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2013 | NAHB
LEGISLATIVECONFERENCE
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HousingOutlook
HOUSING BEGAN A SUSTAINED RECOVERY IN 2012
that has formed a solid basis for continued modest
growth in the face of several head winds that will
keep the industry from full take off. Housing starts in 2012
were 28 percent better than 2011 and early 2013 activity is
following a similar pace. As a result of the housing pickup,
construction jobs have increased at a much faster pace
than overall employment and the housing component of
overall economic activity is advancing at four or ve times
the pace of the economy.
Economic growth will pause in 2013 as the effects of
higher taxes and lower government spending spreads
across the economy. NAHB forecasts a 1.9 percent GDP
growth in 2013 followed by a more robust 2.6 percent
in 2014 as the scal drag effects are absorbed and the
underlying private economy recovers. Housing will suffer
less than other sectors from the slowdown because pentup demand will amplify demand.
Household formations dropped signicantly during the
recession from an average of 1.4 million net additions
each year to 500,000 during the recession. Formations
picked up beginning in 2011 but remain below underlying
demographic expectations. NAHB estimates a shortfall
of 2 million households yet to form from the underlying
population that has up to this point remained in parentshomes. As the economy and job formations grow, normal
life cycle trends will spawn these pent up households.
Other positive housing inuences include extremely low
mortgage rates and rising home prices. Mortgage rates are
expected to remain low, although some increase will begin
as the economy expands in 2014 and more sectors demand
capital. Home price increases are a double-edged sword
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but overall, have had a benecial effect. While higher prices
reduce affordability for rst time home buyers, increasing
home prices provide more equity to current home owners,
which is especially important for home owners with little
or negative equity. Consistently rising prices over the last
year provide condence to home buyers that they will not
lose money if they purchase. That effect has been very
important in the recent rising demand and will continue tobe true over the next year. NAHB forecasts home prices
will rise 7.4 percent in 2013 and 4.5 percent in 2014 as
supply begins to catch up with demand.
Even with these advantages, housing production remains
at about 60 percent of normal output. Housing starts in
the rst quarter of 2013 were 969,000 but should be 1.7
million if underlying demographic demand were back to
normal. The postponed and slower-than-normal recoverycan be blamed on a whole series of head winds. Leading
the reasons for limited growth is tight credit for both the
builder and buyer. Partly due to the unknown and expansive
regulations affecting mortgage originators and investors,
credit standards are much tighter than they were during
more normal periods in the early 2000s. Current lend-
ing thresholds reduce the number of eligible borrowers,
which is already reduced by current home owners withlittle or no equity.
Builders borrow from community banks in the markets
where they build. But national regulators and local bank
examiners have kept a lid on lending to residential real estate
so builders have not been able to expand their inventory.
The number of new homes for sale has remained at historic
lows for over a year as builders struggle to get sufcient
capital to buy land, install infrastructure and build homes.
Other sectors of the home building industry are also
struggling to rebuild their supply chain as the industry
begins to recover. Some building material prices have
skyrocketed in the past year as capacity for items such
as lumber, wood panels and wallboard are re-established.
Labor costs are likely to increase as construction workers
left the industry when housing starts dropped 80 percent
from peak to trough.
The net effect of positive demographic, interest rate
and home price tail winds against the head winds of credit
availability and rising prices and/or scarcity for materials,
workers and lots will allow housing starts to increase to
1 million in 2013 and 1.2 million in 2014. Full recovery at
1.7 million starts is several years away as the economyand jobs grow back to normal and the head winds calm.
NAHB Economics Contact
Dr. David Crowe
Chief Economist
(800) 368-5242, ext. 8383 or
(202) 266-8383
Email: [email protected]
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Tax Reform
CONGRESS HAS BEGUN DISCUSSING POSSIBLE
changes to the tax code. In doing so, it is essential
that Congress take the right approach to foster eco-
nomic growth. It is critical for future economic prosperitythat Congress not harm job creation and recovery in the
construction industry.
