[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]




                       FULL COMMITTEE HEARING ON
                          THE HOUSING CRISIS:
                     IDENTIFYING TAX INCENTIVES TO
                         STIMULATE THE ECONOMY

=======================================================================

                      COMMITTEE ON SMALL BUSINESS
                 UNITED STATES HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                              JUNE 5, 2008

                               __________

                          Serial Number 110-97

                               __________

         Printed for the use of the Committee on Small Business


 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 house

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                   HOUSE COMMITTEE ON SMALL BUSINESS

         NYDIA M. VELA'AZQUEZ, New York, Chairwoman


HEATH SHULER, North Carolina         STEVE CHABOT, Ohio, Ranking Member
CHARLIE GONZALEZ, Texas              ROSCOE BARTLETT, Maryland
RICK LARSEN, Washington              SAM GRAVES, Missouri
RAUL GRIJALVA, Arizona               TODD AKIN, Missouri
MICHAEL MICHAUD, Maine               BILL SHUSTER, Pennsylvania
MELISSA BEAN, Illinois               MARILYN MUSGRAVE, Colorado
HENRY CUELLAR, Texas                 STEVE KING, Iowa
DAN LIPINSKI, Illinois               JEFF FORTENBERRY, Nebraska
GWEN MOORE, Wisconsin                LYNN WESTMORELAND, Georgia
JASON ALTMIRE, Pennsylvania          LOUIE GOHMERT, Texas
BRUCE BRALEY, Iowa                   DAVID DAVIS, Tennessee
YVETTE CLARKE, New York              MARY FALLIN, Oklahoma
BRAD ELLSWORTH, Indiana              VERN BUCHANAN, Florida
HANK JOHNSON, Georgia
JOE SESTAK, Pennsylvania
BRIAN HIGGINS, New York
MAZIE HIRONO, Hawaii

                  Michael Day, Majority Staff Director
                 Adam Minehardt, Deputy Staff Director
                      Tim Slattery, Chief Counsel
               Kevin Fitzpatrick, Minority Staff Director

                                 ______

                         STANDING SUBCOMMITTEES

                    Subcommittee on Finance and Tax

                   MELISSA BEAN, Illinois, Chairwoman


RAUL GRIJALVA, Arizona               VERN BUCHANAN, Florida, Ranking
MICHAEL MICHAUD, Maine               BILL SHUSTER, Pennsylvania
BRAD ELLSWORTH, Indiana              STEVE KING, Iowa
HANK JOHNSON, Georgia
JOE SESTAK, Pennsylvania

                                 ______

               Subcommittee on Contracting and Technology

                      BRUCE BRALEY, IOWA, Chairman


HENRY CUELLAR, Texas                 DAVID DAVIS, Tennessee, Ranking
GWEN MOORE, Wisconsin                ROSCOE BARTLETT, Maryland
YVETTE CLARKE, New York              SAM GRAVES, Missouri
JOE SESTAK, Pennsylvania             TODD AKIN, Missouri
                                     MARY FALLIN, Oklahoma

        .........................................................

                                  (ii)












           Subcommittee on Regulations, Health Care and Trade

                   CHARLES GONZALEZ, Texas, Chairman


RICK LARSEN, Washington              LYNN WESTMORELAND, Georgia, 
DAN LIPINSKI, Illinois               Ranking
MELISSA BEAN, Illinois               BILL SHUSTER, Pennsylvania
GWEN MOORE, Wisconsin                STEVE KING, Iowa
JASON ALTMIRE, Pennsylvania          MARILYN MUSGRAVE, Colorado
JOE SESTAK, Pennsylvania             MARY FALLIN, Oklahoma
                                     VERN BUCHANAN, Florida

                                 ______

            Subcommittee on Rural and Urban Entrepreneurship

                 HEATH SHULER, North Carolina, Chairman


RICK LARSEN, Washington              JEFF FORTENBERRY, Nebraska, 
MICHAEL MICHAUD, Maine               Ranking
GWEN MOORE, Wisconsin                ROSCOE BARTLETT, Maryland
YVETTE CLARKE, New York              MARILYN MUSGRAVE, Colorado
BRAD ELLSWORTH, Indiana              DAVID DAVIS, Tennessee
HANK JOHNSON, Georgia

                                 ______

              Subcommittee on Investigations and Oversight

                 JASON ALTMIRE, PENNSYLVANIA, Chairman


CHARLIE GONZALEZ, Texas              MARY FALLIN, Oklahoma, Ranking
RAUL GRIJALVA, Arizona               LYNN WESTMORELAND, Georgia

                                 (iii)























                            C O N T E N T S

                              ----------                              

                           OPENING STATEMENTS

                                                                   Page

Velazquez, Hon. Nydia M............................     1
Davis, Hon. David................................................     2

                               WITNESSES

Leppo, Mr. Dale, Chairman, Leppo Rents/Bobcat of Akron, 
  Tallmadge, OH, On behalf of the Associated Equipment 
  Distributors...................................................     3
Puffer, Mr. John, Chairman and President, Pilot Bank, Tampa, FL, 
  On behalf of the Independent Community Bankers of America......     4
Robson, Mr. Joe, Robson Companies, Broken Arrow, OK, On behalf of 
  the National Association of Home Builders......................     6
Helsel, Jr., Mr. James L., RSR Realtors, Lemoyne, PA, On behalf 
  of the National Association of Realtors........................     8
Engelhardt, Dr. Gary V., Professor of Economics, Maxwell School 
  of Citizenship and Public Affairs, Syracuse University, 
  Syracuse, NY...................................................    10

                                APPENDIX


Prepared Statements:
Velazquez, Hon. Nydia M............................    25
Chabot, Hon. Steve...............................................    27
Altmire, Hon. Jason..............................................    28
Leppo, Mr. Dale, Chairman, Leppo Rents/Bobcat of Akron, 
  Tallmadge, OH, On behalf of the Associated Equipment 
  Distributors...................................................    29
Puffer, Mr. John, Chairman and President, Pilot Bank, Tampa, FL, 
  On behalf of the Independent Community Bankers of America......    35
Robson, Mr. Joe, Robson Companies, Broken Arrow, OK, On behalf of 
  the National Association of Home Builders......................    44
Helsel, Jr., Mr. James L., RSR Realtors, Lemoyne, PA, On behalf 
  of the National Association of Realtors........................    54
Engelhardt, Dr. Gary V., Professor of Economics, Maxwell School 
  of Citizenship and Public Affairs, Syracuse University, 
  Syracuse, NY...................................................    69

                                  (v)






 
                     FULL COMMITTEE HEARING ON THE
                    HOUSING CRISIS: IDENTIFYING TAX
                      INCENTIVES TO STIMULATE THE
                                ECONOMY

                              ----------                              


                         Thursday, June 5, 2008

                     U.S. House of Representatives,
                               Committee on Small Business,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 10 a.m., in Room 
1539, Longworth House Office Building, Hon. Nydia M. 
Velazquez [Chair of the Committee] Presiding.
    Present: Representatives Velazquez, Gonzalez, 
Altmire, Ellsworth, Akin, Davis and Fallin.

