Housing Construction Drops 5.9% in Feb.

http://news.yahoo.com/s/ap/20100316/ap_on_bi_go_ec_fi/us_economy

bullish. no matter what news story you publish, its bullish. Giant comet crashes into earth, aliens invade, supervolcano, George Lucas decides to make a Jar Jar Bink spin off movie. All bullish.

New Construction makes little sense, and any homes just competes with resales. Let's view as the positive that it is.

resales do little for economic growth unless they are a result of new household creation, something we're not seeing much of.

http://www.calculatedriskblog.com/2010/03/housing-starts-decline-in-february.html

"This level of starts is both good news and bad news. The good news is the excess housing inventory is being absorbed - a necessary step for housing (and the economy) to recover.

The bad news is economic growth will probably be sluggish - and unemployment elevated - until residential investment picks up."

http://www.calculatedriskblog.com/2010/03/home-builders-23-billion-gift-from.html
The home builders lobby to get an undeserved tax credit(they contributed in part to the bubble). And paying home builders to add to supply is just stupid tax policy.

Last year, included in the "Worker, Homeownership and Business Assistance Act of 2009" that extended the popular unemployment benefits were two unpopular and ineffective tax credits: the home buyer tax credit, and a net operating loss carryback extension to allow businesses to write off current losses against profits up to 5 years ago - the profitable years for home builders.

Zach Fox at SNL Financial has an update on the carryback: Builders record $2.30B in tax benefits

In all, homebuilders recorded $2.30 billion in income tax benefits during their most recent quarters, according to SNL Financial. ... The tax benefit was so large that it might have been the only reason two builders did not go under, Vicki Bryan, a senior high-yield analyst at Gimme Credit, told SNL.

"This is so important that it might have saved the weakest ones, Hovnanian [Enterprises Inc.], Beazer [Homes USA Inc.] They looked like they were headed to bankruptcy," she said.
excerpts with permission
Zach has much more on the home builders, and here are some comments from Chris Thornberg on the effectiveness of the tax credit:

[Christopher Thornberg] said the net operating loss carryback extension and expansion will do nothing to mend the housing market.

"Of course not. They're not building any homes; there's still too many of them kicking around," Christopher Thornberg, a principal at Beacon Economics in Los Angeles, told SNL. "Permits, starts are still flat; they're still at a bottom. It's a bailout. It's a bailout for builders. It's a bailout for Robert Toll. They're bailing out Robert Toll. Repeat after me, they are bailing out Robert Toll. What's wrong with this picture?"

When asked whether there were any positives to come out of the net operating loss carryback extension and expansion, Thornberg said, "No, no, no, no, no, no, no. No. Nothing. There's nothing to build; there's an oversupply. If anything, they're making it worse because they're encouraging construction when we need to burn off our existing supply first."
As Thornberg notes, the only reason for a tax provision like this is to spur construction - something we don't need right now. It would be better if there was less capacity in the home building sector.

One thing is certain, the Return on Lobbying (ROL) for the home builders was awesome, as Gretchen Morgenson noted in the NY Times last year: Home Builders (You Heard That Right) Get a Gift
The Center for Responsive Politics reports that through Oct. 26 of this year, home builders paid $6 million to their lobbyists. ... Much of this year’s lobbying expenditures were focused on arguing for the tax loss carry-forward, documents show.

Among individual companies, Lennar spent $240,000 lobbying while companies affiliated with Hovnanian Enterprises spent $222,000. Pulte Homes spent $210,000 this year.

That’s some return on investment. After spending its $210,000, Pulte will receive $450 million in refunds. And Hovnanian, after spending its $222,000, will get as much as $275 million.

That's 2.3 billion of tax payer money that went to home builders!

http://www.snl.com/Interactivex/article.aspx?CDID=A-10875407-12590

Recent legislation that increased the net operating loss carryback provision to five years from two years added billions of dollars to homebuilders' earnings reports during their most recent quarters, turning losses into profits for several builders. And according to some industry observers, the provision was so lucrative that it might have kept a pair of weaker builders out of bankruptcy court.

They're still losing money," Curran said. "This is just because of a tax benefit, so the typical builder, although they may have slimmed their loss, they're still losing money. And these are the public companies; the private builders, for the most part, are in much worse shape."

Bryan echoed that sentiment, adding that she is also concerned the cash infusion from the tax benefit might cause builders to stray from the conservative tack they should be taking.

"My problem is I think their behavior is being altered with these tax refunds coming in," she said. "It's not their money; it's somebody else's money."

In particular, Bryan pointed to Hovnanian, noting that the company plans to spend $140 million on land in 2010 while the company's annual interest cost is $194 million. The builder's debt is 116% of revenue, according to Bryan.

"They're spending almost as much in land as they have in interest costs that they're not covering," she said. "So that's why I focus on cash flow from operations … and what do you got? You've got a big-time negative for Hovnanian when you net out the tax refund. But they're shopping. Yay! Credit card! Hoo-hoo!" And with appetite for land already high, Bryan is worried the extra infusion of cash from the tax credit could create artificially high land prices.

Still, Curran said few land deals have closed, meaning the extra cash might not translate to land spending. Yet hoarding cash appears to be the modus operandi for builders, and the tax benefit has aided that effort. As an example, Curran points to M.D.C. Holdings Inc., which has a large cash position and still issued debt recently to further increase cash holdings. "That could be from the perspective that companies think things will potentially remain uncertain for a number of years yet to come. It could also be a case where the companies would be welcoming in the capital to help fund land purchases down the road to take advantage of a recovery. So it's two-pronged in that regard: It's insurance, if you will, and also ammunition."

In all, homebuilders recorded $2.30 billion in income tax benefits during their most recent quarters, according to SNL Financial. That figure does not represent the net operating loss carryback benefits alone; rather, it shows all income taxes and benefits combined. It includes some builders that actually paid taxes, such as NVR Inc., which reported a loss during just one quarter in the last three years — meaning the company did not have many losses to carry back.

And I disagree that these firms are really broke, Owners like Robert Toll cashed out bigtime before the crash.

thats how you get broke...

Robert Toll had compensation of 17.5 million in 2006 and 27.3 million in 2005(not including his base salary of 1.3 million). The fact that he could spend a few thousand lobbying congress for tax loss carry forwards he was not entitled to is absurd.

exactly how firms get broke.