Fall 2006 issue of Horizons

INDUSTRY HOME BUILDERS The Market, Tax Changes, and More . . .

THE MARKET

Steven Hays Sr., CPA Felicia Malter, CPA

After back-to-back-to-back-to-back record years for the national and local home building industry, it should come as no surprise that a “good,” not “great,” year might happen. Sales have lacked any consistency during the first half of the year. While traffic has remained relatively good, it appears there are many “tire-kickers” in the market. Several creative marketing strategies and promotions have been originated - some with great success. Now is a good time to focus on refining and improving your company's systems and processes. What does this mean for the rest of the year? It appears 2006 certainly will not match the performance of 2005. There has been some erosion of gross profit margin as many in the mar- ket are discounting to get deals. The positives - the economy continues to be healthy and rel- atively strong, which is a good indicator for future opportuni- ties. The raw material price increases at the beginning of the year have slowed and become relatively manageable. There also is capacity with many subcontractors. Stay tuned! The Energy Policy Act of 2005 creates a new tax credit for home builders who build qualified new energy-efficient homes. Tax credits are more valuable to taxpayers than deductions because they are a dollar-for-dollar reduction in tax. Home builders are eligible to qualify for tax credits of up to $2,000 for a new home that achieves 50 percent energy savings for heating and cooling over the 2004 International Energy Conservation Code (IECC) and supplements. The home also must have building envelope component improve- ments, providing a level of heating and cooling energy NEW TAX PROVISIONS Energy-Efficient Homes Credit

consumption that is at least 10 percent below that of a com- parable home. The IRS will create and maintain a public list of software programs that may be used to calculate energy consumption for purposes of providing certifications dis- cussed below: • The credit is available for all new homes, including manu- factured homes constructed in accordance with Federal Manufactured Homes Construction and Safety Standards or meeting Energy Star criteria. These tax credits apply to new homes located in the United States whose construction is substantially completed after Aug. 8, 2005, and that are acquired from the eligible contrac- tor after Dec. 31, 2005, and before Jan. 1, 2008, for use as a residence (2006 and 2007). The home builder must obtain certification for each home from an eligible certifier before claiming the credit. The com- pany must retain this certification as part of its books and records to show entitlement to the credit. Unfortunately, more information regarding how the “savings” are measured is forthcoming. An analysis of the costs to be incurred to receive the credits also should be performed. As a result, it is not possible at this time to determine how much of a benefit this provision will be to the industry.

FINANCIAL MANAGEMENT FOR HOME BUILDERS IN A SOFTENING HOUSING MARKET

As the industry settles into a year that will be less than record breaking, builders must now take action to minimize the eco- nomic impact of a slowdown. These measures include: Control all fixed general and administrative expenses.

These expenses are fixed in cost and include items related

39 • summer 2006 issue