Mortgage Interest Deduction
The mortgage interest deduction (MID) has been part
of the tax code since its inception in 1913 and is the
cornerstone of American housing policy. Home owners
may deduct interest from up to $1 million of acquisition
mortgage debt and up to $100,000 of home equity loan
debt. These amounts were set in 1987 and have not been
adjusted for ination.
There are many misperceptions regarding this deduc-
tion, including who benets. In reality, the deduction is a
middle-class tax break and is particularly benecial for
younger households and larger families. Two-thirds of the
benets of the mortgage interest deduction are claimed
by those earning less than $200,000. Yet these same
taxpayers pay only 40 percent of all income taxes, meaning
these deductions make the tax code more progressive
and fair. As a share of household income, the deduction
primarily benets those aged 18 to 35, as well as larger
families. The vast majority of home owners benet from
the mortgage interest deduction; in any given year, 70%
of home owners with a mortgage will claim the deduction.
Second Homes
Perhaps the least understood component of the mortgage
interest deduction is the allowance to deduct interest on
a second home. In fact, many home owners have owned
a second home without realizing it. For example, when
a home owner sells one home and purchases another,
effectively owning two separate principal residences in a
given tax year. Further, the second home MID rules allow
up to 24 months of construction loan interest on a newly-
constructed home to be claimed while the family resides
in their existing principal residence.
Second homes may conjure up images of expensive
beach homes (although such homes are more likely to be
rented out, in which case the owner does not claim the
mortgage interest deduction, or are owned free-and-clear),
but second homeownership is much more diverse. Everystate, except for Connecticut, has at least one county with
10 percent or more of its housing stock as second homes.
Low Income Housing Tax Credit
The tax code also contains numerous provisions to support
rental housing. One of the most uniqueand effective
provisions is the Low Income Housing Tax Credit (LIHTC).
Created as part of the Tax Reform Act of 1986, the LIHTC
promotes public-private partnerships to produce afford-
able rental housing. The LIHTC allows private equity to be
raised at a lower cost, which makes it possible to operate
these projects successfully with below-market rents. In
general, the LIHTC serves households earning 60 percent
or less of the area median income. Because compliance is
monitored by the state housing nance agencies as well
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as the investors, LIHTC projects have a foreclosure rate
that is one-third of other multifamily properties.
The LIHTC is currently producing approximately 75,000
new apartment homes annually, and since its inception,
the LIHTC has produced more than 2 million affordable
rental units. Despite its success, this is not sufcient to
replace the number of affordable apartments lost each year.
Even in this tough economic climate, the LIHTC cre-
ates 95,000 new full time jobs per year across all U.S.
industriesgenerating $2 billion in federal tax revenue.
No other housing program has been as successful as the
LIHTC in producing safe, quality, affordable rental housing.
Solutions
Recently, several scal commissions have suggested re-
ducing or eliminating the mortgage interest deduction;
the capital gains exclusion; the Low Income Housing Tax
Credit; and the deduction of property taxes, amongst oth-
ers. These proposed tax increases would further depress
home prices; put countless more home owners underwater;
and trigger a new wave of foreclosures. Eliminating or
scaling back these vital housing incentives will also shrink
the local tax base of many communities, causing already
cash-strapped state and local governments to further cut
jobs and essential services. Raising taxes on home owners
and homebuilders is just not sound public policy.
R E COMMEND A T I O N S
Oppose any changes to the tax code that would
increase taxes on home owners, renters, or home
builders;
Co-sponsor H. Con. Res. 4, introduced by
Representative Gary Miller, expressing the senseof Congress that the mortgage interest deduction
should not be further restricted.
NAHB Government Affairs Contact
JP Delmore
Assistant Vice President, Government Affairs
(800) 368-5242, Ext. 8412 or (202) 266-8412
Email: [email protected]
ImmigrationReform
T
HE IMMIGRATION DEBATE HAS HEATED UP AGAIN
in the 113th Congress, with both the House andSenate set to consider legislation in the second half
of the year. As lawmakers work to craft compromise legisla-
tion, these proposed changes will have a direct impact on
businesses, even if they do not use immigrant labor. It is
therefore vitally important that Congress understand the
need for a fair and workable employer verication system
and a set of visa programs that appropriately reects the
needs of the construction industry.
