ORLANDO – The inability to obtain and hold on to financing to buy land, turn it into building lots and build houses is now the single most important issue facing the nation’s home builders. Even more so than the possibility that the cherished tax write off for mortgage interest could be sharply limited or even terminated.
It’s not that the mortgage interest deduction isn’t important. It is, according to builders, who argue that if their buyers can’t claim the interest they pay on their home loans, far fewer will qualify for financing.
But the sacrosanct write off is placed on the table every year by the Joint Committee on Taxation, which reminds lawmakers what it “costs” the government in lost income. And just as sure as it appears in the committee’s annual report, it is swept off the table, never to be mentioned again – until the following year.
This year, though, the deduction was the centerpiece of the final report by President Obama’s National Commission on Fiscal Responsibility and Reform, which, among other things, suggested the benefit be whittled down from $1 million to a mere $500,000. And the proposal doesn’t seem to be going away.
But you can’t sell houses that you can’t build, so it doesn’t matter whether the write off isn’t retained or not if builders can’t get the money they need to acquire ground, develop it and erect houses.
The inability to secure acquisition, development and construction (ADC) financing comes around as a major issue every so many years, too. Not as regularly as the interest deduction, perhaps, but every time interest rates skyrocket or lenders pull in their horns, builders cry foul.
This time around, though, “it’s the worst it’s ever been,” according to David Ledford, senior vice president for housing finance and land development at the National Association of Home Builders (NAHB), which is meeting in Orlando, Florida this week at its annual convention. And NAHB members are once again bellowing their lungs out. Not just to their Congressmen, either, but also to the NAHB staff.
“Our members feel we should be solving the problem and we haven’t done it,” said Ledford, who has been feeling the wrath of angry builders who live or die on their ability to obtain financing and want to know why something isn’t being done about it.
Construction financing isn’t an issue for high production builders. For the most part, the big publicly-traded industry giants which stamp out hundreds, if not thousands, of houses every year get their funding from the capital markets. But it is “a big deal” for the small and medium-size builders who tend to rely on local community banks for their money and make up the majority of the NAHB membership.
And it’s not just about no longer qualifying for financing on otherwise viable projects. It’s also about hanging on to loans they already have, according to numerous builders, who say lenders are unnecessarily calling loans due and forcing them into foreclosure.
Builders acknowledge that many of their communities have declined in value since their loans were first issued. And they admit that sales are slower and at lower prices than they originally predicted. But as long as they continue to make timely payments, they believe their lenders should leave them alone or, at worst, work with them to bring their loans into current guidelines.
Builders don’t fault lenders, though, as much as they blame regulators, who have called on lenders to curtail their commercial lending, a category which includes ADC loans.
“Financing impacts builders every day,” said Ledford. “That why it is our No. 1 issue,” and why it trumps the mortgage interest conundrum.
The NAHB senior vice president said he and his staff “have been working hard” on the ADC problem “but our members haven’t seen any results. There is lots of dissatisfaction.”
So here at the conference, all committee meetings and conference sessions on the issue have been closed to the press while members hammer out new policy initiatives.
Ledford wouldn’t discuss any of the proposals that have been put forth, only that they run the gamut from political solutions to regulatory proposals to public affairs campaigns.
“We are debating and developing new strategies to achieve progress where we haven’t achieved any in the past,” he said. “Once we reach a consensus on what to recommend to the (NAHB) board, and the board approves the plan, we can talk about it. But not until then. All I can say is that we are re-evaluating our approach and hope to come up with some new ideas that might be more effective.”