Housing as a Job Creator – Congressional Testimony

May 7, 2014

Today NAHB economist Robert Dietz testified before the Economic Policy Subcommittee of the Senate Banking Committee on housing issues and the economics of home building as a job creator.

The testimony summarized a number of issues we have covered on Eye on Housing in 2014.  These include:

The subcommittee also asked for policy recommendations. NAHB endorsed passing comprehensive housing finance legislation and enactment of a tax extenders bill, that would extend the 9% credit rate floor for the LIHTC and the 25C and 45L energy efficiency tax credits.


How the Government Shutdown Could Affect Housing and Home Building

October 2, 2013

The ongoing shutdown of certain federal government functions will affect housing and home builders. In most cases, the short-run impacts will be minor. A long-run shutdown, lasting several weeks or a month or more, could have significant impacts on mortgage accessibility and reduce housing demand. And over the coming weeks, the shutdown could merge with the issue of raising the debt ceiling, which could have very significant impacts on interest rates, as well as monetary and fiscal policy.

Compiled by NAHB, the following is a list of government programs that could affect home builders and housing stakeholders under the current shutdown.

Department of Housing and Urban Development

  • FHA-insured single-family loans will continue to be endorsed in the near term, although some delays in processing and closing should be expected.
  • FHA multifamily insured projects with firm commitments and scheduled closings may go forward, although no new firm commitments will be issued.
  • Section 8 Project Based Rental Assistance Contracts, rent supplement, Section 236, and PRACs with permanent or indefinite authority or multi-year funding will have payments made from budget authority available from prior appropriations or recaptures.
  • No Real Estate Assessment Center (REAC) inspections.
  • CDBG, HOME and other block grant funds will be dispersed in cases where failure to address issues result in a threat to safety of life and protection of property.
  • Authorized drawdowns for approved CPD program activities (homeless assistance programs, CDBG, HOME, HOPWA) using pre-FY2014 program funds will continue uninterrupted unless it is necessary for a HUD employee to approve a voucher or lift a system edit prior to a draw down.

Department of Agriculture

  • Most Rural Development programs will not continue without appropriation.
  • The Section 521 Rental Assistance, Section 542 Rural Housing Vouchers, and Single Family Section 502 Guaranteed Loans will continue until funding is exhausted.
  • A shutdown of more than two weeks is likely to have a significant impact on rural development programs.

Department of Homeland Security

  • E-Verify, the Internet-based system that allows businesses to determine the eligibility of their employees to work in the U.S., is unavailable due to the government shutdown. While E-Verify is unavailable, employers will not be able to access their E-Verify accounts.  More details on how this could impact your company’s operations can be found here.

Small Business Administration

  • The SBA will not initiate new loan guarantees during the shutdown.

Occupational Safety and Health Administration

  • With the exception of “imminent danger” to life or property and other emergency situations, OSHA’s investigation and enforcement activities will cease during the shutdown.

Department of the Interior

  • Businesses who seek permits from the Fish and Wildlife Service could be affected. New permits or applications currently under review will not be processed during the government shutdown, which will increase costs and delays.

Environmental Protection Agency

  • Businesses that file the Clean Water Act National Pollutant Discharge Elimination System permit in states where EPA is the primary permitting authority may notice a delay in issuance of their stormwater permits. These states are Idaho, Massachusetts, New Hampshire and New Mexico, along with the District of Columbia.
  • The Energy Star program is shut down until further notice and the processing of all partner applications and partner inquiries has been put on hold. Updates to Energy Star qualified product lists and release of draft Energy Star specifications will also be delayed.

Internal Revenue Service

  • Some lenders require home borrowers to file IRS form 4506-T to verify the mortgage applicant’s income and Social Security number. With the IRS shut down, this could result in major delays in some mortgage application approvals.

Economic Data

  • Due to the shutdown, the August Census construction spending report was not published. The important monthly jobs report for September from BLS is unlikely to be published. And future reports on items like housing starts and new home sales could also be postponed.

In general, expect delays for any housing-related federal government programs that are still operating and plan accordingly. NAHB continues to closely monitor the situation, and we will keep you posted on any new developments.

The President’s Budget: Housing-Related Proposals

April 10, 2013

The President’s Budget includes policies that, if enacted, would have impacts on the housing market and home builders, including a number of tax increases.

While the budget proposal is not a legislative proposal that the Congress will consider in full, the set of policies contained in the document do represent a wish-list for the administration. And with tax reform discussions underway within the House Ways and Means and Senate Finance Committees, it worth examining the proposals submitted by the President to Congress.