Employment Verication
Congress is considering a nationwide expansion of the
electronic employment verication system (E-Verify) to
ensurethat employersonly hire individuals authorized to
work in the United States. NAHB believes that the system
must be fair, efcient, and not impose signicant burdens
on employers. A workable system will:1.Maintain current law, holding every U.S. employer ac-
countable only for the identity and work authorization
status of their direct employees. Congress should not
require employers to verify someone elses workers
such as a subcontractors employeesas this is both
unfair and impracticable.
2.Maintain the current liability standards to ensure employersunderstand their level of compliance. Employers who
knowingly hire undocumented workers will continue
to be held accountable.
3.Make sure that any compulsory federal E-Verify program
contains a robust safe harbor for employers so that
those who use the system in good faith will not be held
liable for errors in the E-Verify system.
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4. Include a strong preemption clause, preventing state
and local governments from creating their own versions
of verication requirements for employers. This is es-
sential for any business that operates in multiple states.
5.Allow employers to begin the E-Verify process when
a worker accepts a position, rather than be required
to wait until after their start date.
6. Permit the system to provide telephone access as well
as Internet access, which will make the system more
workable for small employers.
Labor Shortages
The home building industry, with the contribution of a
substantial immigrant workforce, plays a critical role in
sustaining the national economy and meeting the nations
housing needs. Today, foreign-born workers account for
22 percent of the construction labor force nationally.
The inow of foreign-born labor into construction is cyclical
and coincides with overall housing activity. Their share was
rising rapidly during the housing boom years when labor
shortages were widespread and serious. However, even
during the severe housing downturn and a period of high
unemployment, the construction labor force continued to
recruit new immigrants to replace native and foreign-born
workers leaving the industry.
The improvement in housing markets over the last year
has been a welcome change for the economy. NAHB is
anticipating total housing starts of 1 million this year and
1.2 million in 2014 as the market continues its gradual
rebound. However, this turnaround presents new labor
challenges for the construction industry.The January and March 2013 NAHB/Wells Fargo
Housing Market Index (HMI) surveys, which gauge sales
conditions from builders across the county, indicate that
labor shortages are quickly rising on home builders list of
most signicant problems. Forty-six percent of the builders
surveyed experienced delays in completing projects on
time. Fifteen percent of respondents had to turn down
some projects, and nine percent lost or cancelled sales
as a result of recent labor shortages. Trades with a high
concentration of immigrant workers also tend to have
more vacancies and labor shortages.
NAHB strongly believes that the nation should imple-
ment a new market-based visa system that would allow
more immigrants to legally enter the construction workforce
each year. Despite efforts to recruit and train Americanworkers, the housing industry faces a very real impediment
to full recovery if work is delayed or even cancelled due to
worker shortages. A new, workable visa program would
complement the industrys skills training efforts within the
nations borders and ll the labor gaps needed to meet
the nations housing needs.
R E COMMEND A T I O N S
Support comprehensive immigration reform that
includes a fair and workable employer verication
system and a market-based visa program that
allows the residential construction industry to fully
participate in the program.
Oppose any attempt to require home builders
to verify the work authorization status of their
subcontractors or subcontractors workers. As
with current law, employers who knowingly use
subcontract labor that violates immigration laws
will continue to be held accountable.
NAHB Government Affairs Contact
Suzanne Beall
Federal Legislative Director(800) 368-5242, Ext. 8407 or
(202) 266-8407
Email: [email protected]
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HousingFinanceReform
Background
TH E H OU S I N G GOV E R N M E N T SPON SOR E D
enterprises (GSEs)Fannie Mae, Freddie Mac and
the Federal Home Loan Banks (FHLBanks)have
been, and remain, critical components of the U.S. hous-
ing nance system. They were created by Congress tosupport mortgage market liquidity and help address af-
fordable housing needs.
The GSEs have operated with implicit government
backing that allows them to raise funds at favorable
rates, which ultimately benets mortgage borrowers.
The housing GSE system functioned well for decades,
but the past few years have seen unprecedented turmoil.
