The Modern Builder Welfare State

Back 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?” Before 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 it was certainly a strong “It’ll do”. It was a sense of entitlement to high margins that were too easy to come by. Builders did not have to be good, they just had to be available.

John Caulfield’s well-written, well-researched feature article in the August issue of Builder (“Debt-Ridden Nation Takes a More Skeptical Look at Its Investment in Promoting Homeownership”) clarifies the positions we have witnessed this industry taking, still aptly described by the term “entitlement”.

That sense of entitlement is now characterized by an obsession with maintaining government support of homeownership. Actually, the obsession has nothing to do with homeowners, but has everything to do with the industry that provides the object of that ownership.

Somehow, the federal government, directly or indirectly, is supposed to assure, insure, provide, or otherwise be responsible for all of the following:

— Continuation of an affordable 30 year fixed rate residential mortgage instrument.
— A QRM standard that obviates standards.
— A viable secondary market for mortgage securities.
— Higher conforming loan limits.
— A continuation of the current system of public housing finance, in some form.
— Five-year loss carrybacks.
— Mortgage restructuring assistance.
— Homebuyer tax credits.
— Continuation of the mortgage interest deduction.
— Foreclosure mitigation.

And, it’s all working so well for us, isn’t it? It is, at its core, an unreliable dependency. We have never built in times in which so much was beyond our control, in times when so much upon which we have grown to depend was being done so ineffectively, so incompetently.

The futility of feudalism.

I have a different idea. The homebuilding industry should collectively tell 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 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, fair entitlement reform; 

— Minimal involvement in housing finance; 

— A wholesale reduction in business regulation.

There is a natural, sustainable demand for what we do – selling and building new homes – if there is a viable, growing economy in which to do it. Give us an economy that will grow and be competitive in the world. Give us back market forces – in prices, in interest rates, in risk, in mortgage terms, in securitization. Let the market correct, heal, and restore itself.

Give us a simple, elegant, non-conflicting set of rules.

We will figure the rest out on our own.

It will be painful. There will be a lot of change. Some builders will not make it. We will wish we had done it sooner. But, we are now at risk of losing far more than our entitled existence.