    OPENING STATEMENT OF CHAIRWOMAN VELAZQUEZ

    Chairwoman Velazquez. Good morning. I now 
call this hearing to order on The Housing Crisis: Identifying 
Tax Incentives to Stimulate the Economy.
    Today our Nation is faced with serious threats to its 
economic stability. In recent months we have witnessed 
skyrocketing gas prices, rising food costs and a weakened U.S. 
dollar. This and other factors have combined to put a strain on 
America's ability to make ends meet in an uncertain economic 
environment.
    One area of our economy enduring particularly harsh 
challenges is the housing sector. Housing starts are down more 
than 60 percent since 2005. There has been a sharp decline in 
buyers, and there is now an 11-month supply of newly 
constructed homes on the market, almost double the normal 
amount. As a result, following more than 13 years of increases, 
home values are declining. In the last quarter prices fell by 
an annual rate of nearly 7 percent. And with the subprime 
crisis persisting, there is little hope of a quick turnaround. 
All of these factors have led to record foreclosures and could 
cost some 3 million American families their home.
    The situation poses a great threat to the Nation's housing 
sector, a vital part of our economy. Some estimate that it 
comprises as much as 10 percent of the U.S. gross domestic 
product. As a result, it is not hard to see the drag it can put 
on our Nation's overall growth.
    Just yesterday Fed Chairman Bernanke stated that until the 
housing market, and particularly housing prices, show signs of 
stabilizing, growth will remain to the down side.
    As the housing industry is dominated by small firms, this 
Committee has a particular interest in these issues. Home 
building, realty, lending and other related businesses are all 
proven job creators. However, with the drop in sales and little 
construction, many small employers have been forced to reduce 
staff or go out of business altogether. In fact, since February 
of 2006, the homebuilding sector has lost almost 500,000 jobs.
    One of the best avenues to boost this sector is through 
targeted tax relief. Tax incentives for affected industries 
could provide immediate benefits to millions of small 
businesses. This hearing will give the Committee the 
opportunity to evaluate some of these tax measures and how they 
can best assist the struggling housing sector.
    As this is a multifaceted problem, it is critical to look 
at all angles in identifying solutions. For the current crisis 
there needs to be an examination of how policies will affect 
the consumers, lenders and the homebuilding industry. Today the 
Committee will look specifically at a number of tax reforms 
included in legislation passed by the House and the Senate. 
These include the first-time home buyers tax credit, increasing 
the low-income housing tax credit, and extending the years 
companies can carry back losses. Each of these proposals 
tackles the problems in a different way. We will consider how 
and if these policies can lead to a more robust housing market 
while avoiding the pitfalls that created the problem in the 
first place. This approach can play a significant role in 
halting job losses and creating high-paying jobs. In the end it 
can not only help small businesses and homeowners, but the 
economy as a whole.
    I would like to thank all the witnesses for taking time out 
of your busy schedule to be with us this morning, and I now 
yield to the Ranking Member--representing Mr. Steve Chabot, Mr. 
Davis, for his opening statement.

                 OPENING STATEMENT OF MR. DAVIS

    Mr. Davis. Thank you, Madam Chairwoman. Ranking Member 
Chabot will join us shortly, and he will give his opening 
statement at that time. In the meantime I have a brief opening 
statement.
    Madam Chairwoman, I appreciate you holding this hearing on 
tax incentives to stimulate the housing sector. We are in an 
economic downturn, and the economic market is lagging, we all 
know that. Housing prices are down, and sales volumes are 
depressed. Although Congress has passed economic stimulus 
legislation, it is useful for us to consider other incentives 
to help the housing industry and its related sectors.
    I look forward to hearing the testimony from our witnesses 
today. And again, Madam Chairwoman, I thank you for holding 
this hearing, and Ranking Member Chabot will be with us soon. 
Thank you. I yield back.

    Chairwoman Velazquez. Thank you, Mr. Davis. 
And now it is my pleasure to welcome Mr. Dale Leppo. Mr. Leppo 
is the Chairman of Leppo, Inc., from Ohio. Leppo, Inc., has six 
company construction equipment dealerships located throughout 
northeast Ohio. Mr. Leppo will be testifying on behalf of 
Associated Equipment Distributors. AED is an international 
trade association representing 750 companies involved in the 
distribution, rental and support of equipment.
    Welcome, and you will have 5 minutes for your opening 
statement.

 STATEMENT OF MR. DALE LEPPO, CHAIRMAN, LEPPO RENTS/BOBCAT OF 
 AKRON, TALLMADGE, OHIO, ON BEHALF OF THE ASSOCIATED EQUIPMENT 
                          DISTRIBUTORS

    Mr. Leppo. Good morning, and thank you, Chairwoman 
Velazquez and Congressman Davis and other 
distinguished members of the House Small Business Committee. My 
name is Dale Leppo, and it is my pleasure to come before you 
today both in my capacity as a small business owner and as a 
spokesman for my industry.
    As the Chairwoman mentioned, I am Chairman of Leppo Rents/
Bobcat of Akron. We are a third-generation family-owned company 
that sells and rents construction equipment in northeast Ohio. 
I am also the 2008 chairman of the Associated Equipment 
Distributors Governmental Affairs Committee. We have, as the 
Chairwoman mentioned, hundreds of members across the country, 
and approximately 48 percent of our distributor members report 
annual revenues of under $10 million, so we are a small-
business organization.
    Since mid-January, AED has urged Congress to enact a home 
purchase tax credit to stimulate the residential real estate 
market. We are pleased that both the House and Senate have 
passed legislation in this area; however, given signs that the 
residential real estate crisis is getting worse, AED is urging 
that the tax credit be expanded in conference beyond what has 
passed the House and Senate.
    Specifically we recommend that Congress adopt a $7,000 home 
purchase tax credit for individuals and couples regardless of 
income level who purchase any primary residence between June 
30th and December 31, 2008. Why? Because the excess housing 
inventory on the market today has to be sold before the 
residential construction industry can resume its normal 
activity level.
    I would like to emphasize three points from my written 
testimony. First, the housing crisis is getting worse, not 
better. Last week the Bureau of Economic Analysis reported that 
home purchasing fell 25.5 percent in the first quarter of 2008. 
Consumer confidence has fallen to a 16-year low, and analysts 
have cited the housing market along with higher food and fuel 
prices as a primary cause of consumer pessimism.
    My second point is that in addition to the overall impact 
on the national economy, the downturn of the housing market is 
also having a direct effect on the small-business-dominated 
construction and construction equipment distribution 
industries. Ninety-three percent of AED's members say that the 
housing slump has had an impact on their companies, and close 
to half saying that it has had a major impact. For example, in 
northeast Ohio, compact equipment sales have dropped 46 percent 
since 2005, and over the last year alone the skidster market is 
off 31 percent, and the miniexcavator market is off 41 percent.
    From the ground it is easy to see that the cause of the 
sharp decline in these equipment markets is a slowdown in 
residential construction. The fact that too many houses are 
sitting empty without buyers has led to a significant drop in 
new housing starts. As a result my customers, homebuilders and 
others, are going out of business, equipment distributors are 
closing branches, we are having to repossess equipment from 
nonpaying customers, and overall business activity in the 
construction industry is down.
    Based on discussions with my colleagues around the country, 
I believe that every one of you on this Committee has small 
construction industry companies in your districts facing the 
same challenges that we are.
    My third and final point is that a temporary broadly based 
home purchase tax credit is an effective way for Congress to 
address the housing market crisis. It would stimulate demand 
and slow the decline in home values, thus addressing a major 
economic worry and contributor to consumer pessimism. It would 
bring stability and confidence to the housing market, thereby 
speeding economic recovery. It would help make homes more 
affordable by effectively putting cash in the pockets of home 
purchasers, and the benefit of a home purchase tax credit would 
go directly to the individuals and families who buy homes.
    America is facing an economic crisis unlike any in a 
generation. While other recent economic slowdowns have been the 
result of one or two factors, the U.S. economy is now facing a 
number of challenges at once: a residential real estate slump, 
escalating oil and food prices, consumer credit prices and a 
weak dollar. Of all these, Congress is best positioned to 
address the residential real estate crisis, and we feel the 
most effective way to do so is through a home purchase tax 
credit. I therefore urge you on behalf of the construction 
industry and small businesses throughout the country to work 
with your colleagues to expand the home purchase tax credit in 
conference and enact it quickly into law.
    Thank you for holding this hearing on such an important 
issue, and we look forward to working with you and your 
colleagues.
    [The prepared statement of Mr. Leppo may be found in the 
Appendix on page 29.]

    Chairwoman Velazquez. Thank you, Mr. Leppo. 
Our next witness is Mr. John Puffer, III. He is chairman and 
president of Pilot Bank, a community bank in Tampa, Florida. 
Founded by Mr. Puffer in 1987, the bank's core customers are 
small business owners and their employees.
    Mr. Puffer will be testifying on behalf of Independent 
Community Bankers of America. ICBA is the Nation's voice for 
community banks with nearly 5,000 members.
    Welcome.

