Energy Tax Credits: Large Impacts After 2010 Rule Changes

March 21, 2014

In 2005, Congress established a number of energy-efficiency tax incentives related to housing. These policies include the tax code section 45L credit for the construction of energy-efficient homes, the 25C credit for retrofitting existing homes, and the 25D credit for the installation of power production property in new and existing homes.

Using earlier IRS data for tax year 2009, we previously examined who benefitted from the 25C and 25D credits, as well as how homeowners used the credits. Last year, we examined the 2010 data for these credits.

With the publication of the tax year 2011 IRS data for 25C and 25D, significant reductions in use are clearly seen due to the rule changes that occurred at the end of 2010.

For example, from 2009 through the end of 2010, the 25C credit for existing homes was available as a 30% credit and $1,500 limit. After the extension of the “tax extenders” legislation at the end of 2010, those rules were pared back and retained when the credit was extended again as part of the Fiscal Cliff deal. Among those rule changes, the credit was reduced to a 10% rate and a $500 lifetime cap was imposed. It is worth noting that this version of the credit, along with many other tax extenders, expired at the end of 2013.

25C_2011

The 2011 IRS data show significant declines in 25C use as a result of the 2010 changes. The largest impact came from energy-efficient windows, for which the total dollar volume of installed qualified property fell from about $7.8 billion to approximately $1.4 billion. Qualified furnace installations declined by more than $5 billion, reaching a 2011 total of about $180 million.

Tax credit qualified insulation installations fell by more than $1.5 billion but was the largest category in 2011 at a total of $1.87 billion. Roofing retrofits were second with a tally of $1.4 billion.

In total, more than $6 billion of qualified improvements were made in 2011 in connection with the 25C credit. These expenditures resulted in more than $750 million in tax credits for just shy of 3.5 million homeowners.

25D_2011

 

In contrast, tax credit use under section 25D of the code expanded in 2011 from 2010 levels. The 25D credit is for installation of qualified power production property in both new and existing homes. The credit is equal to 30% of expenditures, including certain labor costs and is claimed by the homeowner. Unlike the 25C credit, the 25D program remains in law and is scheduled to sunset at the end of 2016.

The most popular 25D investment in 2011 was the installation of residential solar panels. 25D qualified solar electric property investments totaled almost $1.5 billion in 2011 for more than 100,000 taxpayers. It is worth noting that these solar installations reflect credits claimed for electrical system integrated panels that provide power for the home, as well as panels used to power stand-alone property like attic fans.

The second largest category was geothermal heat pumps, with $1.2 billion of installations claimed by more than 70,000 homeowners. The geothermal category experienced the largest growth in 2011 in terms of tax credit claims, up almost $300 million in total installations over 2010 totals.

In total, for 2011 there were $3.03 billion of qualified power production investments yielding about $921 million in 25D credits.

Given the rising popularity of items like solar panels, builders are well advised to examine the 25D program for prospective homeowners. The 25D credit can be awarded in new construction by providing the eventual homeowner an itemized breakout of material and labor costs associated with qualified property installation, so that the homeowner can claim the credit on their income tax return. An IRS Q&A on 25D and 25C can be found here.


Wages in Home Building and Remodeling

February 12, 2014

Wages for most jobs in home building and remodeling typically exceed the median wage in the U.S., according to data from the Bureau of Labor Statistics Occupational Employment Statistics (OES) Survey.

In a previous analysis, we examined the kinds of jobs that exist in the residential construction sector.

Using the same 2012 BLS data, it is possible to track wages of employees in the industry (click the chart below for a more detailed view).  It should be noted that typical wages will vary greatly from area to area, so the following data are national medians – wages in your area may differ.

median wages_res construction_2012

The U.S. median annual wage in 2012 was $34,750. The chart above plots the medians for various occupations in the home building and remodeling sector (the single item above with no value did not have sufficient data). The OES survey defines employment as the number of workers who can be classified as full- or part-time employees. The following profile examines the Residential Building Construction industry group, which includes builders of for-sale and owner/contractor built single-family and multifamily housing, as well as residential remodelers.

The wage data presented in this post are for occupations within the home building and remodeling sector, as opposed to data for these occupations across all sectors of the economy. Annual wages are calculated, by the BLS, as the hourly wage paid on a 2,800 hour annual basis. Wages are measured on a gross pay basis, but certain bonuses and employer paid benefits are excluded.

The occupation with the highest wage in the industry is the legal profession, which has a median income of just a little more than $99,000. Managers, who constitute 9% of industry employment, had a median income of approximately $79,000 in 2012. Occupations with median wages in excess of the U.S. median represent approximately 80% of total employees.

median wages_construction occupation jobs_2012

Within the largest subsection of the industry (construction and extraction occupations – 64% of industry employment), a majority of the occupations again have median annual wages in excess of the U.S. median. The highest wage for this subsection is for construction supervisors, with an annual median wage of $56,500.