Overall, the president has endorsed revenue neutral corporate tax reform, which would involve eliminating certain tax credits and deductions for C Corporations and reducing the applicable corporate tax rate. Such an approach would leave taxes on pass-thru and sole proprietorship income unchanged. Many in Congress, including Chairman Dave Camp of the Ways and Means Committee, have rejected this approach and are working toward tax reform involving both the corporate and individual sides of the tax code.

The President’s proposal also includes a change to how inflation is calculated for both entitlements and income tax brackets. This chained CPI definition reports a smaller increase in inflation than the traditional CPI approach because it allows for greater consumer substitution among goods. This methodological change is estimated to reduce deficits by $230 billion over ten years through a combination of reduced (projected) government spending (Social Security) and income tax bracket creep.

All in, the budget proposals would purportedly reduce deficits by an additional $1.8 trillion, bringing total deficit reduction to more than $4 trillion when combined with other efforts from the last two years. Estimating an exact scorecard is difficult however due to varying baselines and how to account for declines in spending due to such items as reduced costs for military expenses.


Tax Proposals

28% Cap on Certain Deductions, Exemptions and Exclusions

Proposed in prior year budgets in more narrow forms, this proposal would limit the tax value of certain tax expenditures for taxpayers paying more than a 28% marginal income tax rate. In particular, the proposal would limit the value of the mortgage interest deduction and real estate tax deduction for homeowners, particularly in high cost areas, for taxpayers with adjusted gross income of more than $223,050 ($183,250 if single). The cap would apply to all itemized deductions.

Additionally, the proposal would tax in part currently tax-exempt items such as tax-exempt bond income (including multifamily tax exempt bonds) and the employer-paid health insurance exclusion and self-employed health insurance costs. Certain “above the line” deductions, such as moving expenses, would also be subject to the cap.

Finally, small businesses, including home builders and remodelers, who claim the section 199 domestic activities deduction would also face potential tax hikes in the form of the 28% cap. It is worth noting that section 199 is available for both corporations and pass-thru/sole proprietorships, and this proposal would only affect the non C Corporation businesses, who tend to be smaller enterprises.

This proposal is estimated to raise $529 billion over ten years.

Carried Interest

Despite being associated with hedge funds and private equity, this proposal would also have an impact on the multifamily sector, where the use of carried interest is a common financing mechanism to attract equity for the development of residential rental property. The proposal would require capital gain income from, among other items, sale of multifamily property to be taxed at ordinary income tax rates when the share of gain from the sale earned by the taxpayer exceeds the share of equity originally invested by taxpayer.

The proposal is estimated to raise $16 billion over ten years.

Debt Forgiveness for Principal Forgiveness

The proposal would extend from the end of 2013 to the end of 2015 the tax exclusion for forgiven or cancelled mortgage debt associated with a principal residence. This tax exclusion, in place since 2007, has facilitated short sales and certain debt workouts.

This proposal reduces federal tax receipts by $2.6 over ten years.

Small Business Section 179 Expensing Extended

The proposal would extend for 2014 and beyond the 2013 small business expensing rules. These rules include a $500,000 expensing deduction limit and a phaseout of the allowance beginning at $2 million of qualified investment.

This proposal reduces revenues by $69 billion over ten years.

Buffett Rule

The proposal would impose a new minimum tax of 30% on adjusted gross income reduced by a maximum 28% deduction for charitable giving. The rule would begin to apply on incomes of $1 million and be fully phased-in at $2 million. Ordinary business expenses would remain deductible.

This proposal raises $53 billion.

Independent Contractor

The proposal would repeal the Section 530 of the Revenue Act of 1978 rule protecting independent contractor status. The proposal would allow the IRS to issue new regulations dealing with the independent contractor versus employee classification using common law tests.

The proposal is estimated to raise $9 billion over ten years.

Contractor Reporting and Withholding

The proposal would require a business to verify the taxpayer identification number (TIN) with the IRS for all contractors receiving more than $600 in a year. If the contractor failed to provide a valid TIN, the business would be required to withhold a flat rate of taxes on the payments made to the contractor.

The proposal is estimated to raise $1 billion over ten years.

Energy Efficient Commercial Building Deduction

Under present law, the section 179D energy-efficient building deduction is available to commercial and multifamily properties (apartment buildings of more than three stories above grade). The proposal would reform the 179D tax rule to promote its use and achieve energy efficiencies for existing commercial and multifamily properties. Among other changes, the per square foot deduction amount would be increased to $3.

The proposal would reduce federal tax receipts by $5 billion over ten years.

Estate Tax

The proposal would reinstate the 2009 rules regarding the estate tax, including increasing the tax rate from 40% to 45% and reducing the exemption amount from $5 million to $3.5 million.