  STATEMENT OF MR. JOHN PUFFER, III, CHAIRMAN AND PRESIDENT, 
   PILOT BANK, TAMPA, FLORIDA, ON BEHALF OF THE INDEPENDENT 
                  COMMUNITY BANKERS OF AMERICA

    Mr. Puffer. Good morning. My name is John Puffer, and I am 
chairman and president of Pilot Bank in Tampa, Florida.
    Chairwoman Velazquez, Ranking Member and 
members of the Committee, I am pleased to be testifying today 
on behalf of the Independent Community Bankers of America. ICBA 
applauds the Committee for examining the tax changes, can help 
the troubled housing sector and boost small business and the 
economy. ICBA represents 5,000 community banks throughout the 
country with 180 community bank members in Florida. Since Pilot 
Bank was started in 1987, it has grown to more than $240 
million in assets and currently serves more than 15,000 
customers. We pride ourselves on small business relationships 
and are proud to support our local communities in the Nation's 
economy.
    Housing market woes still plague the entire U.S. economy. 
The housing troubles are particularly acute in my State of 
Florida. Restoring confidence in the housing market is vital to 
restoring economic growth.
    While it is true that some regions of the country witness 
unsustainable price appreciation and speculative buying, the 
weakness in housing is widespread. Recent official data showed 
home prices dropping in 43 States in the first quarter of 2008. 
Nationwide nearly 1 in every 194 households received a 
foreclosure filing in the first quarter. In my home State of 
Florida, the State recorded more than 87,000 properties in some 
state of foreclosure, or 1 of every 97 households in the first 
quarter of this year. This is 178 percent higher than the same 
period a year ago.
    Large financial institutions in general have already 
experienced $379 billion in asset write-downs and credit losses 
since the start of 2007. This is impairing lending to small 
business and exacerbating the economic downturn.
    Community banks represent the other side of the financial 
story. Community bankers live and work in towns they serve and 
do not put their customers or neighbors in loan products they 
could not possibly repay. Community banks did not cause the 
current turmoil in the housing sector, but are well positioned, 
well capitalized and willing to help. At Pilot Bank we are 
currently looking at additional mortgage opportunities as 
homeowners seek loans in a difficult credit market.
    While economists debate the chances of the Nation slipping 
into recession, severe housing market declines have already 
caused a recession in many States. Notably States like 
California, Nevada, Florida, Michigan and Ohio have all 
witnessed dramatic declines in their housing markets and 
associated economic decline.
    Responding to a slowing economy, ICBA was out front in 
early January with a nine-point economic stimulus plan focused 
on communities and small business needs. Because the troubles 
in the subprime mortgage markets quickly spread to the entire 
housing sector and broad credit markets, the ICBA included a 
targeted home buyer tax credit as the first item in its 
proposed stimulus plan. The ICBA's economic stimulus plan 
recommends a $5,000 first-time home buyer Federal tax credit 
for 1 year in order to jump start home sales, reduce unsold 
inventories and stabilize home prices and foreclosures. A 
first-time home buyer's tax credit would provide a reasonable 
incentive for potential qualified buyers to get off the 
sidelines and to take advantage of low interest rates and the 
temporary tax break to purchase a home. Stabilizing home prices 
will lower mortgage refinancing qualification hurdles as well 
and help to keep more people in their homes. ICBA is pleased to 
see a home buyer tax credit advancing in both the House and the 
Senate.
    We commend recent House and Senate legislation to address 
the foreclosure problem with a voluntary program. ICBA supports 
the additional tax provisions in H.R. 3221, including allowing 
the Federal home loan banks to guarantee community bank letters 
of credit to enhance local government bonds; an additional 
standard deduction for State real property taxes; allowing a 
temporary increase in State mortgage revenue bond authority. 
ICBA also supports proposals for increasing the GSE conforming 
loan limit for high-cost housing areas. All these targeted 
housing incentive proposals would help to stem the ongoing 
decline in the housing sector.
    Housing activity had peaked nearly 3 years ago, and since 
home sales have fallen nearly 40 percent, housing starts more 
than 60 percent, and home prices some 15 percent, it is urgent 
that more be done on the fiscal policy front to address 
housing. ICBA believes a sharp decline in real estate values 
must be addressed before genuine stability can be achieved in 
the broad credit markets and economy. The road to economic 
recovery must go through housing. Community banks like Pilot 
Bank are well positioned and prepared to help.
    I appreciate the opportunity to testify today on behalf of 
the Independent Community Bankers of America. Thank you.
    [The prepared statement of Mr. Puffer may be found in the 
Appendix on page 35.]

    Chairwoman Velazquez. Thank you, Mr. Puffer. 
Our next witness is Mr. Joe Robson. He is the founder and 
president of Robson Companies. Robson Companies are developers 
of residential communities and commercial properties in Tulsa, 
Oklahoma. He is also the 2008 first vice president of the 235-
member National Association of Home Builders. NAHB is a trade 
association that helps to promote the policies that make 
housing a national priority.
    Welcome.

 STATEMENT OF MR. JOE ROBSON, ROBSON COMPANIES, BROKEN ARROW, 
    OKLAHOMA, ON BEHALF OF THE NATIONAL ASSOCIATION OF HOME 
                            BUILDERS

    Mr. Robson. Thank you, Chairwoman Velazquez, 
Congressman Davis and other distinguished members of the 
Committee. My name is Joe Robson, and I am a builder and 
developer from Tulsa, Oklahoma, and, again, the 2008 first vice 
president of the National Association of Home Builders.
    And, Madam Chairwoman, what you said in your opening 
statement is absolutely true. The housing crisis is at the core 
of the Nation's economic struggle and places increasing stress 
on homeowners, State and local governments, and those 
industries connected to housing. Unfortunately, small 
businesses, which comprise the majority of the homebuilding 
industry, are particularly hard hit by this downturn. Housing 
starts are down by more than 60 percent from 2005, job losses 
are accelerating, and many homebuilders are reporting 
substantial financial losses.
    NAHB testified in front of this Committee previously about 
the drastic steps that small business owners are taking to 
generate capital and to keep their businesses solvent, 
including laying off workers, and, despite the tax 
consequences, accessing personal retirement funds. For the 
broader economy, if housing prices continue to fall, household 
consumption will decrease as household wealth declines. 
Mortgage accessibility will continue to be a challenge, and 
mortgage foreclosures will continue to surge.
    America's small business owners are struggling to keep 
their heads above water. The time for targeting housing 
stimulus has come. NAHB appreciates the efforts by this economy 
and Congress to address the housing crisis and economic 
downturn; however, we respectfully ask you to go further. Both 
the House and Senate have taken important steps towards 
crafting a stimulus package targeting at housing, and we urge 
Congress to finish the work as soon as possible.
    As we outline in our written statement, we believe a home 
buyer tax credit is a key ingredient in any final housing 
stimulus compromise between the House and the Senate. NAHB 
applauds the House for including a temporary home buyer tax 
credit in H.R. 3221. Under this model first-time home buyers 
would receive a $7,500 refundable tax credit for the purchase 
of any home to be used as a principal residence. A tax credit 
of this nature would reduce excess inventory and relieve 
pressure on falling home prices by ending the waiting strategy 
of some potential buyers. Furthermore, it would go a long way 
to restore confidence in the housing market for homeowners, 
home buyers and financial institutions, mitigating many 
elements of the current crisis. We estimate that this credit 
could increase housing sales by hundreds of thousands of units.
    H.R. 3221 also includes a special allocation of mortgage 
revenue bonds. By expanding the MRB program and permitting 
States to use MRB proceeds to refinance troubled mortgages, as 
well as for new lending, communities across the Nation could 
see reduced numbers of foreclosures and stabilize local 
property prices.
    NAHB believes that modernizing the Nation's largest 
affordable-housing production program, the low-income housing 
tax credit, is an important additional component for economic 
stimulus. Additionally, construction of affordable housing has 
a direct stimulative effect in terms of job creation, local 
taxes, and wages and salaries paid.
    Finally, the ability of homebuilders, large and small, to 
have the ability to claim and carry back net operating loss 
deductions to years when significant taxes were paid is very 
important. Without this additional financial tool, businesses 
will be forced to increase borrowing or liquidate land and 
homes, only compounding the existing inventory problem and 
prolonging the housing crisis.
    On behalf of NAHB's members, thank you for your efforts to 
stimulate the housing sector and help turn around our 
struggling economy. We look forward to working with this 
Committee as the process continues, and I thank you for the 
opportunity to testify today.
    [The prepared statement of Mr. Robson may be found in the 
Appendix on page 44.]

    Chairwoman Velazquez. Thank you, Mr. Robson. 
Our next witness is Mr. James L. Helsel. Mr. Helsel is a 
partner with RSR Realtors, a full-service real estate company 
in Harrisburg. He also serves as 2008 treasurer of the National 
Association of Realtors. Founded in 1908, NAR is America's 
largest trade association, representing more than 1.3 million 
members involved in all aspects of the residential and 
commercial real estate industries.
    Welcome.