Carpenters, who make up the largest group (47% of the construction occupations and 30% of industry employment), had a median annual wage of $39,940 in 2012.  This is 15% higher than the U.S. median annual wage.


Jobs in Home Building and Remodeling

February 11, 2014

Home building is an industry dominated by small businesses around the nation. Data from the Bureau of Labor Statistics (BLS) reveal the many job categories within the industry and their relative concentrations.

Previous NAHB research has examined the geographic scope of the building industry, as well industry surveys that present a census of builders and associated businesses.

BLS data from the 2012 Occupational Employment Statistics (OES) Survey allow reporting the roles workers play in home building. The OES survey defines employment as the number of workers who can be classified as full- or part-time employees. The following profile examines the Residential Building Construction industry group, which includes builders of for-sale and owner/contractor built single-family and multifamily housing, as well as residential remodelers.

Home building jobs_2012

Management jobs constituted approximately 9% of jobs in the residential construction industry, for a total of more than 48,000 positions. Office and administrative support made up the second largest category, which at just under 80,000 jobs represented 14% of sector employment.  Sales staff and business/finance roles each made up about 4% of home building business jobs, each contributing approximately 24,000 jobs.

Other jobs in home building, generally representing about 6% in combination, include architects, lawyers, designers, building/grounds maintenance staff, security guards, drivers, and IT staff (chart above corrected from earlier version for which this share was incorrectly reported).

Not surprisingly, the largest share of home building/remodeling employment is concentrated in construction and extraction jobs. For 2012, more than 363,000 jobs were in such fields.  The following chart provides a breakdown of these jobs.

Home building construction jobs_2012

Carpenters make up almost half of construction/extraction jobs (47%), for a total of more than 171,000 jobs. The OES defines carpenters as workers who construct, erect, install, or repair structures made of wood. It also includes workers who install cabinets, drywall, siding, and insulation. Approximately 30% of carpenters nationwide are employed by the residential building construction sector.

Rounding out the construction segment of industry employment are construction laborers, worksite supervisors, brickmasons, stonemasons, carpet/tile installers, cement masons, equipment operators, drywall installers, electricians, glaziers, insulation workers, painters, plumbers, plasters, rebar workers, roofers, and sheet metal workers.

A follow-up post to this analysis examines wages for many of these industry jobs.


Most Remodeling Business Still Comes from Customer Referrals & Returns

February 3, 2014

Although relatively new ways of generating business—such as company web sites and online review services—tend to get a lot of attention, the best source of leads for remodelers are still the traditional ones, according to NAHB’s Remodeling Market Index (RMI)  survey.

In answer to special questions on the third quarter 2013 RMI survey, NAHB’s professional remodelers on average attributed 37 percent of their leads to “Existing and Returning Clients” and another 37 percent to “Referrals from Clients.”  No other source was responsible for more than 8 percent.  (The questionnaire was developed after extensive consultation with remodelers, to make sure it captured the important sources of leads).

Remod Leads

Not only are returns and referrals the most common source of leads, they’re also the best in terms of close rates.   In the same survey, professional remodelers on average said they closed 53 percent of their leads based on existing and returning clients, and 45 percent of their leads based on referrals from clients.  Again, these percentages are considerably higher than for leads generated from any other source.

Remod Close

The large share of business from customer returns and referrals doesn’t mean remodelers can neglect web sites and other means of advertising altogether.  The alternatives  offer newer companies that haven’t built up a customer base a way to generate businesses, and the close rates on leads generated from signage  and company web sites is a respectable 10 percent-plus.  An earlier post has shown that remodelers and builders can, in fact, generate substantial business from their company web sites, especially if the sites offer the right kind of information.


Remodeling Market Index Steady at Historical High

January 23, 2014

The NAHB Remodeling Market Index (RMI) held steady at 57 in the fourth quarter of 2013. This is the same level as the third quarter of 2013 and the highest reading since the first quarter of 2004.

An RMI above 50 indicates that more remodelers report market activity is higher (compared to the prior quarter) than report it is lower. The overall RMI averages ratings of current remodeling activity with indicators of future remodeling activity.

RMI_4q_13

The RMI’s future market conditions index rose from 56 in the previous quarter to 58, the highest reading since the inception of the series in 2005. Three of the four major components of the RMI’s future market conditions index increased in the final quarter of 2013. Calls for bids increased from 56 to 59, the amount of work committed for the next three months from 52 to 54 and appointments for proposals from 55 to 59. The backlog of remodeling jobs fell one point to 59.

The current market conditions component of the RMI declined two points to 56 this quarter.

Steady existing home sales, historically favorable interest rates for home buyers and rising home equity have combined to release some of the pent up demand for home remodeling from the past few years. This quarter’s RMI reading shows that the slow but steady improvement in the remodeling market will continue in 2014.

