Builders: Give Home Buyers a Tax Credit

Robert Toll took time out from explaining his company's dismal earnings report on June 3 to pitch a proposal. To shore up the real estate market, and the economy in general, he said, Congress should pass a bill to give tax credits to home buyers.

Toll and other builders suffering through the downturn think that homeowners need extra incentives to get off the sidelines. Their pitch goes like this: If the government simply bails out people whose home values have dropped below their mortgage amount, or spends hundreds of billions of dollars on Federal Housing Administration loans, prices will continue to drop, and those government-subsidized loans also will end up under water. Better to urge potential home buyers off the sidelines and back into the market, so prices can stabilize.

"I believe that this is the way to stabilize the economy," Toll, chairman and CEO of Toll Brothers (TOL), said in an interview on June 4. "Before trying to straighten out the credit market, you need to straighten out the basis of the problems in the credit market. You want to look at the asset that backs up that credit."

Reinflate the Bubble?

However, that "fix" alarms some economists and other financial experts, who think that a home-buyer subsidy will only serve to reinflate the housing bubble.

Toll said it has been done before. Congress passed a tax break for home buyers during a real estate downturn in the mid-1970s, he said, giving them a $2,000 credit for entering the market. About six months ago, Toll started to talk to lawmakers about a similar plan, although he thinks the pot needs to be sweetened to $15,000. He said he pitched the idea to Treasury Secretary Henry Paulson around that time. In February, Senator Johnny Isakson (R-Ga.) introduced a bill that echoed Toll's proposal.

The National Association of Home Builders has been pushing a tax-credit proposal since November, said Jerry Howard, chief executive of the NAHB.

Both the House and Senate versions of the Foreclosure Prevention Act include some form of tax credit for home buyers. The House bill offers buyers who have not owned a home in at least three years up to $7,500 in refundable credits if they buy a home in the next year. Single buyers with adjusted gross incomes less than $70,000 and couples making less than $140,000 are eligible for the full credit. The Senate bill gives buyers up to $7,000 if they purchase a foreclosed home.

Further Tax Benefits

The Senate also included other tax benefits for homebuilders, allowing them to charge current losses against the large gains they posted during the boom. House and Senate negotiators have begun meeting to resolve the differences between the bills.

Toll said targeting the tax credit only to certain buyers—such as first-time buyers or those buying foreclosed homes—is "silly" because it won't effectively spur the entire market. "The move-up guy can't move up," he said.

There is no doubt homebuilders are in trouble. Toll Brothers, which builds luxury homes, reported a loss for its fiscal second quarter of $93.7 million, after $288.1 million in pretax writedowns. Hovnanian Enterprises (HOV) reported a $340.7 million loss for the same period. Lennar (LEN), the largest U.S. homebuilder, is expected to release its latest quarter's results at the end of the month.

The earnings releases arrived on the heels of a National Association of Realtors report that showed inventories of unsold homes climbed 10.5% in April over March. The increase—to more than 4.5 million homes, or 11.2 months' worth of supply—came after inventories had held relatively steady for about four months. Sales of existing homes in April were down 17.5% from last year. "With inventories so high, it will be difficult for the market to bottom," said Eric Landry, an associate director at Morningstar Research (MORN) who covers the building market.

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