you build a hurricane, tornado, flooding, blizzard resistant McMansion?

With the number of single-family homes damaged by Hurricane Harvey in Texas, could you design a McMansion that could stand up to natural disasters? Here are a few factors that might affect whether this is possible:

  1. One of the advantages of McMansions for builders is that they are often constructed on a mass scale. Any changes to construction could slow down the process.
  2. Related to #1, an increase in the materials needed or a slow down in the process would likely lead to an increased price. Compared to true mansions, McMansions are aimed at a broader segment of the housing market.
  3. Different disasters likely require different approaches. If the problem is tornados, say in Tornado Alley, you are trying to protect against winds whereas if the home is constructed in a flood plain or on a coast, the home could be built on stilts or piers to allow floodwaters to pass underneath.
  4. Many McMansions are constructed in suburban areas. No matter what you do to each house, it could be very difficult to protect against everything. For example, flooding is less an issue of each home being poorly constructed but rather a problem connected to land development on a broader scale.

Many McMansion builders or owners would not have to worry too much about major disasters. But imagine that someone develops “the Resilient McMansion.” Could this be worth pursuing in certain areas?

NAR economist: “major housing shortage” in the US

The chief economist for the National Association of Realtors suggests there is a major housing shortage:

“A major housing shortage exists in this country,” Yun said in a statement. “It is therefore disappointing to witness in March the continued lackluster performance in new-home building, which was the second lowest activity over the past six months. Home prices have risen by 41 percent and rents have climbed 17 percent over the past five years at a time when the typical worker wage has grown by only 11 percent. To relieve housing costs, there simply needs to be more homes built.”

My first thought on this reading this: builders and developers are still skittish from the 2000s housing bubble. Instead of risking overextending themselves, compared to the past they are now focusing on more expensive homes or rental properties. Oddly though, I have seen little media coverage regarding builders and developers. They may be a secretive bunch generally but why isn’t there more scrutiny of their actions and motivations?

My second thought: if there is indeed a housing shortage, what does this say about the state of the economy? A booming construction sector is often related to a good economy. It doesn’t necessarily have to be this way in the future, particularly if there is a shift away from sprawl and homeownership of detached single-family homes, even if it was true in the post-World War II era.

Finally, who might be held responsible if there is indeed a housing shortage? It is hard to rally potential homebuyers into a cohesive group. Is there a way to prod politicians and business leaders to act and if so, could their actions even effect much change?

Builders turning from McMansions to smaller housing units?

Alongside recent news of reduced price premium for McMansions, data from the second quarter suggests builders are constructing more townhouses and smaller units:

Reversing years of ballooning home sizes aimed at upper-bracket buyers, builders have begun refocusing their efforts on entry-level and more modest-sized homes. According to new data from the National Association of Home Builders, the median floor area in new-home starts dropped during the second quarter of this year by about 3 percent.

Meanwhile, townhouse construction has been increasing fast — up 25 percent over the past year as of the second quarter. New townhouses, which typically are smaller and cost less than detached single-family homes, now account for 13 percent of all single-family starts, the highest it’s been since 2008.

NAHB chief economist Rob Dietz told me the quarterly decline is no fluke and the trend is likely to persist. “What you’re seeing is the beginning of builders trying to expand the market” and pull in first-time and other buyers who are frustrated by the lack of affordable alternatives in the resale arena, he said. Many shoppers, especially those with or planning on children, now find growing opportunities in townhouse and entry-level detached-home communities in the suburbs and exurbs compared with closer-in, higher-cost homes.

Critics of McMansions as well as advocates for affordable housing have been asking for years why builders have been focusing so much of their efforts on larger homes. The short answer: such homes can generate a lot of profit while building smaller homes lead to less profit per unit. Yet, this article also suggests that demand has increased for smaller homes as entry-level buyers haven’t been able to find much thus far.

One point to note: even as builders and buyers are looking for smaller spaces, I suspect builders will do what they can to raise the values/prices of these units. Smaller doesn’t necessarily mean that much cheaper once numerous features are added and locations are considered. This doesn’t necessarily mean that builders are going to be constructing bare bones, cheap units – unless they are significantly farther away from city centers and job centers.

Profile of a smaller post-World War II builder

The efforts of Levitt & Sons are well known but here is a quick overview of a smaller “merchant builder” from the Boston area:

The Campanelli Brothers of Braintree, Massachusetts, were one of these typical merchant builders. When Michael, Joseph, Nicholas, and Alfred Campanelli created a construction company in the late 1940s, they were young and inexperienced. Their parents, Francesco Campanelli and Lisa Marie Colondono Campanelli, arrived in the U.S. in 1915 from a tiny and ancient mountain village in the Italian Apennines; they settled in an immigrant neighborhood in the small city of Brockton. The boys were used to hard work, quitting school after their father died to help support the family by working at the Quincy shipyards near Weymouth. Joseph also worked on some house construction sites before World War II. The three younger brothers served short stints in the Navy during the war.