 STATEMENT OF MR. JAMES L. HELSEL, JR., RSR REALTORS, LEMOYNE, 
PENNSYLVANIA, ON BEHALF OF THE NATIONAL ASSOCIATION OF REALTORS

    Mr. Helsel. Thank you, Madam Chairman and other 
distinguished members of the Committee. My name is Jim  Helsel, 
and I am here in my capacity as the elected treasurer of the 
National Association of Realtors. NAR has 1.25 million members 
engaged in every aspect and facet of the real estate industry. 
I am also a partner in the full-service real estate brokerage 
known as RSR Realtors in Lemoyne, Pennsylvania. Thank you for 
this opportunity.
    The ugly dimensions of the housing crisis have been covered 
extensively in the media. Despite today's challenges, it is 
still true that more than 90 percent of homeowners are current 
on their mortgages. Generally their mortgages are not under 
water. Home values continue to appreciate in about one-third of 
the U.S. markets and in even more neighborhoods.
    The decline in property values has not changed Americans' 
basic perception that home ownership is good for families and 
good for communities. Our members continually report that 
traffic at open houses and property showings have been steady 
enough, but that a "no thanks, just looking" mentality 
dominates. The "just looking" comment is really a code for how 
low will prices go and how long will it take before they decide 
to make a decision.
    In February, some of NAR's current and former tax committee 
leaders met to explore approaches that might help to create a 
floor on the market prices. Their discussion included property 
tax holidays, special property tax deductions, tax-exempt 
bonds, investor incentives and a home buyer tax credit. They 
easily agree that the most beneficial incentive will be a 
temporary tax credit that will change a "just looking" mood to 
"I am ready to buy." Part of the support for a home buyer 
credit was based on the success of a 1975 temporary tax credit 
designed to clear an oversupply of newly constructed homes 
during an economic downturn back then.
    We note three critical features for an optimal home buyer 
tax credit. First, it would apply to all residential real 
estate, not solely foreclosed properties. Second, a temporary 
credit would assure that prospective purchasers would have to 
act within a relatively short time. Third, the House-imposed 
income limits should be increased, particularly for single 
individuals. After all, there is no difference between the 
purchasing power of a single individual or a married couple 
with the same amount of income. Moreover, housing policy seems 
inconsistent when current law offers higher FHA or conforming 
loan limits to borrowers in high-cost housing areas, but then 
makes them ineligible for a tax credit because of income 
limits.
    We urge Congress to move quickly to conference and to final 
passage of this tax incentive. Failure to act quickly could 
further stall the market as prospective purchasers wait to see 
if they will qualify for the benefit.
    More information and further detail about the tax credits 
are provided in a chart attached at the end of our written 
testimony.
    The housing crisis is not limited to homeowners and buyers 
and sellers. It also affects individuals who work in any facet 
of the real estate business. We want to note for the record 
that many of our own members and other self-employed folks, 
such as carpenters, landscapers and other construction workers, 
will not receive the $600 stimulus package check this year.
    NAR's real estate sales agent members are compensated 
solely by commission, so when the number of sales declines 
along with the prices of properties, and commission income 
drops, by the time sales agents have to deduct their allowable 
expenses for 2007 real estate sales revenues, many had no net 
income in their 2007 1040 form. These folks won't get the kick 
of the $600 rebate until they file their 2008 tax returns in 
2009.
    We also want to talk about the small investor for a moment. 
The so-called small investor is a class of real estate owners 
that has all but disappeared. We need to bring these people 
back to the market. These are individuals who might own one or 
two single-family homes or condos that they offer for rent.
    Their reason for disappearance traces back to the 1986 Tax 
Reform Act. In 1986, Congress enacted the so-called passive 
loss rules to shut down abusive, syndicated, tax-shelter 
projects that were marketed for their tax benefits rather than 
for the appreciation and income stream these investments 
provided. The passive loss rules included an exemption to 
assure that individuals with moderate incomes could continue to 
invest in real estate as individual owner-landlords. The 
exception criteria were expressed in dollar amounts that were 
not indexed to inflation. Individuals earning less than 
$100,000 qualified to take advantage of this exception.
    In 1986, the median price for a home was $72,000, much less 
than the $100,000 investor threshold. Today the median price 
for homes hovers at about $200,000, but the investors' income 
threshold is still $100,000. Had the limits for the small 
investor exception been indexed for inflation, individuals with 
an income of nearly $185,000 could more readily invest in 
residential real estate. NAR urges Congress to adjust these 
thresholds for the passive loss exception and index them for 
inflation. The return of the small investor will no doubt help 
shrink the current overabundance in the real estate inventory.
    Our written testimony provides additional information on 
each of these matters. Thanks again for the opportunity to 
provide these thoughts. I look forward to answering your 
questions. Thank you.
    [The prepared statement of Mr. Helsel may be found in the 
Appendix on page 54.]

    Chairwoman Velazquez. Thank you, Mr. Helsel. 
And our next witness is Dr. Gary V. Engelhardt. Dr. Engelhardt 
is an associate professor in the economics department of the 
Maxwell School of Citizenship and Public Affairs at Syracuse 
University. Dr. Engelhardt's specialties are in the economics 
of aging, household savings, employer-provided pensions, Social 
Security taxation and housing markets.
    Welcome.

 STATEMENT OF DR. GARY V. ENGELHARDT, PROFESSOR OF ECONOMICS, 
  MAXWELL SCHOOL OF CITIZENSHIP AND PUBLIC AFFAIRS, SYRACUSE 
                 UNIVERSITY, SYRACUSE, NEW YORK

    Dr. Engelhardt. Thank you for inviting me. My views are my 
own and not those of Syracuse University.
    The current housing market challenges have led to call for 
new Federal legislation to stabilize the housing sector in the 
short run. The American Housing Rescue and Foreclosure 
Prevention Act, H.R. 3221, would expand housing tax incentives 
through a number of elements, the most important of which I 
view as being the refundable first-time home buyer tax credit, 
expanded temporary financing for the long-term housing tax 
credit for developers of affordable rental housing, and 
provisions for business income averaging through net loss 
carrybacks.
    My written testimony analyzes the desirability of each of 
these elements in detail, but let me give you my overall 
assessment, and that is because of the interplay between 
financial markets and financial market regulatory policy and 
Federal Reserve policy which result in economic adjustments 
that occur with greater speed than most tax-based policies, my 
overall assessment is that new tax incentives for housing are 
not an attractive solution to problems in the housing sector in 
the near term.
    In particular, tax changes are best designed to promote 
long-run growth. Effort is probably better spent on considering 
tax changes that would broaden the tax base, level the playing 
field, reduce tax rates and reduce complexity, allowing for 
improved long-run functioning of the economy and future revenue 
needs. To the extent that a definite need for additional 
preferences for housing is identified, new tax incentives 
should be specifically targeted to those that generate new 
investment and personal saving.
    Now, for the remainder of my time, I want to focus my 
comments on the first-time home buyer credit, which everyone 
seems to be very interested in. And this credit, which would be 
available to first-time home buyers with adjusted gross income 
of $70,000 or less if single, or $140,000 or less if married, 
is an important employment of this package. We know relatively 
little about the potential impact of these credits, so what I 
have done is I have analyzed a similar policy, which is the 
Federal tax credit for first-time home buyers in the District 
of Columbia that was first enacted in 1997.
    The D.C. Credit has had an important impact on the housing 
market in the District. Estimates suggest that housing capital 
gains were almost 5  percentage points higher in the District 
relative to five  comparison areas. Those comparison areas are 
Arlington and Fairfax Counties in Virginia, Prince George's in 
Montgomery County in Maryland, and Alexandria City. In 
addition, it has had important effects in the short run, 
defined as the first 4 years of the program, in the 
construction sector in the District. In particular, the number 
of business establishments in the construction sector rose 20 
percent. Total employment in the construction sector rose 30 
percent. The average annual pay for individuals employed in the 
construction sector in the District rose 9 percent. And 
importantly, most of the gains in business establishments were 
among small businesses. Finally, building permits more than 
doubled. So it appears that the D.C. Credit was an unqualified 
success in terms of promoting the housing market and 
construction sector activity here in D.C.
    That said, I think there are reasons to be somewhat less 
optimistic about the impact of a national credit. In 
particular, a national credit may be less effective in bringing 
home buyers into the market for a number of reasons. First, 
home buying is not a snap decision. It involves a set of long-
run trade-offs, some of which are not credit-related, including 
things like prospects for future income growth and uncertainty 
about job stability. And secondly, the tax credit is designed 
to be temporary, and this might actually exacerbate problems in 
the medium term.
    The idea is as follows. First of all, if you give a 
temporary credit now, you will bring buyers into the market, 
but who are those buyers? Some of those buyers might have been 
individuals who were going to buy a couple years down the road. 
So all you have done is you have shifted the total number of 
home purchases towards the present so that the current stimulus 
comes at the cost of future growth.
    Finally, and this is very important, is that the Federal 
credit of $7,500 sounds like a lot of money, but it is actually 
only one-quarter as generous as the District credit, and it is 
available to a smaller segment of the market. This substantial 
reduction in generosity and breadth of the credit will result 
in far less take-up of the credit on a national basis and hence 
far less housing sector stimulus.
    Thank you.
    [The prepared statement of Dr. Engelhardt may be found in 
the Appendix on page 69.]