Freddie Mac and Fannie Mae were found to have serious
accounting irregularities that required them to be placed
under government conservatorship and receive direct
federal support. The FHLBanks have not experienced
these difculties and continue to operate outside of direct
government control.
The regulatory system for the GSEs underwent a complete
overhaul during this period, with all GSEs now under the
oversight of a single regulator, the Federal Housing Finance
Agency (FHFA). As the conservator for Fannie Mae and
Freddie Mac, FHFA is trying to balance the signicant role
that Fannie and Freddie have played during the housing
downturn by supporting mortgage markets and mitigating
mortgage foreclosures, while reducing taxpayer losses
and minimizing future risk exposure.
One thing is clear: the status quo cannot be maintained.
Serious policy discussions are underway regarding the
future of Fannie Mae and Freddie Mac following the cur-
rent, still-indenite conservatorship period, and what, if
anything, should change in the structure and operation
of the FHLBanks. A key consideration is the transition
from the current structure to a future arrangement with-
out undermining ongoing nancial stabilization efforts and
disrupting the operation of the housing nance system.
Solutions
NAHB believes that Fannie Mae and Freddie Mac should
not be converted to government agencies, nor should their
functions be completely turned over to the private market.
While major structural and operational changes are needed,
NAHB believes it is crucial for the federal government to
continue to provide a backstop for the housing nancesystem to ensure a reliable and adequate ow of affordable
housing credit in all economic and nancial conditions.
The need for government support is underscored by the
current state of the housing nance system, where Fannie
Mae, Freddie Mac, the FHLBanks, the Federal Housing
Administration and Ginnie Mae are the only conduits for
residential mortgage credit. The federal backstop must be
a permanent xture in order to ensure a consistent supply
of mortgage liquidity, as well as allow for rapid and effective
responses to market dislocations and crises.
NAHB has provided a plan to Congress where the
federal government would only be called upon when the
capital and self-funded insurance resources of newly cre-
ated private secondary market entities are exhausted.
NAHB supports comprehensive GSE reform legislation thatprotects the American taxpayer while ensuring a safe and
sound means of providing a reliable ow of housing credit.
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R E COMMEND A T I O N S
Pass comprehensive GSE reform legislation that
ensures the federal government continues to
provide a backstop for a reliable and adequate
ow of affordable housing credit in all economic
and nancial conditions.
I While NAHB agrees that private capital mustbe the dominant source of mortgage credit, the
future housing nance system cannot be left
entirely to the private sector.
I The historical track record clearly shows thatthe private sector is not capable of providing
a consistent and adequate supply of housing
credit without a government backstop.
I Fannie Mae and Freddie Mac should begradually phased into a private-sector-oriented
system, where the federal governments
backing is explicit but its exposure is limited.
I Federal support should be limited tocatastrophic situations where carefully
calibrated levels of private capital and
insurance reserves are depleted before anytaxpayer funds are employed to shore up the
mortgage market.
I NAHB believes federal support is particularlyimportant in continuing the availability of the
30-yearxed-rate mortgage, which has been a
staple of the U.S. housing nance system since
the 1930s.
NAHB Government Affairs Contact
Scott C. Meyer
Assistant Vice President, Government Affairs
(800) 368-5242, Ext. 8144 or
(202) 266-8144
Email: [email protected]
Addressingthe HousingProduction
Credit Crisis
Background
T
HE HOME BUILDING INDUSTRY CONTINUES TO
experience a signicant adverse shift in terms andavailability on land acquisition, land development
and home construction (AD&C) loans and builders with
outstanding loans are facing mounting challenges. Lend-
ers are refusing to extend new AD&C credit or to modify
outstanding AD&C loans in order to provide more time to
complete projects and pay off loans. Lenders themselves
often cite regulatory requirements or examiner pressure on
banks to shrink their AD&C loan portfolios as reasons fortheir actions. While federal bank regulators maintain that
they are not encouraging institutions to stop making loans
or to indiscriminately liquidate outstanding loans, reports
from NAHB members in a number of different geographies
suggest that bank examiners in the eld have adopted a
signicantly more aggressive posture.