The proposal would raise $71 billion over ten years.

Low-Income Housing Tax Credit

The budget proposal includes a number of changes intended to improve the effectiveness of the LIHTC program. These changes include a small increase of rate to the 70% present value credit (which absent the temporary 9% rate floor would fall to 7.43%).  The proposal would change the formula producing a rate closer to 7.9%. The proposals would also allow certain income averaging for tenant requirements, allow states to convert some amounts of unused private activity bond cap for LIHTC credit use, and make changes that would permit REITs to invest in LIHTC partnerships.

Together these proposals reduce tax receipts by $1.4 billion over ten years.


Other Fiscal Policy Proposals


Streamline HARP to Allow for Additional Refinancing

The proposal calls for legislation to modify the HARP program to increase access and lower costs to allow refinancing of mortgages that are not backed by the GSEs in order to reduce monthly costs for underwater homeowners.

Neighborhood Stabilization Efforts

The budget provides funding for rehabilitating, repurposing, and demolishing vacant and blighted properties. In addition, the budget includes funding to support public-private land banks, provide grants to areas with high-levels of vacancies or severe blight, and offer loan subsidies to stimulate private investment.

HOME Program

The budget reduces funding for the HOME program by 5% relative to 2012 levels.

State-Level Mortgage Interest Deduction Statistics

March 22, 2013

The tax benefits of the mortgage interest deduction (MID)  are primarily targeted to the middle class. According to 2012 Congressional estimates, 65.4% of the tax benefit is collected by households who have economic income* of less than $200,000. 

Of course, the claims for the MID are going to vary state-to-state given differences in house prices and other costs of living, household incomes, and tax items such as property taxes or state income/sales taxes, which in part determine whether a homeowner claims the standard deduction.

Fortunately, the Internal Revenue Service publishes state-level data of tax statistics. And these state level data, for which the income classifier is equal to adjusted gross income (AGI), illustrate the degree to which MID-benefiting taxpayers are concentrated in the middle class.

MID_200K (2)

The map above reports the share of taxpayers who claimed the MID on 2010 federal income tax return (the most recent data available) and who also report less than $200,000 in adjusted gross income. Not surprisingly, the share tends to drop somewhat in high cost states, such as New York and California, for which household incomes tend to be higher.  Nationally for 2010, 91% of taxpayers claiming the MID has an AGI of less than $200,000.

Of course, income, homeownership status, and tax characteristics are not fixed across one’s life-cycle. For example, interest payments for a fixed rate mortgage are larger in the early years of a mortgage, thus the potential deduction amount for the MID is higher for recent homebuyers.

As a result of this life-cycle effect, many homeowners benefit from the MID for a series of years and then cease claiming the deduction as their interest payments fall and the standard deduction becomes a better deal. For this reason, the often cited statistic that only a quarter of taxpayers benefit from the MID is misleading.  In fact, this claim should be qualified as “in a given year,” given the life-cycle impact.

By merging IRS data with Census American Community Survey data (both for 2010), we can estimate the more useful statistic of how many homeowners with a mortgage benefit from the MID in a given year. Nationally, 73% of homeowners with a mortgage claimed the MID on their income tax returns for tax year 2010

It is important to note that this number is not an accounting of the percentage of homeowners who benefit from the MID during their tenure of homeowners. That percentage would be higher given life-cycle effects, but cannot be estimated without panel data of income tax returns.

* Economic income is equal to adjusted gross income plus certain items that people do not normally count as income, such as employer paid health insurance or employer paid payroll tax. So, for most households their applicable economic income is higher than they would imagine given their knowledge of gross income or adjusted gross income from their tax returns.

Eye on the Economy: Improvement for Housing

May 24, 2012

*Eye on the Economy is an NAHB newsletter that is published every two weeks and takes a larger view of recent economic and housing policy news.

After soft economic and housing reports for February and March, recent data suggest a return to the trend of housing market improvement – a fitting theme for May, National Home Remodeling month.

Leading the flow of positive news was the NAHB/Wells Fargo Housing Market Index (HMI), a measure of single-family home builder confidence. At a reading of 29, the HMI was up five points from the April level. This marks the highest reporting of the HMI in five years, even accounting for the period during which the federal home buyer tax credit was in effect. All components of the HMI were up in May, including the gauge of sales expectations over the next six months.

Further, the NAHB 55+ Housing Market Index rose significantly in the first quarter of 2012 compared to the survey of a year ago, suggesting better times ahead for builders of senior housing.