    Chairwoman Velazquez. Thank you. I would like 
to address my first question to Mr. Robson. In your testimony 
you mention the importance of a first-time buyer's credit. And 
out of all the problems facing your industry, from excess 
inventory to declining home values, to increased foreclosures, 
what specifically about the first-time home buyers credit will 
motivate people to buy a home and boost consumer spending?
    Mr. Robson. I think there are a couple of reasons. One, 
sitting in a sales office in Tulsa, Oklahoma, we see people 
coming in all the time that are just waiting. They are ready to 
buy a house. They just need that extra push to get them to do 
it. Part of it, frankly, is they read every day in the paper 
that maybe Congress is doing something, that maybe there will 
be a credit out there, there may be a special program. And I 
think there are people that are sitting on the sidelines, 
frankly, that are doing that.
    Secondly, even discounting that part of it, in a lot of 
markets there is simply no bottom to the market because of 
foreclosures, because of the overhang in inventory, and there 
needs to be a solidifying of the bottom of the market, 
otherwise there just continues to be--I think the tax credit, 
frankly, will go a long way to doing that, and it happened in 
the mid-1970s very successfully.
    Chairwoman Velazquez. We have two different 
versions; the one in the Senate, the one in the House of 
Representatives. Is there a magic number that you think will 
really motivate more buyers?
    Mr. Robson. I am not sure I have a magic number. I think 
there are three main principles for it to work: One, having as 
large a tax credit as possible, as far as a dollar amount; 
having the broadest pool of homes that would qualify; and 
thirdly, it needs to be temporary so that there is some sort of 
incentive to get people back into the market. I think with 
those three it would be successful.
    Chairwoman Velazquez. Mr. Helsel, we know 
that the membership in the real estate realtors have increased 
by almost 500,000 from the year 2002 to 2006, and we know that 
many real estate companies and agents are small businesses. How 
has the housing crisis affected entrepreneurial opportunities 
for those in your industry? And is it fair to say that many 
real estate agents have either lost their job or taken a second 
job to make ends meet?
    Mr. Helsel. It is actually very fair to say that, Madam 
Chairwoman. And I can tell you in my own company, and we are 
roughly a 60-agent company, we have lost about 15 or 17 people 
who have either literally gone out of business or who have 
taken a second job to supplement their income, because the 
housing market has slowed down to the point where they just 
can't support themselves the way they thought they could 
before. So that is very true.
    Chairwoman Velazquez. Mr. Leppo, could you 
tell me the effect that is felt by communities and other small 
companies if businesses like the one that you represent 
experience a slowdown? Can you talk about the domino effect of 
other businesses that rely on the housing industry?
    Mr. Leppo. I can think of two right off the top of my head. 
One is--and I will just use our company as an example--we have 
significantly reduced our advertising spending this year. That 
is money that comes out of something you really wouldn't think 
is associated to housing, but it reduces the income of a lot of 
those advertising companies in our area. And another kind of 
ancillary effect is we normally buy between two and six pick-up 
trucks a year for our own transportation needs, and so far in 
2008 we have bought zero and plan to buy zero. So then that 
ripples through both the local truck dealer, but also through 
the manufacturers and the people who provide product support 
for those vehicles.
    Chairwoman Velazquez. Mr. Puffer, along with 
the housing boom, there was also a tremendous growth in home 
equity lines, and homeowners took out loans for everything from 
home improvements to paying bills. Can you talk about the 
trends that the lending industry has seen in the demand for 
these loans, and how have declining home prices affected the 
ability of homeowners to secure home equity lines of credit?
    Mr. Puffer. I will be happy to, Chairwoman 
Velazquez.
    With respect to what has occurred in the ability to provide 
home equity lines of credit, the decline in house prices has 
had a tremendous negative effect, because it has in many case 
eliminated equity, particularly for homeowners who purchased in 
recent years. And the regulatory structure is such that it is 
not possible for banks to loan money without equity.
    The second factor is that there have been two approaches to 
home equity lines of credit, and I am proud to say that 
community banks have always used good underwriting standards 
and not encouraged homeowners to borrow more than is 
appropriate. You don't see community banks lending 125 percent 
of the value of the homes and increasing the economic turmoil.
    Chairwoman Velazquez. Thank you.
    Dr. Engelhardt, you noted that home buyers will simply not 
be enticed to purchase a home because of the first-time buyer 
credit. However, when this country was faced with excess 
housing inventory during the mid-1970s, a $2,000 credit was 
passed, and nearly 500,000 people used the tax credit. Doesn't 
this provide evidence that such a tax credit could incentivize 
certain individuals?
    Dr. Engelhardt. 1975 was a long time ago.
    Chairwoman Velazquez. 1970.
    Dr. Engelhardt. 1970. Even longer. So first of all, I think 
that evidence is probably a little bit dated. The housing 
market was quite different. The financial markets were 
extremely different in terms of the ability to get mortgage 
credit. So I am not sure that that experience translates to 
what we would see today.
    Chairwoman Velazquez. I am sorry, you said 
that the economic environment was different?
    Dr. Engelhardt. Absolutely.
    Chairwoman Velazquez. But if I recall, or 
based on what I have read about the 1970s, we faced high 
inflation, didn't we, gas prices, and we had an excess housing 
inventory? So is there some similarities?
    Dr. Engelhardt. Yes, there are some similarities, but there 
are a lot of differences on the financial side. And a lot of 
the current problems are propagated by problems in the 
financial sector, so there are some important differences.
    I think one of the key differences is you have to ask 
yourself do we really think that there is a large pool of 
potential first-time home buyers out there who already haven't 
bought homes in the last decade through all the other 
initiatives that have gone on, Federal initiatives especially? 
Is there a large army out there of potential buyers? It is not 
clear to me that there are.
    I think the long-run demographics are quite favorable 
actually for the housing and construction sector, because you 
have got the baby boomers aging into older housing needs that 
will need to be addressed, and then you have got their children 
who are currently in college that will be aging into the first-
time buyer market in the next decade. I think those 
demographics are very favorable.
    But right now it seems to me that it is unlikely that there 
is a large army out there of potential individuals that would 
come in that are in addition to those who would otherwise come 
in in a couple of years, so that, again, short-run stimulus 
might come at the cost of medium-run or long-run growth in the 
first-time home buyer market.
    Chairwoman Velazquez. Mr. Robson, I would 
like to hear your comments on this matter.
    Mr. Robson. Well, actually about 40 percent, or at least 
our analysis show about 40 percent of all new homeowners every 
year are first-time home buyers. So I think that kind of flies 
in the face of Dr. Engelhardt's comments. I am not sure whether 
the realtors have that data, but they are simply not in the 
market right now. As someone that goes to a sales office every 
day, and we do sell to some first-time home buyers, they are 
waiting, they are waiting on the sidelines.
    Chairwoman Velazquez. Dr. Engelhardt, do you 
think that or would you agree that there will be some buyers on 
the margins who will purchase a home because of the credit?
    Dr. Engelhardt. Yes, there will be some. The question is 
whether there will be enough. The key is what fraction of the 
total number of homeowners are first-time buyers. It is true 
that of the fraction of buyers, first-time buyers are a large 
fraction. But of all homeowners, first-time buyers are a very 
small fraction. And if these housing market problems are 
widespread, there are marketwide problems that are affecting 
all homeowners, or at least all homeowners with mortgages. That 
is a much, much larger group than just the narrow slice of 
first-time buyers. And the question is can the activity of just 
the first-time buyers, that narrow slice, be enough to support 
or prop up what seems to be a very strong marketwide 
phenomenon?
    You are talking about a situation, and you have to ask 
yourself, in places like--nationally prices have declined 14 
percent in the last year, and in hard-hit areas like California 
and Florida, do we really believe that a small slice of the 
market coming in, like first-time buyers, will really prop up 
price declines at 14 percent or more? I just don't think that 
that is a realistic scenario. It is going to help, but will it 
help enough? And what are the trade-offs, what are the other 
things that can be done? And those are the key questions.
    Chairwoman Velazquez. Mr. Davis.
    Mr. Davis. Thank you, Madam Chairwoman.
    Mr. Robson, I would like to start with you. NAA economist 
David Sodders has said that the biggest economic boost for the 
buck would be to provide a temporary home buyer tax credit. 
Would you elaborate on why you think this credit provides the 
most positive effect?
    Mr. Robson. I think it kind of relates to my earlier 
answer. When you look at the markets, because of foreclosures, 
and every time a foreclosure happens, there is about a 30 
percent discount that happens because of the whole process. So 
you have got just this multilayer of foreclosure and 
overhanging inventory, and simply nobody knows when to get in. 
