Tax Reform Doubts Mute Builders’ Cheer
It was mostly money-talk during the four-day, 27th annual Pacific Coast Builders Conference in San Francisco under a lingering cloud of uncertainty concerning proposals for national tax reform.
There were the usual educational sessions covering every aspect of the home- and light-construction industries but the pervading issue was financing.
How would pending legislation treat future home-buying habits? Would it cut off all tax incentives for realty investments? Would it inevitably raise rents and lead to more rent control?
Those were a few of the principal questions, but there were no answers, just some good guesses and lots of opinions as participants discussed tax reform and its coming impact on the housing and real estate fields.
Industry leaders seemed agreed that there is a 50-50 chance that some tax reform will be enacted this year unless all or most of President Reagan’s energies are turned to the TWA plane hijacking and the holding of American hostages. A worsening of that crisis could obviously affect all other matters.
The overwhelming complexities of tax reform marred an otherwise upbeat and cheerful meeting attended by about 4,400--a new high in the history of the nation’s largest regional builders conference.
Construction in 1984 and to date this year, bolstered by lower interest rates and a strong pace of housing starts, provided a general feeling of “enjoy-it-while-we-can” among the builders and their allies in the business. Nationally, housing, a bellwether for the economy, is a current bright spot.
But Stanley Swartz of San Diego, president of the California Building Industry Assn., which sponsors the annual event, conceded that the industry is “frustrated” continually in its efforts to provide affordable housing, particularly in California where the price of a single-family home can be as much as $50,000 higher than the typical house elsewhere in the nation.
Revenue-bond financing of homes--at lower rates for buyers--is a primary hope for affordable housing, he said, and must be continued at all levels, but changes in tax structures can lessen incentives for multifamily housing construction and become “one of the sacrificial lambs of tax reform.” If the economics of the marketplace cannot provide for such housing, then there will be a “genuine revolt” by “unhoused people” and the government will have to react, he said.
Assemblyman Gray Davis (D-Los Angeles), addressing the same issue, noted that while the price tag of a California home is from 48% to 50% higher than the comparable national figure, the average income in California is only 8% higher than the U. S. figure.
Assembly Bill 2052, introduced by Davis in March to extend for two more years the bonding authority of local government entities for apartment house construction, has just been amended by Davis to double the money amount to $3 billion.
“Earlier this month, local governments reached the $1.5 billion limit for bond sales to finance new apartment construction, Davis said. “We cannot afford to slam (that) door shut . . . in California at this pivotal time in the building cycle. The vacancy rate in most California cities is well below 5%--a definite indication of a housing shortage. Nationwide, over 60% of apartment construction is stimulated by this type of bond financing. We need to keep pace with California’s growing needs and low interest bonds are the answer.”
He added that bond-financed apartments must comply with federal and state laws requiring that at least 20% of the units be available to low-income renters over a 10-year period. That is essential to meet the state’s responsibilities to provide “affordable housing for people from all income levels,” he said.
Kenneth Leventhal, a prominent Los Angeles-based housing industry consultant, described the current tax reform issue as the “fifth round of tax tinkering” with the 1954 tax code. Unless the President pushes real hard, “we won’t get tax reform” this year, he said.
His view of the savings and loan institutions, and some banks, was very harsh. “They are being held together by creative accounting, " the certified public accountant declared, alluding to the rash of failures of lending institutions and various resultant rescue attempts. The federal budget deficit and the national debt don’t brighten the picture either, he added. His priorities would place the budget deficit ahead of tax reform.
Because apartment house construction is usually “tax motivated,” changes in the new structure will have an adverse effect for the industry, he said, while anticipating increasing activity in real estate investment trusts.
Michael Salkin, Bank of America economist, bullish about the entire housing market--because real estate financing is readily available and is enhanced by mortgage sales in the secondary market and by securitization of loans--expects nevertheless a “painful transfer” for savings institutions in the wake of deregulation.
The 3,000 or so institutions now in business will be consolidated into about 1,000 stronger, better organized and more secure firms, when deregulation has run its full course, he predicted.
Thomas Hammond, of Newport Beach, who heads one of only three of the nation’s publicly-held mortgage banking firms, agreed fully that the housing industry will be serviced by fewer savings and loan institutions.
Their traditional role is changing as more mortgage securitization (greater participation by such financially powerful institutions as major banks, insurance companies and pension funds) takes place and the “sky is the limit on loans now,” he said, because they are no longer dependent upon old formulas.
Savings and loan institutions “are down to 40% of the loan origination and their share continues to slip,” he said.
Other panelist and speakers, while agreeing that drastic changes are taking place in the lending arena, said savings and loan firms will continue to provide money for housing as their primary purpose.
Stan Ross, a co-managing partner with Leventhal in Kenneth Leventhal & Co., hailed the advent of tripartite teams in the industry, made up of a builder (expertise), a lender (money) and an entrepreneur (an elusive but fetching ingredient).
Insurance firms are becoming more visible in that growing arena, he said. Others noted that there will be “new and more people on the turf” as traditional building, lending and development processes change as part of deregulation.
Wayne Wedin, a former city manager who now heads Wedin Enterprises of La Habra, said the public and private sectors involved in housing have finally “discovered each other.” There is noticeable improvement in understanding resources and using them for the good of both sectors, he said, citing bond revenue programs as an example.
And not too surprisingly, the convention ended on a political note.
Sen. Alan Cranston (D-Calif.), the final speaker on the conference agenda, discussed what tax reform can do for and to the housing industry, and guessed also that there is a 50-50 chance at some new tax laws becoming enacted before the Oct. 1 deadline.
Later, at a concluding press conference, he claimed that he was “unbeatable” now for reelection next year to the U .S. Senate because a new poll put his popularity and acceptance at its highest level ever.
Just a few moments later, there was some tart rebuttal from a prominent Republican who is a leading Southern California builder, a general in the U.S. Air Force Reserve and president of Air Cal.
Participating with Leventhal in a wrap-up session on the outlook for the housing business, William Lyon, president of the Newport Beach-based home-building firm bearing his name, said Cranston had a “perfect record--wrong in everything he’s done!”
Lyon told the audience he had been asked if he wanted to say “hello” to the senior senator from California as they passed in the Moscone Convention Center building. No, Lyon replied, he would prefer, instead, to say “goodby--in 1986.”