Consistent with these surveys, housing starts rebounded in April to a seasonally adjusted annual rate of 717,000. The April report marked the sixth consecutive month with starts near or above a level of 700,000 units. Gains were experienced in both single family and multifamily. The improvement in April suggests that declines in March were temporary and due to unusually warm weather in the early part of 2012.

Multifamily starts in buildings with five or more units increased by 4% to a rate of 217,000. In addition, multifamily starts data for February and March were both upwardly revised, suggesting that the rate of multifamily construction, which has been leading the industry in terms of growth, was stronger than initially estimated. Taking into account the revisions, the starts rate for 5+ multifamily units has been above 200,000 for the last three months.

The single-family housing market is again showing signs of improvement after a brief pause in the last month or so. Driving this expansion is the fact that housing affordability continues to improve.

The NAHB/Wells Fargo Housing Opportunity Index reached an all-time high for the first quarter of 2012. At a level of 77.7, the index indicates that more than three-quarters of all existing and new homes for sale are affordable for an average family’s income. However, it is worth noting that home buyer access to credit continues to hold back housing demand, despite historic affordability conditions.

Nonetheless, new home sales in April (343,000 at a seasonally adjusted annual rate) were up 3.3% over the March tally, and up nearly 10% from this time a year ago. Prices remained relatively flat, perhaps indicating emerging nationwide stability in pricing for new construction. Inventories of new homes ticked up for the first time in two years, but only marginally so. Inventory remains low – a 5.1 months’ supply. Finally, the March estimate of new homes sales was revised upward.

Similarly, the April existing homes report from the National Association of Realtors (NAR) presented more good news. Existing single-family sales were up 9.9% from a year ago and 3% from March. Existing condominium and co-op sales were up 6% from March and more than 10% from a year ago. Inventories were up in March, but this is consistent with seasonal patterns. The median sales price was up significantly in March, more than 10%, but this is indicative of a change in the sales mix rather than a large jump in national house prices. This good news for April is consistent with the previous reading of pending home sales from NAR.

Good news was also reported by the Mortgage Bankers Association mortgage survey, which showed the delinquency rate for mortgages fell to 7.4% during the first quarter of 2012. This marks the lowest reading in five years and is now roughly at normal levels. Short sales continue to grow, however. According to mortgage loan service provider Lender Processing Services, short sales surpassed foreclosure sales for the first time during the first quarter of 2012.

In other economic news, consumer and producer price indices remained relatively unchanged in April. The Consumer Price Index was unchanged, in part due to a 1.7% decline in energy prices, despite gasoline prices peaking at $4 a gallon in April. Declining natural gas prices were responsible for the overall drop. Moving in the opposite direction, residential rents were up more 2% in April, adding to the relative affordability of home purchases. Producer prices were slightly down in April, with a small decline in the much-watched price of gypsum, reducing its year-to-date increase for 2012 to 11.6%.

May is National Remodeling Month, and with this in mind, NAHB Economics continues to examine the issues involving the remodeling sector. While the economic benefits of home building are often cited in the media, remodeling has similar economic benefits. NAHB estimates that every $10 million of remodeling activity generates on average 78 local jobs, plus additional economic benefits in business income and state and local tax and fee revenue.

Remodelers who are NAHB members tend to work on larger projects, according to recent survey results. In fact, more than one-third of jobs undertaken by NAHB remodelers have a final price tag of $50,000 or more. The data also indicate that NAHB remodelers perform about 95% of projects totaling $100,000 or more but only about 20% of jobs costing $2,500 or less.

NAHB survey data indicate that the main drivers of remodeling remain constant. Survey data from the first quarter of 2012 find that the “need to repair/replace old components” and “desire for better/newer amenities” are still why most customers choose to remodel their homes, as compared to other options including energy efficiency and increasing the value of the home as an investment. The data reinforce the notion that owners are interested in enhancing the spaces in their homes more for themselves than future owners.

Finally, NAHB recently critiqued a report from the Government Accountability Office (GAO) that suggested possible changes to the widely used section 25C remodeling tax credit for energy-efficient upgrades to existing homes. The heart of the NAHB critique was that the GAO report missed the most salient point: the tax rule expired at the end of 2011 and should be extended to continue its policy benefits.

The Fiscal Cliff: What it Means for Housing and Home Builders

May 24, 2012

At the end of 2012, a number of tax and spending policies are scheduled to change. Taken together, these changes may exert a strong fiscal drag on an already fragile macroeconomic environment depending on the actions of Congress. Federal Reserve Chairman Ben Bernanke calls this the “fiscal cliff.” Tax policy analysts call it “taxageddon” or “taxmageddon.”