They don't want to buy a house today if they can buy it cheaper 
a month from now or 2 months from now, and that is the 
psychology that is going into the market right now.
    There are a lot of people that can qualify for homes and 
are looking. Actually, people coming through sales offices are 
up in a lot of markets, but their sales are down. So people are 
looking. It is simply a matter--and that is what the tax credit 
would do. If it is a limited time, it gets people off the dime 
and gets them possibly to buy a home.
    Mr. Davis. So you think a limited tax credit so people know 
you have got to do it between now and now so you get into the 
market, you make the decision and sign your name?
    Mr. Robson. Right. Yes, sir. And frankly, it ought to be 
long enough to go into kind of next year's prime selling season 
in the spring.
    Mr. Davis. Okay. How would the opportunity to carry back 
net operating losses to years as soon as taxes were paid help 
the homebuilders?
    Mr. Robson. Well, it would help everybody. I think there is 
a lot of misconception about that, that this is just something 
for the big guys or big business or small business. But the 
fact is if you look at IRS analysis, most losses that are filed 
are on individual returns from pass-throughs through small 
business, sole proprietorships, partnerships and that sort of 
thing. And what we are really doing is--I mean, there is ways 
of kind of stretching those out for a long period of time as 
far as losses going forward.
    This simply goes back in the years when they were paying 
taxes. It actually lets them recapture some of those, because 
frankly, especially on builders and that sort of thing, they 
have been having capital calls. I mean, there is a huge need 
for capital, and this is a source that they would be able to 
use to survive until they can start making profits again.
    Mr. Davis. If the Federal Government holds onto that money 
that you paid in in the good years, then in effect you would 
have to go back over to Mr. Puffer and borrow that money to 
continue to stay in business or go out of business; is that 
what I hear you saying?
    Mr. Robson. That's correct, sir.
    Mr. Davis. There is some talk in Washington about 
increasing the budget and suspending here in Washington. If 
that takes place, there is the potential that the 2001, 2003 
tax cuts would be eliminated, and that would put an extra 
burden of $2,000 per family in new taxes. What effect would 
that have on housing, in your opinion?
    Mr. Robson. Well, I think any new taxes in a down economy 
would probably not be very good. I haven't heard that 
particular proposal, and I am not an economist and a tax 
advisor, but as a businessman I don't think I would like it 
much right now. Of course, if you are not making any money, it 
doesn't matter, so--
    Mr. Davis. You don't pay taxes if you are not making it.
    Mr. Robson. That's right.
    Mr. Davis. Thank you.
    Mr. Puffer, I have been a small-business owner myself, and 
I have actually put my home up to start a small business. Can 
you tell me the effect that lowering equity in a home will have 
on small-business owners to go out there and take a risk and 
start new businesses to create the jobs that keep the American 
economy going?
    Mr. Puffer. Congressman Davis, it creates a real challenge 
for small-business owners. The focus of community banks is on 
lending to small businesses, and we often have the opportunity 
to make loans to relatively new businesses and certainly even 
start-up businesses, and good credit techniques require that 
lenders have collateral. And often equity in a home is the only 
collateral that someone has that is starting a business. So it 
is absolutely essential for the overall welfare of the economy 
to do something that stimulates the purchases of homes and 
turns around the decline in the housing industry.
    Mr. Davis. That independent Community Bankers Association 
has strongly supported a temporary, targeted first-time home 
buyer tax credit to jumpstart the home sales and stimulate our 
overall economy. As you noted in your testimony, there is a 
difference in the House version and in the Senate version. Can 
you tell me which would be best?
    Mr. Puffer. I am not sure that it is one or the other. A 
witness stated that there is magic to the number. I think the 
number has to be significant enough to be meaningful to 
encourage folks to buy. I am not an economist, but my 
observation is that so much of economics is psychological, and 
people need to have a reason in a down economy to consider to 
think that the opportunity is right, and one of the ways to do 
that is to have a targeted tax incentive. I also, and the ICBA 
agrees, that it should be of limited duration, long enough so 
that people can make buying decisions, but not so long that 
people will think that it is always available to them.
    Mr. Davis. Thank you.
    Mr. Helsel, I want to let you follow up on that, if you 
would. You say in your testimony that you think it should be 
temporary. Could you tell me why you think it needs to be 
temporary and how long temporary means to you?
    Mr. Helsel. First I would say, Congressman, that temporary 
to me would be probably not less than a year and probably not 
more than 18 months. For some of the similar reasons that have 
already been mentioned, we want it to stimulate the market; we 
don't want this to be an ongoing tax incentive. I don't think 
that solves the problem. The intent is to stimulate home 
buying. It is not to do anything more than that from a 
practical standpoint. If you leave it going forever, it doesn't 
stimulate people that get into the marketplace now, which is 
really what we want them to do.
    It is an interesting problem that we all have right now. If 
you really back up into things, it is a whole economic 
stabilization of the country. The housing market has led the 
economy for the past 7 or 8 years. And now we are at the lower 
end of that, and my own members are at the lower end of that, 
and we need to do something to restimulate not just the housing 
market, but the economy as well, and this does all of that.
    So the tax incentive is what I think everyone here at the 
table seeks. We may not all agree on how, Dr. Engelhardt has a 
different view, but I don't think anybody will disagree that 
the tax incentive is the right way to go. Short term is better 
than long term; 12, 15, 18 months. We want people to see it, 
know they have a short time to get in, begin the process and 
move forward from there.
    Mr. Davis. Thank you.
    Mr. Leppo, I am going to have you follow up on that. You 
said in your written testimony that the window of opportunity 
is narrow for enacting the first-time home buyer credit. Why do 
you believe it is essential to act now?
    Mr. Leppo. Well, this is an anecdotal piece of evidence, 
but last night I met a couple for the first time. The question 
was, why are you in town? I told them why I was in town; to 
promote this tax credit for home buying. And they said, we are 
poster children for what you are talking about. We want to buy 
a house, we are sitting on the sidelines, we are waiting to see 
a bottom, we are waiting to have a reason to buy a house.
    And to the message that several of other people have put 
out here, the market just continues to spiral in the wrong 
direction, and we need to create a bottom. And by bringing some 
of those people who are sitting on the sidelines in, I think we 
can create that bottom and then build up from that point.
    Mr. Davis. I think indeed it is important as a first-time 
home buyer credit that it is available to all regardless of 
income and applicable status of the home, new, existing, 
foreclosure, in order to maximize the credit's effectiveness. 
Please amplify on the need to have this credit applied broadly.
    Mr. Leppo. I will use another example of another tax 
incentive that has had a significant positive effect on our 
business, and that is the depreciation bonus. The depreciation 
bonus, when that was in effect earlier in this decade and now 
has been reinstituted in 2008, we have seen purchasing 
decisions by our customers driven by that tax incentive. And in 
the first pass of the depreciation bonus, we were concerned 
that when it was over, that buyers would be gone and there 
wouldn't be any buyers left. That is not what happened. It 
actually accomplished what both the Congress and we had hoped 
it would, which was to bring buyers into the marketplace, have 
them buy more equipment, increase the efficiencies of their 
companies, make them more productive. And so we think that it 
is a good way to create a stimulus for the entire economy.
    Mr. Davis. I asked a question earlier to one of the other 
witnesses about the potential for the 2001, 2003 tax cuts to go 
away and the potential for each family to have a burden of an 
extra $2,000. What effect do you think that would have on your 
business in particular and on the economy as a whole?
    Mr. Leppo. One of my concerns is that our costs of running 
our business are going up fairly significantly, and our 
revenues and ability to generate margin aren't. And that means 
that that is putting pressure on some of our coworkers from our 
ability to look at wage increases. My coworkers are seeing 
increased cost of fuel, increased cost of food, increased costs 
on them. One of the effects I see is that if we continue with 
the current economic slowdown for an extended period, they are 
buying--their discretionary income is going to significantly 
decrease, and that will just make the spiral continue because 
we can't raise their wages right now.
    Mr. Davis. Thank you.
    And, Dr. Engelhardt, in your written testimony you mention 
several guiding principles for any discussion of tax reform, 
including reducing complexity and generating stability. In your 
view, why are these principles so important?
    Dr. Engelhardt. Well, because Tax Code complexity imposes 
very substantial costs in terms of compliance and in terms of 
just understanding the Tax Code.
    Secondly, stability is very important. There has just been 
a tremendous increase in the reliance on sunsetting, and I 
think a lot of that has been driven by revenue concerns, and 
