Losses may turn into relief for home builders
By Ilaina Jonas
NEW YORK (Reuters) - Home builders are expected to post losses when they start issuing their quarterly earnings results this week, but they are likely to be smaller than the staggering losses seen last year.
However, if the Senate has its way, last year's numbing results could actually help the home builders by giving them a tax rebate they would otherwise not receive.
The Senate has approved a bill that would extend the "net operating loss carry-back rule" to four years from two years. The carry-back rule allows U.S. companies to use losses from one year to offset income from the previous two years.
The rule essentially allows the companies to redo prior years' taxes, using the recent year's losses to offset past years' income. That lowers the past year's taxable income and results in a rebate for the company.
Under the Senate bill, U.S. companies, including home builders, would be able to apply losses in 2008 and 2009 to 2004 and 2005 income, when the home builders' profits continued to break records.
But first the provision would have to survive the reconciliation procedure with a yet-to-be-approved House of Representatives' bill that doesn't contain the carry-back extension.
The Laborers' International Union of North American (LIUNA) opposes the Senate proposal, saying it amounts to a corporate bailout for home builders that helped create the problem.
The union said, for example, that Lennar, the second-largest U.S. home builder, could get back $573 million under the Senate proposal, and at least one analyst concurred.
The largest builder, D.R. Horton Inc (DHI.N), could get $607 million and No. 3 Pulte Homes Inc (PHM.N) could receive $598 million, the union said.
Pulte said the union's number "has no basis in fact." A Lennar spokesman said the union's figures have been incorrect in the past but would not comment on its estimate. D.R. Horton representatives did not return phone calls. Weiss Research analyst Mike Larson supported the union's figures.
TAILSPIN
Over the past year, the larger U.S. home builders have recorded losses, reflecting the tailspin the U.S. housing market began experiencing more than two years ago.
The publicly traded home builders are required under Generally Accepted Accounting Principles to record not only cash losses in some quarters, but billions of dollars in paper write-downs and impairments from the lower value of the land and inventory they hold.
However, under tax accounting rules, the write-downs and impairments are not recognized until the land is sold.
"That's why extending the carry-back period an additional two years would help give some builders some breathing room," Pulte spokesman Mark Marymee wrote in an e-mail.
"Otherwise, some builders may be forced to sell land for far less than it's even worth today in order for them not to lose the potential relief," he said.
The National Association of Home Builders, which pushed hard for the provision, did not say by how much the proposal would benefit the industry.
JMP Securities analyst Jim Wilson said such refunds would not significantly bolster the health of most home builders, except possibly for those more cash-strapped, such as Hovnanian Enterprises Inc (HOV.N).
Vicki Bryan, senior high-yield analyst for corporate bond research firm Gimme Credit, said the bill unwisely keeps failing businesses, which contributed to the glut of homes weighing down the U.S. housing industry, afloat.
"They should fail," Bryan said. "Capacity should come out of the system when it's not supported. If you've got too many builders, they should fail. We haven't seen enough of that."
Wilson said the consumer will be best served by the large builders in the long run.
"The country and credit markets are better off if the big ones do the building because they'll do it more efficiently," Wilson said. "Over time, the U.S. keeps growing and the best thing for the consumer is to build new homes as cost efficiently as possible, and that will be done by the big guys."
(Editing by Brian Moss)