Regardless of its name, it represents the next dramatic policy deadline in Washington. Under present law, in 2013 the 2001/2003 tax cuts expire, the payroll tax cut expires, extended unemployment benefits end, and federal government spending levels decline due to last summer’s Budget Control Act.

If implemented, these changes would have large consequences for housing and home builders.

First, at the macro level, the fate of the ongoing recovery in housing is dependent on economic growth, job creation and household balance sheet repair. If all of the scheduled tax hikes and spending cuts go into force, the Congressional Budget Office (CBO) estimates that the total 2013 fiscal drag on the economy will be $560 billion. The chart below illustrates the CBO budget projections by fiscal year. Notice the jump in revenues in 2013, as well as the decline in outlays from 2011 to 2014.

As a result of the scheduled 2013 policies, the CBO forecast for GDP growth in 2013 falls from 4.4% to 0.5%. NAHB is currently forecasting 2.8% growth, but that is because our forecast assumes that the fiscal cliff is for the most part avoided (producing only a 1 to 1.5 percentage point drag on GDP, compared to the 3.9 percentage point drag estimated by CBO).

However, if the full fiscal drag is inflicted on the economy it would clearly be harmful to GDP growth. Negative or virtually flat GDP growth would obviously be harmful for housing, as it would cause more job loss, set back household balance sheet repair, and depress the already weakened housing market.

Besides the macro impact, certain individual policies will have a direct negative impact on housing and home building.

For home builders, the expiration of the 2001/2003 tax cuts would represent a business tax hike for a majority of the industry. According to NAHB census of membership data, 80% of NAHB members are organized as pass-thru entities, such as S Corporations or LLCs. For pass-thru entities, individual income tax rates are business tax rates. And if the 2001/2003 tax cuts expire, all the rates will increase – from the bottom rate of 10% increasing to 15% to the top rate of 35% increasing to 39.6%.

Taxes would rise for capital income as well. Capital gains tax rates, important for multifamily developers and C Corporations, would increase from 15% to 20%. Dividends rates, important for some S Corporations and C Corporations, would increase from 15% to ordinary income tax rates up to 39.6%.

Expiration of the 2001/2003 tax cuts would also mean an end to the Alternative Minimum Tax (AMT) patch. Absent an AMT patch, the number of AMT payers for 2012 would grow from somewhat less than 5 million to more than 30 million. If the other tax cuts expire, this 30 million number would be significantly lower (10 million), but the AMT patch remains important nonetheless given the number of home builders organized as pass-thrus, who tend to get hit with the AMT. Typically the AMT is a concern for taxpayers reporting $200,000 to $500,000 in income, particularly those with large numbers of dependents or who live in high cost areas.

Finally, the top estate tax rate would increase to 55% and the exemption amount would fall to $1 million. For the nation’s family-owned home builders, the estate tax is a threat to keeping an multigenerational enterprise alive.

For housing demand, a number of expiring tax law provisions would reduce after-tax income and homebuyer and rental demand. For example, if the 2001/2003 tax cuts expire, the marriage penalty returns for a significant number of taxpayers. The child tax credit falls from $1000 to $500 per child.

And a direct negative effect on housing demand would come from the return of the Pease limitations, which would reduce the value of the mortgage interest deduction (MID) for taxpayers in high cost areas. The Pease rule phases out itemized deductions for taxpayers above and below the commonly cited middle class threshold of $250,000, thereby weakening the benefit of the MID.

Finally, while already in the baseline, there is also the issue of the “tax extenders.” For housing, important tax extenders needing approval include the 9 percent credit fix for the Low-Income Housing Tax Credit, the 25C energy-efficient remodeling credit and the 45L new energy-efficient home tax credit.

So what do we expect to happen? While a lot rides on the results of the 2012 presidential and congressional elections, the best guess is that Congress manages to avoid the fiscal cliff, but as usual, runs close to the effective deadline. Thus, most, if not all, of the 2001/2003 tax cuts will be extended, perhaps for just a year or two. The payroll tax cut and extended unemployment benefits will likely lapse, but we expect the net spending cuts from the Budget Control Act to stand, even if there is some shifting or postponement among certain programs.

It is worth noting that there is a long-run fiscal challenge. Current budget deficits are unsustainable year after year if present policy is extended. Hard choices are going to have to be made regarding government spending – particularly entitlements – and tax revenues. But those choices do not have to be enacted in 2013, and given the weakness in the economy, they should not be.

While our expectations are that an economic crisis is averted, how the fiscal cliff problem is solved in 2012 will shape the tax reform debate in 2013. And given then importance of the MID and other housing tax rules, the importance of the short-term political challenge should  be apparent.