Builders Rush to Finish Houses by U.S. Tax Credit Deadline

Construction crews for LGI Homes begin work at 4 a.m., pouring concrete slabs for houses before the heat of a Texas day. They don’t stop until 6 p.m., and usually work six days a week.

U.S. builders such as LGI Homes are on a tight deadline to finish houses by the end of June so purchasers can get a federal tax credit of as much as $8,000. Buyers had to sign a contract by April 30 and must complete the transaction by July 1 to qualify. That’s speeding up a construction process that for some builders can take five to six months.

“We have people we need to get closed by the end of the month,” said Eric Lipar, 39, chief executive officer of Conroe, Texas-based LGI Homes. “There is a sense of urgency.”

Senate Majority Leader Harry Reid proposed a three-month deadline extension yesterday amid concern that a rush of buyers created too big of a backlog. New-home contracts rose 30 percent in March and 15 percent in April, the biggest two-month gain in records dating to 1963, according to the Commerce Department. About a third of the April signings were for homes under construction, and a quarter were for those that weren’t started.

Waiting to see if a new home will be finished by the credit deadline can be nerve-wracking for buyers, said Charlie Li, a civil engineer in Kansas City, Missouri, who is purchasing a property in the nearby suburb of Overland Park, Kansas. Li drives by the building site every day after work. The four- bedroom house probably will be finished in two weeks, he said.

Photographer: George Frey/Bloomberg

Paul Grzybowsky cuts wood for a new home under construction at the Split Rock at Entrada development in St. George, Utah. Close

Paul Grzybowsky cuts wood for a new home under construction at the Split Rock at... Read More

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Photographer: George Frey/Bloomberg

Paul Grzybowsky cuts wood for a new home under construction at the Split Rock at Entrada development in St. George, Utah.

‘Under the Gun’

“We’re under the gun, because you never know if the weather will impact the schedule,” Li said. “If I don’t see that progress has been made, it makes me nervous.”

To complete a sale, builders in most of the U.S. are required to have a certificate of occupancy from local officials attesting the house is finished or at least conforms to building codes. Mortgage lenders usually require the document before closing on a loan.

“I’ve seen some building officials require that a house be completely finished before issuing a certificate of occupancy -- even the carpets installed,” said Richard Wildermuth, president of Connecticut Valley Homes in East Lyme, Connecticut. “In other towns, all they require is the house conforms to code -- things like installed windows, stair railings, a functional bathroom and a working furnace.”

Construction Employment

Builders are snapping up workers to make the deadline. The jobless rate in the construction industry dropped to 20 percent in May from a high of 27 percent in February. The national unemployment rate for May was 9.7 percent, according to the Bureau of Labor Statistics.

The number of people working in residential construction rose to 579,700 in May, up from a 17-year low of 549,800 in February, according to Bureau of Labor Statistics data. That doesn’t include sub-contractors who aren’t on payrolls, such as self-employed plumbers.

New-home sales in March and April were concentrated in houses costing less than $300,000, signaling a rise in first- time buyers seeking the tax credit. The maximum benefit of $8,000 is reserved for people who have never owned property, while current homeowners can qualify for as much as $6,500.

Entry-level houses tend to be smaller and many can be finished in three months or less, compared with five to six months for larger homes, said David Crowe, chief economist of the National Association of Home Builders in Washington. Still, it’s not easy to build a house that quickly, he said.

“Finishing a home in a few months can be done, but the builder would have to work fast,” Crowe said.

45 Days

In Texas, the LGI Homes crews have it down to a science, according to Lipar. They can complete a home in about 45 days with a crew of 10 to 12 people on site, including framers, drywallers and electricians, he said.

The builder’s entry-level properties cost $110,000 to $170,000 for homes that are 1,100 to 2,500 square feet (102 to 232 square meters), Lipar said. The most popular model is a ranch-style house with three bedrooms, two bathrooms and an attached two-car garage for about $130,000, he said.

The National Association of Realtors asked members of Congress to consider extending the tax credit deadline to allow people more time to complete sales, said Lucien Salvant, head of public affairs for the Chicago-based trade group. Reid, a Nevada Democrat whose state has been among the nation’s worst-hit housing markets, proposed moving the date to Sept. 30.

“The bulk of the delays are coming from people doing short sales, but we’re also seeing people having problems closing on homes they’re having built,” said Salvant. Short sales are transactions in which a bank accepts less than the balance owed on a property.

California Credit

In California, the federal tax benefit has been eclipsed by a $10,000 state tax credit for real estate purchased between May 1 and the end of the year. The credit applies to people who buy a new home and first-time homebuyers who purchase either a new or existing property.

“We think the California tax credit will be more helpful than the federal,” said Jim Warmington Jr., president and CEO of the Warmington Group, a homebuilder in Costa Mesa, California.

The rest of the U.S. may see a sales slump after the end of the federal credit, said John Burns, chairman of John Burns Real Estate Consulting in Irvine, California.

Permits, a sign of future construction, fell in April by the most since December 2008, the Commerce Department said in a report last month.

“The federal tax credit got people off the fence and pulled a lot of sales forward,” Burns said. “We’re now entering a period where we’ll see the U.S. new-home market trending down.”

To contact the reporter on this story: Kathleen M. Howley in Boston at kmhowley@bloomberg.net.

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