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Some of nation's large home builders could be due millions of dollars - thanks to a tax break signed into law by U.S. President Barack Obama - boosting the cash hoards builders are tapping as they limp toward recovery.
Businesses would be able to apply current losses against profits made five years ago - instead of two years - resulting in refunds that could come sometime next year. The measure isn't expected to be a game-changer for home builders, given that the major pubic players have been conserving cash for several quarters. The 10 companies JP Morgan covers have an average $1.2 billion, compared to $616 million as the market soured in late 2007.
Credit Suisse predicts Lennar Corp. (LEN) could see a boost between $200 million and $300 million. Meritage Homes Corp. (MTH) expects about $60 million. "That's obviously a substantial number, but I'm not certain it would change our growth prospects that much," CFO Larry Seay said during a quarterly conference call last week.
Smaller private builders, who have been battered in the housing downturn without access to construction financing, would receive less money, but a bigger benefit. "They can take a breath, survive," said Bill Killmer, vice president of advocacy with the National Association of Home Builders. "Many of these guys would have to shutter and close their doors. They'll be able to survive."
The Washington-based trade group estimates about 30,000 construction-related jobs will be saved. That's good news, given construction unemployment was 18.7% in October, according to the Laborers' International Union of North America, well above the national rate.
The building industry's bigger names were disappointed to see the break pulled from the government's $787-billion economic stimulus plan signed earlier this year. But it is not without controversy: The NAHB previously fretted that large builders might use the tax break to unload land at a discount to generate a tax loss and then buy the land back, potentially putting smaller players at a disadvantage. Killmer said the builder group is now glad a "broad swath" of the industry will benefit.
Such concerns are less of an issue now because builders have purged some of their less desirable land. Plus, the land-related charges they'd take to use the NOLs – primarily through selling bulk land at distressed prices – would be more of a negative, given they aren't as desperate for cash, said JP Morgan analyst Michael Rehaut.
The tax break is part of a hard-lobbied package that would also extend the first-time home-buyer tax credit for several months and expand it to some existing homeowners. Builders, who say the credit delivered much-needed sales, warn the market will resume its slide without continued incentives for buyers.
-By Dawn Wotapka, Dow Jones Newswires; 212-416-2193; email@example.com