The Modern Builder Welfare State

This post was originally published on Escape from Averageness in August 2011, under the same title.  Updated and republished here, as part of our retrospective Above Average:  The Best of Escape from Averageness, 2009-2012)

In early 2009, the very first entry to SAI’s Escape from Averageness weblog asked this question:  “Does the world really need one more average homebuilding company?”  Prior to 2006, during the roughly ten-year, halcyon period that I describe as The Age of Homebuilder Entitlement, the answer may not have been a resounding “yes”, but there was acquiescence to that fact.  There was a sense of entitlement to volumes and margins that were too easy to achieve;  builders did not have to be good, they just had to be there.

At the time [August 2011], John Caulfield’s well-written, well-researched feature in Builder (“Debt-Ridden Nation Takes a More Skeptical Look at Its Investment in Promoting Homeownership”) had clarified the positions we had witnessed this industry taking, aptly described by the term “entitlement”.

It is a sense of entitlement now characterized by an obsession with maintaining government support of homeownership, and – by extension – the homebuilding industry.  The industry’s position on everything is filtered through the obsession.

Somehow, the federal government, directly or indirectly, was supposed to assure, insure, provide, or otherwise be responsible for any number laws, regulations, and policies, including a continuation of an affordable 30 year fixed rate residential mortgage instrument, a QRM standard with few requirements, a viable secondary market for mortgage securities, higher conforming loan limits, a continuation of the current system of public housing finance, five-year loss carrybacks, mortgage restructuring assistance, homebuyer tax credits, continuation of the mortgage interest deduction, foreclosure mitigation.

And, it all worked so well for us, didn’t it?  With yet more to come.  It remains, at its core, an unreliable dependency – a dependency that takes the form of feudalism;  we are vassals dependent on our lords, except that our lords are ineffective, incompetent, misguided, and overreaching, with nothing ever at risk.

As an industry, do we not think we can do better than this?

Here’s a different approach:  The homebuilding industry collectively tells its trade organization, its lobbyists, its members of Congress, and the White House that we don’t want the modern builder welfare state.  Any of it.  Get rid of it.

In its place, give us:  significant, permanent reductions in marginal personal income tax rates, and an elimination of most of the deductions;  a simple personal federal income tax structure that requires every wage earner to pay some income tax;  lower tax rates on capital gains;  elimination of the corporate income tax;  dramatically lower levels of government spending, including meaningful, effective, and fair entitlement reform;  minimal government involvement in housing finance;  a wholesale reduction in business regulation.

There is a natural, sustainable demand for what we do – developing new communities, selling and building new homes – if there is a viable, growing economy in which to do it.  Our government needs to get out of the way.  It needs to give us an economy that will grow and be globally competitive.  It needs to give us back market forces – in prices, in interest rates, in risk, in mortgage terms, in securitization.  It needs to let the secondary mortgage market correct, heal, and restore itself.

It needs to give us a simple, elegant, non-conflicting set of rules.

We will figure the rest out on our own.

There will be yet more pain.  The landscape of residential mortgage lending will change.  We will wish we had done it sooner.  But, if we don’t do it, we continue to be at risk of losing far more than our entitled existence.

The comfort of entitlement is an illusion.