Unaccustomed as they are to optimism, the more than 50,000 builders attending the 41st annual convention of the National Assn. of Home Builders here last week managed to isolate at least one dark cloud over the housing recovery landscape.
Last year it was deficits, deficits and still more deficits, especially the federal budget deficit but also including the balance of trade deficit. The deficit problem is still present, with record levels in both categories, but the attention at this year's convention was focused on the threat of tax reform.
The convention ended with the board failing to take a strong stand against any of three major tax reform proposals making the rounds in Washington. All three--the proposal by Treasury Secretary Donald T. Regan, the Kemp-Kasten plan and the Bradley-Gephardt plan--would damage the housing recovery, now in its third year. At least that was the concensus of most of the sessions dealing with economic matters and it was emphasized in a 31-page study analyzing the three proposals.
Rents, Costs to Go Up
John J. Koelemij, the new president of the builder group, and Kent W. Colton, executive vice president, said the study showed that all the tax reform plans would raise home ownership costs for first-time buyers, a group already on the endangered species list because of high mortgage interest rates and housing costs.
Koelemij said that the current $675 net monthly costs of paying for an $83,500 house with a 10% down payment would increase to $730 a month under Kemp-Kasten, $815 a month under Regan's treasury plan and $834 under Bradley-Gephardt. The figures assume an adjusted gross yearly income of $40,000 for the hypothetical family.
Damage would also be done to the rental housing delivery system, which depends on investor confidence in tax benefits already in place, they said. The tax reform proposals of Regan, Bradley-Gephardt and Kemp-Kasten would result in rents that are respectively, 42%, 28% and 22% higher for conventionally-financed apartments, according to the study.
Housing and Urban Development Secretary Samuel R. Pierce Jr. agreed, in response to a question at a press conference, that the Treasury tax reform proposal would result in higher rents.
Speaking to the 1,500 members of the association's board of directors on the next to the last day of the convention, Pierce told the builders that his department will continue its efforts to ensure the availability of sufficient capital to finance home mortgages.
The housing department will also focus on rehabilitation programs to return "neglected and damaged" existing housing to productive housing stock, a message that should appeal to the nearly 40,000 remodeler members of the association. In recent years, the builder group has gathered remodeling contractors and producers of factory-built housing, among others, under its association umbrella.
Pierce, the only black member of the Reagan cabinet, said that growth in housing benefits the entire nation, adding that the goal of his department is to see as many renters who want to become homeowners do so.
He returned repeatedly to the issue of federal deficits, saying bluntly that "if we don't get our deficits down, the economy will go straight to hell."
One of two momemts of levity involving the Reagan Administration occurred at the Pierce press conference. Doris L. Muir of Log Home Guide startled the housing secretary with a question about his department's alleged discrimination in energy standards for log houses. When Pierce asked what she was talking about, Muir told him to look at his speaker's rostrum. She had placed a copy of her publication on the rostrum. As reporters in the audience chuckled, Pierce promised to look into the matter when he returned to Washington. Afterward, Muir told a reporter that builders of the 30,000 or so log houses constructed each year in the nation face discimination because the housing department's Minimum Property Standards don't address the issues of log-built construction; the standards are written largely with stick-built housing in mind, she said.
The other moment occurred during a board of directors meeting on the final day of the convention, when President Reagan, on a telephone hookup from Washington, mispronounced the name of the new president of the builder group. He accented the second syllable, pronouncing Koelemij "Kool-AM-I." The audience, many of whom are still trying to figure out how to spell and pronounce their new president's name, laughed. The proper pronunciation accents the first syllable.
If a Profiles in Courage award had to be presented to a convention speaker, the logical recipient would be Sen. Dennis DeConcini (D-Ariz.), who proposed his own 19% flat tax proposal, for all business and personal taxpayers. The bill, which he admitted has little congressional support and less support from the real estate industry, would eliminate the home mortgage interest deduction for all homes, principal and second alike.
The proposal has received the media attention of flat-tax plans by Sen. Bill Bradley (D-N.J.) and Rep. Richard A. Gephardt (D-Mo.) and by Rep. Jack F. Kemp (R-N.Y.) and Sen. Bob Kasten (R-Wis.).
DeConcini said that a similar plan adopted in Hong Kong has stimulated the economy of that prosperous city-state and said that "unless we really move toward a flat-tax I don't feel tax reform will lead to simplification."
He advised the builders not to get caught up in a debate about flat-tax plans unless the proposals are really reforms. He said that the Bradley-Gephardt plan probably has the most support in the Senate.
Bruce Karatz, president of Kaufman & Broad Inc., Los Angeles, was one of the most optimistic speakers at an outlook panel. He predicted that California would see more than 200,000 housing starts in 1985 and that nationally, 1985 will be a better year for housing than 1984 was. He took issue with the view that manufactured housing is a cure-all for problems of housing affordability. Rather, the cost of buying the land and developing it is relatively more expensive than the cost of labor and building materials.
"Fifty percent of the total cost of building a house is in land development," Karatz said. His firm calls itself the largest home builder in California and builds houses in France. Karatz headed the firm's operations in France from 1976 to 1980 and said in an interview that, contrary to popular belief, the people of France--as opposed to their leaders--like and admire Americans and American ways.
"They're a lot like us, individualistic and stubborn, not the kind of people who can be regimented," he said.
Jay Kaplan, president and chief executive officer of Consolidated Capital Companies, a San Francisco Bay area-based real estate syndicator and investment concern, believes that all the talk about tax reform has already confused real estate investors enough. His advice was simple and to the point "This is not the time for pessimism and uncertainty--this is the time to buy real estate as fast as you can."
Growing numbers of home buyers are rejecting the adjustable rate mortgage in favor of the fixed-rate loan, a form of housing finance that was considered on the way out a few years ago, according to Robert J. Spiller, president of the Mortgage Bankers Assn. of America. A survey by his association of 10 of the nation's largest mortgage bankers revealed that 85% of their December mortgage originations were fixed-rate loans. Just last summer, adjustable rate mortgages accounted for 60% to 70% of the total market, he added.
David Roberts, the Mobile, Ala. realtor who heads the National Assn. of Realtors, was as optimistic about the 1985 outlook for housing as most of the builders at the convention. He suggested that a 3% reduction should be made in the growth of federal entitlement programs, such as Social Security, along with a 5% cut in the growth of defense spending. Another 10% should be trimmed from the savings received by taxpayers through the indexing of income taxes, he told the group's board of directors.
Although cabinet member Pierce appeared to oppose the Treasury Department tax plan in his news conference--or at least was able to find something wrong with it--another Reagan administration figure, R. T. McNamarr, deputy treasury secretary, told the association that Reagan will endorse the Regan plan in his Feb. 6 State of the Union message.
The proposed plan to overhaul the nation's tax system is an old idea whose time has come, McNamarr said, urging the audience to look beyond the short-term distortions that the proposal will cause the economy to the "positive and far reaching effects" it will have on the economy, individual taxpayers and businesses.
A dozen years ago, the President, or the Vice President would be at a convention of the realtors or builders. This year, Reagan invited members of half a dozen trade groups, including Koelemij and Colton, to fly to Washington to discuss proposed budget cuts.
Under the ground rules of the meeting, tax reform was specifically excluded, Koelemij said. This subject will be taken up at a later meeting with Treasury Secretary Regan, he added.
The convention moves to Dallas next year for a three-year stay. It moves to Atlanta for 1989-91 and Las Vegas for 1992-94.