many of the provisions in H.R. 3221 would be sunset as well. 
And what sunsetting does is it creates uncertainty about where 
the Tax Code is going, and that uncertainty has some costs. 
Because a certain Tax Code that is stable provides a good 
environment for individuals and businesses to make wise 
decisions. And just even the questions you were asking about 
the previous tax cuts, that just creates a lot of uncertainty. 
So I would--you know, I would advocate for a decreased reliance 
on sunsetting and thinking more about permanent tax changes 
that make sense.
    Mr. Davis. Okay. One last question. Generally, what are the 
best short- and long-term solutions to help small businesses 
affected by the housing slowdown, in your opinion?
    Dr. Engelhardt. Well, I think the key is there are a number 
of things that the government can do. I am not saying the 
government should do nothing, but the question is whether tax 
policy is the right response. If a lot of the problems are 
caused because of problems in the financial markets, okay, why 
do we have--then maybe this should be addressed through 
financial market policies.
    For example, if we have a large inventory of homes that 
have been foreclosed upon, there are a couple ways to get rid 
of it. One is to have a home buyer tax credit or get more 
buyers in the market. The other is to just to try to prevent 
foreclosures, and there are a whole set of options on the 
financial side that could address that. And that would be 
probably much more widespread than targeting the thin part of 
the first-time home buyer market.
    Chairwoman Velazquez. Would the gentleman 
yield?
    Mr. Davis. I yield back.
    Chairwoman Velazquez. Would you support a 
regulation as a way to prevent foreclosure?
    Dr. Engelhardt. Changes on the financial side--
    Chairwoman Velazquez. Other side, let's put 
it that way.
    Dr. Engelhardt. Right.
    Chairwoman Velazquez. Better oversight.
    Dr. Engelhardt. Better oversight and changes on the 
regulatory side that would allow individuals to stay in their 
homes longer would I think provide a more effective bottom to 
the market in places that have been really hard hit and 
probably should have been done earlier in retrospect than it is 
now. But to prevent further damage I think that is potentially 
a better way in the short run to address the problem than 
through tax-based policies.
    Like I said in my testimony, tax-based policies are great, 
but they are kind of like the tortoise. They win in the long 
run. They are just not very good for managing short-run 
economic fluctuations.
    And I might add I am somewhat perplexed about the support 
for just a temporary home buyer tax credit. If a temporary home 
buyer tax credit is going to be so stimulative to bring home 
buyers in the market, why isn't there support for a permanent 
home buyer tax credit and just bring even more people in the 
market in the long run?
    So I think it is better if you use other policy tools to 
address these problems. These problems are real. I am not 
saying that they are not. But I think there are other tools 
available, and I think that tax policy is not the best tool.
    Chairwoman Velazquez. Thank you for yielding.
    Mr. Davis. I yield back.
    Chairwoman Velazquez. Mr. Gonzalez.
    Mr. Gonzalez. Thank you very much.
    I apologize for getting here so late, and I apologize to 
the witnesses. But thanks to the Chair for having this hearing.
    Our concern is always going to be the impact on small 
businesses. Dr. Engelhardt, I think you pointed out why are we 
doing this short-term if it is good? Why shouldn't we do it 
long-term? You are making way too much sense for Washington. 
There is a lot of truth to what you are saying.
    I guess my concern has always been that when it comes to 
vulnerability and such in economic downturns, it is all going 
to be small businesses that generally will not have the 
resources to last longer than, let's say, some of the bigger 
operations. It is just the way it is. And then you are caught 
in the middle of what has been basically the meltdown of our 
credit markets. When that happens, it is just not Bear Stearns, 
it is just not Citigroup, we are really talking about everyone 
that wants to go out there and borrow money and loans. So it is 
small businesses that have always had a hard time when it comes 
to access to capital that is really aggravated. And now it is 
crunch time, they probably need an infusion of resources, money 
and such to get over the hump with reduced sales, reduced 
products and services.
    Because the housing market is not what it used to be. We 
don't have the construction and all of that that it encompasses 
in the way of small businesses being very active, and what 
really propped up our economy for so long is no longer there.
    I will say this about the independent bankers: if our 
commercial and investment bankers had followed the good 
philosophies of our community and independent bankers, we 
wouldn't be in the situation that we are in.
    I am going to lead up to something, but we are trying to 
come up with something here, looking at the big picture. And 
hopefully it will pay dividends to the small businessman and 
woman in freeing up monies so that there are monies to be 
borrowed and loaned and such so they can survive the downturn.
    So some of this is somewhat temporary. And I guess what I 
wanted to--this is the way Representative Frank has 
characterized it, and I love the way he said it and I hope this 
does not offend anybody--the economy has been taken hostage by 
people that made some very bad decisions. The answer is to pay 
as little ransom as possible to the least ill-deserving people 
we can find. But that is the reality, I mean, and it is a sad 
state of affairs. But I think Chairman Frank and I think his 
piece of legislation is the best.
    I don't know eventually what we will end up with, but what 
we are trying to do is restore some value to people holding a 
bunch of paper out there. The administration believes it be can 
be done voluntarily. I don't think that is going to happen. Dr. 
Engelhardt, and I believe, is it Mr. Puffer, is that correct?
    Mr. Puffer. Correct.
    Mr. Gonzalez. The bankers, not that the others wouldn't 
know the situation, but you are probably not just looking at 
reduction of interest, you are looking at reduction of 
principal. And are we going to have people willing to do that? 
And the legislation we are proposing is totally different from 
some voluntary plan that the President has attempted to do. So 
you are going to see a legislative fix.
    But the whole question to all of you is how do you see the 
credit markets and what we refer to as the meltdown impacting 
small businesses? Is it, first of all, the availability of this 
thing about access to capital? I mean, we always think in terms 
of start-ups. Well, it does impact start-ups, but ongoing small 
businesses, when there is a downturn, how do you see this 
impacting their ability to withstand and get over this hump 
when the credit markets are in the state that they are? And I 
know we are talking about tax incentives and such, but I like 
to think that we really need to be doing something on the 
availability of capital.
    And so I will just go down the line of the witnesses and 
what is your opinion as far as the impact?
    Mr. Leppo. The biggest impact we see, Congressman, is on 
our essentially first-time buyer for a piece of construction 
equipment, the guy who wants to get in business, the 
landscaper, the concrete contractor who wants to get started, 
he is struggling to get approved to buy equipment. That means 
you don't get the ball rolling on the new business starting and 
all the good that comes from that. That is where we see the 
biggest impact is on the new entry start-up businesses. The 
credit companies have tightened their requirements on people 
borrowing who are relatively new in business.
    Mr. Gonzalez. Thank you.
    Mr. Puffer.
    Mr. Puffer. Quite frankly, Congressman Gonzalez, one of the 
concerns that bankers have is that there will be regulatory 
overreaction to the crisis. For example, there is a strong 
focus now on evaluating the worth of the collateral that banks 
currently hold, and that has required examiner pressure comes 
even when loans are performing. And if that is taken to its 
extreme, the result will be to discourage community banks from 
lending because of the regulatory constraint just based on 
artificial concern about appraised values and that would have a 
significant impact on lending.
    In the current environment, the community banks are the 
ones that are available and willing to provide capital to the 
small businesses in their communities; and we hope that the 
regulatory environment will be such that that ability is not 
reduced.
    Mr. Gonzalez. Yes, sir. And I do want to tell you that we 
are sensitive to who created the situation and the practices 
that we have to address without going in and having the 
collateral damage to the innocent bystanders.
    Mr. Robson.
    Mr. Robson. Well, I think you really hit it on the head. We 
are in falling collateral valuations. And I am speaking 
primarily from the Home Builders Association, but even in some 
of those markets there are viable projects because of some of 
the guidelines, new guidelines that the bank regulators have 
come out with. They aren't lending. So, you know, part of the 
problem is how do you get out of a business situation if you 
can't borrow the money even on a good project that cash flows, 
even with some history, where, you know, bankers are pulling in 
even commitments halfway through a project?
    It is a very tough situation. And, you know, that is why we 
have got to have some sort of stabilization of the actual 
values of homes and land and the collateral that the banks are 
taking so that we can start moving forward again. Because until 
that happens, we are not going to get there.
    Mr. Gonzalez. Mr. Helsel.
    Mr. Helsel. Thank you, Congressman.
    I hate to be fourth in this line because I don't want to 
repeat the same thing that the fellows to my right said, so I 
will say it a little bit differently but kind of the same 
thing.
    The real estate industry touches so many other industries 