For more information about remodeling, visit www.nahb.org/remodel.


Owners Spend $1.9 Million to Remodel in Typical Zip Code

January 21, 2014

Home owners in the typical zip code area spent a total of $1.9 million to improve their homes in 2013, according to new zip-level estimates developed by the National Association of Home Builders (NAHB).  This works out to about $1,400 per owner-occupied home within the zip code (based on the median across all zip codes estimated by NAHB).

The estimates are based on a statistical model developed by NAHB, using data from the HUD/Census  Bureau American Housing Survey) that relates remodeling expenditures to the number of owner-occupied  homes in the area, the share of those homes built in the 1960s and 1970s, the average home owners’ income, and the share of owners  who are college educated.  The model is applied to data from the Census Bureau’s American Community Survey, using  geographic boundaries developed by the Census Bureau to capture zip code mailing addresses.

The estimates of remodeling  by zip code were produced by NAHB economists for NAHB Remodelers.  Those who are not members of NAHB Remodelers and have questions about the zip-code level data can contact NAHB Remodelers staff.

While the median level of spending on improvements is $1,400 per owner-occupied home, it can be as high as $5,000 in particular cases.  Estimates for the top five zip code areas in the country by this measure are shown below.

Top 5 Zips

These five zip codes are located in the suburbs of San Francisco, Manhattan, and Long Island.  They’re characterized by home owners who are 73 to 93 percent college educated with high average incomes (roughly at or above $400,000).  The first and fifth zip code on the list also have a high percentage of homes built in the 1960s and 1970s, an age when the NAHB model indicates homes undergo above-average remodeling.

The map below shows average spending on improvements per owner-occupied home by zip codes.

Remodel_zecta3

For convenience, the estimates have also been aggregated up to the state level:

Remodeling by State


Remodeling Market Index Up

October 24, 2013

The NAHB Remodeling Market Index (RMI) continued to climb, although at a modest pace, in the third quarter of 2013. Rising two points to 57, this marks the highest reading of the RMI since the first quarter of 2004.

3q_13

An RMI above 50 indicates that more remodelers report market activity is higher (compared to the prior quarter) than report it is lower. The overall RMI averages ratings of current remodeling activity with indicators of future remodeling activity. The RMI’s current market conditions index rose from 54 in the previous quarter to 58, the highest reading since the creation of the RMI in 2001, driven partly by rising existing home sales.

All three major components of the RMI’s current market conditions index increased in the third quarter.  Major additions and alterations increased from 51 to 55, minor additions and repairs from 55 to 58, and maintenance and repair from 57 to 59.  The future market indicators component of the RMI remained even with the previous quarter reading of 56.

Regionally, the RMI has registered two consecutive quarters of gains in the Northeast, Midwest, and West.  In the South, the RMI edged down slightly in the third quarter after a five point gain the quarter before.   All four regions were above 50 and higher in the third quarter than in the first quarter of 2013.

In addition to rising existing home sales, which support remodeling activity as owners fix up their homes before and after a move, remodeling has benefitted from rising home values. This boosts home equity that owners can tap to finance remodeling projects.


Housing-Related Tax Provisions Expiring at the End of 2013

October 23, 2013

With the government shutdown/debt ceiling conflict resolved, at least for the next few months, it is a good time to revisit the policy debate that preceded it – the fiscal cliff.

In January, a number of real estate related tax provisions were extended for another year. At the end of 2013, these provisions are set to sunset. And for now, there appears to be little likelihood of a “tax extenders” bill being enacted before the end of the year.

The following are housing or real estate related tax provisions that expire at the end of 2013:

Housing Rules

  • Mortgage debt forgiveness tax relief: rule that prevents tax liability arising from many short sales or mitigation workouts involving forgiven, deferred or canceled mortgage debt.
  • Deduction for mortgage insurance: reduces the after-tax cost of buying a home when paying PMI or insurance for an FHA or VA-insured mortgage; $110,000 AGI phase-out.
  • The section 25C energy-efficient tax credit for existing homes: remodeling market incentive with a lifetime cap of $500.

Business Rules

  • The section 45L new energy-efficient home tax credit: allows a $2,000 tax credit for the construction of for-sale and for-lease energy-efficient homes in buildings with fewer than three floors above grade.
  • The 9% LIHTC credit rate: absent the credit fix, the LIHTC program would suffer a loss of equity investment for affordable housing projects; in place for 2013 allocations.
  • Base housing allowance rules for affordable housing: income definition rules.
  • The section 179 small business expensing limits: offers cash flow and administrative cost benefits for small firms, with limits of $500,000 for deductions and $2 million for capital purchases.
  • The section 179D deduction: provides a deduction for some energy-efficient upgrades to multifamily and commercial properties.
  • New Markets Tax Credit: no new allocations of this community development tax credit.