As a result of this regulatory pressure, the home building
industry is having extreme difculty in obtaining credit for
viable projects. Builders with outstanding construction and
development loans are experiencing intense pressure as
the result of requirements for signicant additional equity,
denials on loan extensions, and demands for immediate
repayment. In short, the credit window seems to have been
slammed shut for builders all over the country.
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Solutions
NAHB has presented banking regulators with specic in-
stances of credit restrictions, provided data showing no
difference in credit access across market conditions; and
requested specic changes to current regulatory guidance.
To date, these efforts have not produced any tangible
results. With the spigot for housing production loans cut
off, it is clear that congressional action is needed to helpopen the ow of credit to home builders. Without such
action, there can be no housing recovery, which has major
implications for our nations ability to recover from the
current economic downturn.
With the introduction of legislation to address the regu-
latory barriers to construction lending, the prole of this
lending crisis has been raised signicantly in Congress. In
fact, in the last Congress, NAHB supported legislation toaddress this issue that ultimately garnered the support of
113 bipartisan members in the House of Representatives
and 8 Senators. The legislation has been reintroduced once
again to continue the momentum gained during the last
congressional session. Moving forward, NAHB will push
once again for the passage of the Home Construction
Lending Regulatory Improvement Act, H.R. 1255, intro-
duced by Representative Gary Miller (R-CA) and CarolynMcCarthy (D-NY), and S. 1002, the Home Building Lending
Improvement Act of 2013, introduced by Senator Robert
Menendez (D-NJ) and Johnny Isakson (R-GA).
The momentum generated by these two bills, is now
the basis for new bipartisan legislation before Congress to
tackle the issue of overly restrictive bank examiner regula-
tion. H.R. 1553, the Financial Institutions Examination Fair-
ness and Reform Actintroduced by Financial Institutions
Subcommittee Chairman Shelly Moore Capito (R-WV) and
Representative Carolyn Maloney (D-NY), as well as S. 727
introduced in the Senate by Banking Committee members
Jerry Moran (R-KS) and Joe Manchin (D-WV), would provide
new standards for bank examinations. Of particular note
to the home building industry, such new standards would
specify that a commercial loan (including AD&C loans) cannot
be placed in nonaccrual status solely because the collateral
has deteriorated in value. Additionally, the legislation would
clarify that a new appraisal is not required on a commercial
loan unless an advance of new funds is involved. NAHB
strongly supports H.R. 1553 and S. 727 and as this legislation
moves forward in Congress, we will advocate for additional
elements of our credit crisis reform legislative agenda to beincorporated to strengthen the overall bill.
R E COMMEND A T I O N S
Members of the House of Representatives:
Cosponsor H.R. 1255, theHome Construction
Lending Regulatory Improvement Act, introduced
by Representatives Gary Miller of CA and Carolyn
McCarthy of NY.
I H.R. 1255 directs the banking regulators toissue new guidance in three key areas:
1.Cease implementing a 100 percent capital
bank lending limit for AD&C loans as a hard
limit, and utilize the 100 percent capital guid-
ance as it was intended;
2.Use as-completed values when assessing
the collateral of residential AD&C loans they
intend to fund to completion and use arms
length transactions standards when assess-
ing new loans;
3.Abstain from compelling a lender to call or
curtail AD&C loans where the home builder
is current in making payments in accordancewith the loan documents.
Members of the Senate:
Cosponsor S. 1002, theHome Building Lending
Improvement Act of 2013, introduced by Senator
Robert Menendez of NJ and Johnny Isakson of
GA.
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I S. 1002 directs the banking regulators to issuenew guidance in two key areas:
1.Change the 100 percent capital bank lending
threshold that triggers additional scrutiny
for construction loans to 125 percent and
clarify that if a bank exceeds that threshold,
it should not be treated as a hard cap on
further construction lending, but a multi-fac-
tor analysis of the banks portfolio and risk
management;
2.Abstain from compelling a lender to call
construction loans where the home builder
is currently making payments and provides
for a work out period before charging off a
loan.
NAHB Government Affairs Contact
Scott C. Meyer
Assistant Vice President, Government Affairs
(800) 368-5242, ext. 8144 or
(202) 266-8144
Email: [email protected]
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