across the country. It touches almost every type of small 
business that there is. So every small business that is being 
hurt right now affects the real estate industry and affects the 
National Association of Realtors' members and affects each of 
us on a daily basis. We see things like Mr. Robson said, where 
commitments are pulled when a project is somewhere in the 
middle. I mean, it is very difficult to work in an industry 
when you are not sure whether the people you are working with, 
who have to be able to borrow money, can't borrow money. 
Because it ends up affecting my own members and my own 
association.
    But the credit crunch has trickled down to us from so many 
places ahead of us that I am not sure where I would say it 
hasn't affected our industry or any of the other industries, 
because the credit crunch has touched so many different people.
    The lending requirements and the regulatory processes that 
are being used now make it difficult for anyone to borrow money 
when credit scores have to be higher even at the individual 
purchase level. Credit score ratings have to be so much higher 
now, it goes down to the individual purchaser of a home, the 
people who build the homes, the people who sell the equipment 
to build the homes, all of the things that go along with it. It 
just goes on and on and on.
    Mr. Gonzalez. Dr. Engelhardt.
    Dr. Engelhardt. Yeah, these credit effects are real. And I 
guess what I would say again, it is about trade-offs, if you 
are thinking about tax policy, to get back to Mr. Leppo's 
comments.
    One alternative to things like net loss carry-backs, which 
are not a targeted form of tax incentive for new investment, 
would be something like expensing, the temporary--basically, 
temporary expensing. Expensing is quite effective in generating 
new capital purchases and investment and would help individuals 
along the lines that Mr. Leppo said but is targeted towards new 
investment and does not change tax liability paid in the past. 
It affects cash flow, which is going to be, of course, the 
primary source of financing when there is a credit crunch for 
these small businesses, but it does it in a way that promotes 
new capital purchases. And I think that is probably a better 
way to go.
    Mr. Gonzalez. Well, thank you all very much.
    Again, I apologize for my tardiness; and I yield back, 
Madam Chair. Thank you.
    Chairwoman Velazquez. Ms. Fallin.
    Ms. Fallin. Thank you, Madam Chair. I appreciate 
recognition here today and say welcome to all of you. Sorry I 
didn't get to hear some of your testimony, but I have your 
testimony in writing here.
    I want to welcome my Oklahoman here, Mr. Robson, who has 
joined us here today, and appreciate all you do for the 
National Home Builders Association.
    I had a question for you, Joe. You talked in your testimony 
about collateral damage and some of the trickle-down effects of 
some of the policy that we are looking at here in Washington, 
D.C.; and you talked about the issue of allowing home prices 
and the home market to self-correct versus taking action here 
in Congress. Could you explain what you mean by the collateral 
damage and some of the trickle-down effect that self-correction 
in the market could have upon the housing market?
    Mr. Robson. I guess, if nothing is done, you know, what is 
my vision? It is not very good. Congressman Fallin, you were in 
the Oklahoma in the '80s; and that was the oil bust days. And 
when you look around the country, it is really kind of the rest 
of the country upside down, as we were in the '80s. We didn't 
have congressional help; and we had values that fell 40, 50, 60 
percent. You know, it wiped out people's savings. And it wasn't 
people that were involved, it was people that were innocent 
bystanders that lost everything. And they just went to work 
every day. They were small businesses. They were people that 
worked with their hands. They lost everything because of a 
spiraling devaluation of real estate values and general 
business conditions.
    You know, and, fortunately, we were a pretty small 
geographic group at the time. But it is on a much larger scale 
today. I mean, this is really national in scope. And even where 
Oklahoma is okay today, we are starting to see value declines 
just because of perception. We are at 2.9 percent unemployment, 
and we are starting to see value declines. And so it is a 
consumer confidence aspect. I mean, people look and read the 
paper every day, and unless we do something and kind of set the 
bottom of it, it is going to continue to spiral down.
    Ms. Fallin. So do you see this time period being even worse 
than the 1980s, when we had the oil crunch and--
    Mr. Robson. I see it as that. If you look at our numbers, 
this is the largest downturn since the Great Depression as far 
as housing starts are concerned.
    Ms. Fallin. Okay. Let me ask you one other question. You 
talked about the excess inventory problem and how it could be 
compounded if you didn't have the--if you had the inability to 
carry back net operating losses. Would you talk just a few more 
minutes about that, how that affects investment and--
    Mr. Robson. Well, I think it is simply a lifeline. It is a 
lifeline to small businesses. You know, is it going to 
stimulate the economy? It will keep people in businesses maybe 
long enough for the economy to turn around. I mean, that really 
is what it is. Because they don't have anywhere else to go. And 
all of us answered the credit crisis question, you know, if you 
are not making much money, if there are capital calls with the 
new criteria that community banks are looking at borrowing 
money or lending money, there is nowhere else to go. And so, 
you know, being able to go back and tap taxes you paid a couple 
of years ago could give you the lifeline to stay in business to 
keep people employed, to pay down creditors, and keep you alive 
until the market turns.
    Ms. Fallin. All right. Thank you so much.
    Let me ask Dr. Engelhardt one question, if I can. In your 
testimony, your conclusion, you stated that new tax incentives 
should be targeted towards promoting new investment and 
personal savings. Can you elaborate on that? And what would you 
recommend?
    Dr. Engelhardt. Well, in general, you want a tax system 
that has a broad base, low tax rates, and is not terribly 
complex. We really have none of that currently. But that is a 
slightly different topic.
    I would say if you are going to have preferential tax 
treatment--by the way, the housing sector has the most 
preferential tax treatment of any sector in the economy. The 
biggest tax expenditure in the Federal budget is for the 
housing sector. So it is not as if it is like the forgotten 
stepchild here of the tax system.
    The question is, do we need additional incentives on top of 
that? And my view, and I think this is the consensus view of 
economists, is new incentives should be targeted just to 
activities that substantially and demonstrably increase new 
business capital formation and saving and because those are the 
engines of long-run growth in the economy.
    Ms. Fallin. Okay. Thank you, Madam Chairman. I think my 
time has ran out. Thank you.
    Chairwoman Velazquez. Thank you.
    Mr. Helsel, you mentioned how increasing the threshold for 
the passive loss exception will shrink the overabundance of 
real estate inventory. This will be targeted to investors, some 
of whom have been blamed for the current crisis. Can you talk 
about how this provision balances the interests of small 
investors, while not artificially increasing real estate 
values?
    Mr. Helsel. Congresswoman, a couple thoughts on that, I 
guess.
    First, I would want to make sure that the regulatory 
process and that the funding processes, the financing processes 
were held at a level that made sure that the people that came 
in under the passive loss rules did so--were true small 
investors. Because if we go to larger groups, it compounds the 
problem and doesn't fix it.
    And if you read my testimony the whole way through, my 
written testimony, you will see that I speak specifically of 
the small private individual investors, not the large 
investment groups that I think to some degree didn't do us any 
good with the way things were done. If the passive loss rules 
are applied and if the dollars are indexed to inflation both in 
terms of the dollar amount of the person's income as well as 
the dollar amount of the property being involved in the 
process, it will stimulate people who can't right now get into 
it because of the difference in their income levels.
    Chairwoman Velazquez. Okay. Thank you.
    Dr. Engelhardt, the Low Income Housing Tax Credit has been 
praised as an efficient means of raising capital for affordable 
housing. However, in your testimony, you note that it could be 
better targeted if it were limited to poor neighborhoods. How 
would this type of change be structured?
    Dr. Engelhardt. Right. So the evidence is that the Low 
Income Housing Tax Credit basically substitutes for residential 
investment that otherwise would have been done in higher-income 
neighborhoods but does provide substantial stimulus to 
construction in lower-income neighborhoods that otherwise 
wouldn't have been done.
    It could be targeted that way quite easily. There are 
already provisions in the law that give basically different 
generosity levels, depending upon whether it is a higher-income 
or a lower-income neighborhood. Those could be expanded, 
strengthened. There are a number of ways to do it. It is very 
doable.
    Chairwoman Velazquez. Okay. Any other member 
wishes to ask any other questions? Mr. Gonzalez?
    Well, again, I want to thank all of you; and, hopefully, we 
could get the House and Senate to come together and reach a 
compromise. I know that is the right thing to do.
    I want to take this opportunity once again to thank all the 
witnesses for being here.
    I ask unanimous consent that Members will have 5 days to 
submit a statement and supportive materials for the record. 
Without objection, so ordered.
    This hearing is now adjourned.
    [Whereupon, at 11:24 a.m., the Committee was adjourned.]






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