Goldilocks And The Obama Budget

Today the Obama administration sent the House a $3.73 trillion budget proposal which would give the United States a first ever four consecutive year run of trillion plus deficits. Like Goldilocks and the beds in the three bears’ house, Congressional Republicans characterize the administration’s proposed spending cuts as too soft, Congressional Democrats say they are too hard, and the Obama White House says they are just right. By the time appropriations legislation passes through the Capitol, however, it won’t likely look like a bed at all. The White House proposal falls far short of Obama’s blue ribbon deficit commission’s recommendations for a $4 trillion deficit reduction.

The Obama budget proposal goes nowhere near the entitlement “third rail” of electoral politics. And, it contains a mixed bag of the bitter and the sweet for the construction sector of our economy. On the positive side, Obama proposes doubling the nation’s share of clean energy electric power by 2035; building high speed internet connections to reach 98% of American homes and businesses; $328 billion in additional funding for transportation infrastructure construction, from sources other than motor fuel taxes; and dropping cap and trade taxes on greenhouse gas emissions. In the negative ledger column, the budget would eliminate home mortgage interest deductions for households with income more than $250,000; $1 billion reduction in grants for airport construction; and another billion dollars cut from water treatment and other infrastructure construction programs.

House Budget Committee Chairman Paul Ryan (R. Wis.) is expected to unveil an alternative budget in April that will take a meat axe to entitlement spending. House Budget Committee Ranking Member Chris Van Hollen (D. Md.) defended the administration’s proposal: “Compared to the slash and burn Republican approach, [the administration’s] budget positions the president as offering a responsible approach to deficit reduction.

Housing Boom’s Walls of Jericho

The housing boom during the first half of the last decade added over 10 million apartments, condominiums and homes to the U. S. housing stock. Now, however, just as the construction industry’s economic recovery is choking on the glut of foreclosed and unsold housing units, the prospect of any recovery for housing construction is further dampened by the tumbling of the walls of Jericho hastily erected and poorly fabricated during the overbuilt, easy money years of 2000 through 2005.

Three of Illinois’ most active home builders – Pulte, D. R. Horton and Lennar – are currently plagued by the financial fallout from a doubling of the rate of defects per new housing unit during 2000 through 2005, compared to the immediately previous six year period, according to estimates from the International Association of Certified Home Inspectors. Adding these woes to the ongoing multistate litigation over problems resulting from use of corrosive Chinese drywall products means the home building sector of the economy is facing a liability headache so tall even Superman couldn’t leap it in a single bound.

Pulte and D. R. Horton are the nation’s two largest home builders. In the third quarter, Pulte recorded a one time expense of $272.2 million – 25% of Pulte’s third quarter revenue – for increased reserves to cover losses for warranty repairs on homes built over the past 10 years. Similarly, Horton states its net liabilities for construction defect claims as of September 30, 2010, at $319.8 million, more than doubling the liability reserve Horton stated on September 30, 2003. Pulte CEO Richard J. Dugas told securities analysts that the huge increase in defects reserves “was completely unforeseen.” The housing sector issues, and corporate accounting for burgeoning liabilities, bother Towers Watson actuary Ron Kozlowski. “Their liabilities are underfunded,” Kozlowski contends. He remarks that home builders “have their heads in the sand.”

Meanwhile, 13 customers who bought new homes from Lennar in Hutto Parke, a subdivision of an old cotton plantation 30 minutes outside Austin, Texas, are suing for fractured foundations, drooping ceilings and sagging fences because, they contend, the homes were put up on unstable soil. Lennar has already settled claims by 221 of the 443 homebuyers in Hutto Parke.

In today’s liability insurance market of ever tightening claims made policy forms, little if any of these claims asserted against housing contractors will be covered by any sort of insurance, and the builders will have to dig deep into shareholder pockets to pay the resulting attorney fees and costs of litigation, as well as the customer recoveries against them. As if the housing sector didn’t have enough problems getting out of the starting blocks and running the high hurdles toward economic recovery.

Illinois Tax Hikes Driving Business Investment Out Of State

Knowledgeable observers predicted early in this legislative session that a major hike in state taxes would drive business investment out of state, and developments in neighboring states are already proving them correct. For example, 112 commercial and industrial construction projects worth $8.9 billion are already underway in 2011 just across the lake in Michigan.

The electric power industry in Michigan leads the way with 37 projects totaling $5.2 billion, representing 58% of new industrial construction investment in Michigan for 2011. The largest single power industry project in Michigan is the 765 KV Lower Peninsula Transmission Line, a 700 mile overhead extra high voltage transmission line extending into Ohio. American Electric Power Company will commence construction of this project this summer.

General industrial manufacturing construction, including auto industry plant expansions, accounts for 20 projects worth $1.4 billion, followed by 21 pharmaceutical and biotechnology investments totaling $467 million.

Illinois could have benefited greatly from the jobs created by this construction investment, as well as the new jobs in the completed or expanded facilities. Our state economy desperately needs new high tech jobs, but the income tax increase enacted by our legislature and signed by our governor is driving the money, construction jobs and manufacturing jobs across the lake.

Republican Subcommittee Chairman Lauds Obama Housing Smackdown

Illinois’ 13th District Republican Representative Judy Biggert, Chairman of the House Financial Services Subcommittee on Insurance, Housing and Community Opportunity, is looking forward to joining with other committee Republicans to quickly extract the federal government from its role as primary financial risk taker in the housing market in this country. Joining in the Obama Treasury Department attack on any continuing role for federal housing subsidies in the form of residential mortgage guarantees, Biggert said in her E-mail message to constituents yesterday: “Taxpayers cannot continue to shoulder the financial risks associated with [federally chartered mortgage guarantors] Fannie [Mae] and Freddie [Mac]. … Our goal should be to choose a path that will quickly and prudently wind down the government’s role and restore stability to the housing market.”

In other words, Republican leaders are climbing aboard the Obama Treasury train of proposed measures which will raise home mortgage interest rates, cut back availability of 30 year fixed rate mortgages to even the most creditworthy borrowers, and altogether eliminate availability of low down payment lending to first time homebuyers. If you don’t already own your home, the American Dream may be pulling out of your station and rapidly receding into the distance as the train whistle hoots its demise. In a long awaited white paper released yesterday by Treasury, the Obama administration proposes cutting the size of mortgages Fannie and Freddie can purchase from private lenders, from the present $729,750 down to $625,500 as soon as the third quarter of 2011. Minimum required down payments will go up to 10% for conventional loans, and rise from the current 3.5% up to 5% for FHA first time buyer mortgages.

Finally, Treasury proposes increasing the fees Fannie and Freddie charge conventional lenders for guaranteeing the mortgages these lenders underwrite.

In a related Obama administration attack aimed specifically at lower income home owners, the administration proposes a $2.5 billion reduction in the LIHEAP home heating fuel assistance program. What’s the point in owning your home if you can’t afford to heat it?

While, admittedly, excesses in home mortgage lending, and the securitization of home loans into derivative instruments, contributed heavily to the near collapse of worldwide financial markets and drove the U. S. economy into the worst recession in decades, it is beginning to look like the Obama administration’s use of a purgative on Fannie Mae and Freddie Mac could be the cure that proves worse than the disease. Available credit for both the construction and purchase of new homes has already dried up into a syrupy consistency clogging the arteries of any hope for quick recovery in the construction sector of the American economy, and the Obama Treasury Department recommendations for home mortgage market reform will keep construction workers, trade contractors and home builders on the sidelines of the economic recovery for years to come.