After they came home, the brothers used an army surplus truck to move gravel to big construction sites, including Logan Airport. Soon they began pouring concrete footings for new buildings. As their assets increased, they built two new houses in Brockton, one for their mother and one for their sister Ann, whose husband, Salvatore De Marco, now joined the brothers’ team. They branched out to small developments near Braintree, Massachusetts, and Warwick, Rhode Island. Success there led them to develop more ambitious subdivisions in Natick, Framingham, Peabody, and other areas near Boston. In the process, they assembled a sizable group of foremen and loyal subcontractors, many drawn from their old neighborhood and earlier shipbuilding work. Their firm rapidly grew into the leading home building enterprise in the Boston area, and later built extensively in Florida and Illinois as well.

The typical Campanelli house was attractive because, as one buyer explained it, it was “a new kind of house” for “a new time.” It discarded the old-fashioned, larger, more monumental look. It had a low-pitched roof, like contemporary ranch houses in California, but still kept shutters or an occasional bow window for a faintly “colonial” flavor. Campanelli houses usually had two or three bedrooms, a living room, a kitchen large enough to eat in, and a garage. The three-bedroom version was about 1,000 square feet of living space. In the mid-’50s, the firm extended the kitchens to form a “living kitchen” or a kind of a “family room.”

The last brother died just a few years ago and the company the brothers started did a lot of work:

Campanelli Companies built more than 30,000 single-family homes in eight states during the post-war period.

Here is the company – Campanelli – today and how they describe themselves:

Campanelli is a vertically integrated commercial real estate, construction, development and acquisitions company with over six decades of successful experience having developed, built and acquired over 20 million square feet of property. Campanelli has a trustworthy, successful and experienced team that maximizes value, consistently executes on target objectives and provides operational excellence for your company.

I would love to see a study that compares the (1) home styles (2) buyers (3) interactions with local governments and (4) organizational operations of a number of post-World War II builders. Campanelli started small and became a commercial property developer. Though there are differences, it kind of reminds me of the Harold Moser story in Naperville where a former newspaper owner turned lumber store operator started by building a few homes and then ended up constructing a sizable amount of the large city’s homes.

Additionally, are such family business stories like this still possible today or did the combination of unusual housing needs plus innovations in building create a uniquely open market?

Builders to construct “jewel box homes”?

Builders have ways to sell small but high-end homes:

Stumped on what to do about buyers who are looking for a home that comes with a tiny price but a McMansion look and feel? Enter stage right: the jewel box home.

Ranging between 650-2,500 square feet, these are a win for buyers who want something custom but affordable, but they’re also an ideal product for builders looking to diversify and sell a higher-end product across multiple demographics…

It’s just a smaller-than-average single-family home — not a starter home or a tiny house — built with high-quality materials, exquisite detailing and custom finishes with an emphasis on tailoring the home to the owners’ way of life for maximum elegance, harmony and function…

Another key advantage to building jewel box homes: They’re ideal for high-density areas. In some of Weremeichik’s planned communities, he has reached densities up to 9-11 dwelling units per acre.

I suspect this may be a way for builders to avoid the ignominy of constructing oversized single-family homes: they can build (1) homes with all sorts of nice touches that still command high prices and (2) fit even more of these smaller homes onto parcels of land. Of course, there is also the matter of providing the sorts of homes that at least some in the housing market desire. However, are the profits to be made in these smaller homes enough to outweigh what could be made in larger homes or other development projects?

Paying for Austin’s permitting backlog which may be partly due to its McMansion ordinance

Several years ago, Austin enacted an ordinance intended to reign in McMansions. But, that ordinance may have contributed to a backlog of permits which the city is now trying to tackle:

The directors of the city’s planning and permitting departments estimate it would take $400,000 to hire temporary workers and pay for overtime to eliminate the current backlog in the next 90 days…

Next year the department plans to ask for $1.6 million in additional money to fund 11 new positions. This memo comes as the city is just launching its annual budget process. Over the next few weeks, every department is going to be compiling a budget wish list, which eventually is sent to the City Council…

Some of the blame for the three-week delay in residential planning and permitting was placed on the “complexity” of the city’s McMansion ordinance, which limits housing sizes in certain neighborhoods. “As such the department will recommend changes to the (land development code) that will simplify the McMansion provisions and will extend turnaround times for those types of reviews to ensure that there is sufficient time to perform a thorough review,” the memo states.

The planning and permitting departments, which used to be one department called Planning and Development Review, are responsible for approving all real estate development in the city, from housing remodels to new subdivisions.

It can take some time to see how ordinances actually play out and perhaps the initial ordinance can be “smoothed out” for this sort of process. Communities can also run into this problem if they have high rates of growth. Austin is a desirable place for construction so it may make sense that it has a lot of permits to deal with.

I wonder how much these decisions to speed up the permitting process are driven by builders and developers who generally want to move as quickly as possible. If there is a bit of a delay in the process, would these builders actually cancel their projects or go elsewhere? Builders and developers are often powerful and are viewed as important harbingers of economic growth. Yet, isn’t Austin so desirable that a delay won’t harm things much? Granted, lots of people might want more efficient government but that also may just require more government employees.