At this time, it would be prudent for homeowners and housing stakeholders to assume that all of these tax provisions will sunset at the end of 2013. If these rules are extended, it will almost certainly occur retroactively through legislation passed later in 2014. And of course, comprehensive tax reform could change all tax rules substantially.

Finally, while not expiring at the end of 2013, it is worth noting that the section 25D 30% credit for installation of solar, wind, fuel cell, or geothermal residential power production property expires at the end of 2016. This credit can be used in connection with both remodeling and new construction and is claimed by the homeowner.


What Do Home Buyers Buy after Moving

October 17, 2013

In a post last week we discussed NAHB research showing how during the first two years after closing on a home sale, home buyers tend to spend money on furnishings, appliances and remodeling considerably more compared to non-moving owners. Buyers of new homes spend most, outspending non-movers by a factor of 2.8. Buyers of existing homes spend twice as much as non-moving owners. This post reveals particular items that are most popular with home buyers and helps explain changes in their spending behavior triggered by a house purchase.

The NAHB analysis of the Consumer Expenditure Survey (CES) data from the Bureau of Labor Statistics shows that the biggest outlay in the budget of new home buyers is furnishings. They spend $5,288 on furnishings during the first year after buying home, outspending buyers of existing homes 2.2 times and non-moving owners 5.3 times. Average spending is estimated for all households in the group regardless whether they purchased a certain item or not. Thus, higher averages may point to larger and/or more frequent spending by the group.

Single-Family Detached Home Owners’ Average Annual Spending on Various Items, 2007$

Spend_chart

The biggest ticket item for all home owners is bedroom furnishings, including mattresses. However, buyers of new homes spend twice as much on this item as existing home buyers and outspend non-moving owners six times.  This is not surprising considering that the number of bedrooms in new single-family detached homes has been on the rise.

The second largest furnishings outlay for home buyers is sofas. New home buyers spend on average $746 during the first year after moving, more than double of what existing home buyers spend, and more than six times the amount spent on sofas by non-moving owners.

The differences are even larger when comparing spending on window coverings. New homebuyers outspend existing home buyers 7.7 times and non-moving owners 24.7 times.

New home buyers also outspend non-moving owners on every single appliance listed in the CES. They also tend to outspend existing home buyers across almost the entire range of appliances. The few exceptions include lawnmowers, gas stoves, built-in dishwashers, and some other miscellaneous appliances. The high level of spending by new home buyers may seem surprising considering that many new homes come with installed appliances, but the data suggest that these purchases are nevertheless more frequent among these households.

New home buyers spend the most on televisions, refrigerators, clothes washers/dryers, and computer systems – items that are less likely to be included in the purchase of a new home. The most expensive appliances in the budget of existing home owners are clothes washers/dryers, refrigerators, and lawnmowers.

Somewhat surprising, new home buyers spend almost as much as buyers of existing homes and outspend non-moving owners on property alterations and repairs. However, the specific types of remodeling projects are quite different across the groups. As expected, buyers of existing homes and non-moving owners spend more on various repairs and replacements. As a matter of fact, existing home buyers spend more than new home buyers on every single item the CES lists as a repair or replacement. They also outspend new home buyers on kitchen/bathroom addition or remodeling, and purchasing and installing new items such as HVAC, plumbing, electrical and security systems, paneling, flooring, siding, windows and doors.

However, when it comes to outside additions and alterations, including additions of patios, terraces, new driveways, and fences, new home buyers outspend existing home buyers and non-moving owners by far. There are several items where non-moving owners outspend homebuyers, including addition of detached garage, repairs of driveway/walk, siding/roofing, replacements and repairs of doors and windows.


Construction Spending: Improving at a Slower Rate

September 3, 2013

Total private residential construction spending increased marginally to a seasonally adjusted annual rate of $334.6 billion in July 2013 according to Census estimates. Spending continues to improves, but remains well below the peak pace of $676.4 billion in March 2006. The current reading is 17.2% higher than a year ago.

Single-family spending registered a slight increase of 0.5% for the month, while the home improvement category increased 0.8%. The multifamily category remained nearly unchanged with an increase of 0.1% for the month.

Chart_September

In spite of the tepid month-over-month increases for July, on a 3-month moving average basis, all categories have experienced significant improvements over the course of 2013. Remodeling related spending is up 6.5% for the year-to-date. Single-family spending has increased by 11.6% and multifamily spending has increased 16.0%.

Since market low points, total private residential construction spending is up 46.4%, single-family 84.5%, multifamily 143.8%, and improvement-related spending 29%.

The data shows improvements in construction categories for all categories but at a slower month-over-month rate than experienced in recently. The slow-down comes ahead of the effects of an increase in mortgage interest rates that has slowed both new home and pending home sales.


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