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Budgeting: The Basis for Profitable Endings
By Alan Hanbury, Jr., CGR, CAPS
The start of any successful business year is making an intelligent guess at what the end of the year will look like
There is a saying that failing to plan is planning to fail. It is truer than you want to believe. Unless you are exploring Mars, there is information that you can and should use to get from Point A to Point B. The start of any successful business year is making an intelligent guess at what the end of the year will look like—starting with the end in mind.
Before you prepare your 2007 budget, read about a five-step process you can use that will predict a pricing model, forces decisions based on production as well as financial impact, and can be tracked month by month in this Business Management Resource.
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IRS Plans More Scrutiny of Small Business
By Krista Mund
 According to Ann Makres, senior stakeholder liaison with the small business/self-employed division of the Internal Revenue Service (IRS), the agency is hiring more examiners to specifically pursue the small business sector.
The overall tax gap (the difference between what taxpayers should have paid and what they actually paid) came to $345 billion in 2001. Almost 43 percent of that tax gap is attributable to small businesses and self-employed people not reporting all business income, overstating business expenses, and underreporting self-employment tax, according to the IRS. For that reason, Makres told builders gathered at an informational session at the HBA of Fargo-Moorhead, N.D., that small businesses can plan to be looked at more closely by the IRS.
If you are not sure whether your operation is in compliance with all IRS regulations, now is the time to find out. Read this Business Management Resource.
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Section 199 Update: Interest Apportionment Could Boost Deduction
Robert Dietz, NAHB Director of Tax Issues
The American Jobs Creation Act of 2004 established Internal Revenue Code section 199, which provides a deduction for domestic production activities, including construction. Unlike most other deductions in the tax code, the section 199 deduction offers an opportunity for builders to reduce their tax liability by simply doing normal business—no special actions or expenditures are required.
Builders must be aware of certain limitations and qualifying rules regarding section 199, particularly those qualifiers that are governed by other elements of the tax code. One of these issues is the apportionment of certain interest expenses. Treasury regulations require taxpayers to elect the manner in which they apportion interest costs among assets. The election is binding on the taxpayer for a period of five years.
However, as the tax value of the section 199 deduction is dependent on business costs, the IRS is offering the opportunity for taxpayers to alter elections made before the establishment of section 199. The IRS will issue Revenue Procedure 2006-42, which details the manner in which this election may be changed. This could be an important opportunity for some taxpayers, as altering the manner of interest expense apportionment may increase the value of their section 199 deduction.
The revenue procedure will appear in the upcoming Internal Revenue Bulletin dated Oct. 30, 2006. Once it's published, you will be able to access it here.
Builders should consult their tax professional to ensure they are taking optimal advantage of the deduction given their particular tax and business circumstances.
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Protect Your Profits Through 'Defensive' Estimating
 Learn how to estimate based on fiscal goals and protecting the company’s bottom line through Defensive Estimating: Protecting Your Profits by Bill Asdal, CGR, and available through BuilderBooks.com.
For builders and remodelers, this user-friendly approach to estimating will help you improve your process, and the book provides hundreds of ideas and simple suggestions.
Through “Defensive Estimating,” you will learn how to:
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Take a hard look at your business processes and modify them to meet financial goals
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Create profits un-endangered by carelessness or short vision
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Defend each estimate line so that the system of planned profit is consistent and bankable
Defensive Estimating: Protecting Your Profits is available at http://www.builderbooks.com/, or by calling 800-223-2665.
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Census Data Tracks Growth in Home Building, Home Values
 New U.S. Census data confirms what Americans already knew—that home values grew substantially between 2000 and 2005, with half of home values growing by more than 32 percent. San Diego, Calif., saw the largest jump among big cities in median home value—from $249,000 to $567,000—between 2000 and 2005, according to the latest housing data from the American Community Survey.
The data provide the first look at key housing information for many communities since Census 2000, including 75 of the top 100 fastest growing cities.
Real median selected monthly owner costs for owners with mortgages increased 5% nationally between 2000 and 2005. Some of the highest increases—of roughly 20% or more—were in Detroit , Chicago, and San Francisco. Decreases of about 10% in real median homeownership costs were found in smaller cities such as Bryan, Texas, and Greenville, N.C.
More than two-thirds of the nation’s occupied housing units were owner-occupied in 2005, an increase of 4.5 million over the Census 2000 number (69.8 million). Among the 15 largest cities, Jacksonville, Fla., had one of the highest percentages of owner-occupied housing units at 64.2 percent. San Jose, Calif., and Indianapolis also had high percentages of owner-occupied housing units. Of the 15 smaller cities, Missouri City, Texas (88.6 percent); Boynton Beach, Fla. (72.9); and Folsom, Calif. (71.3), had some of the highest percentages of owner-occupied housing units.
Among other findings:
- States with the greatest percentage of housing units built since 2000 include Nevada (19.9%), Arizona (16.1%), Georgia (13.7%), and Utah (12.8%).
- Median home value spanned a wide range among states, from a high of $477,700 in California to a low of $82,700 in Mississippi. The U.S. median was $167,500.
- New Jersey had the highest monthly median housing costs for owner-occupied homes with a mortgage, at $1,938, and West Virginia the lowest, at $797.
- Minnesota, West Virginia and Michigan had the highest percentage of owner-occupied homes, all at roughly 75%. The U.S. average was around 67%.
- In most states, and in the nation as a whole, 30 percent or more of owners with mortgages spent 30 percent or more of household income on homeownership costs.
Among the nation’s largest cities, some of the highest percent increases in real median home values between 2000 and 2005 were found in San Diego (127.2 percent), Los Angeles (110.2) and New York (79.1). In the smaller cities, with 65,000 population or more, some of the highest percentage increases in real median home values were found in Boynton Beach, Fla. (120.3 percent); Folsom, Calif. (99.5)1; and Redondo Beach, Calif. (91.7). Among the smallest cities covered in the 2005 ACS data release with populations of 65,000 or more, Newport Beach and Santa Barbara, Calif., were the only two cities with a median home value of a million dollars or more.
For more information, go online to the Census Bureau.
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Business.gov Consolidates Regulatory Information, Resources
More than $7,000 per employee per year—that's the cost to small businesses of complying with some 192,000 government regulations, according to the National Federation of Independent Business.
Federal officials in October 2006 unveiled a new Web site, http://www.business.gov/, to consolidate compliance resources from a number of agencies and provide a consistent way for users to search for them. "This is new—to have small business compliance resources in one place," says Nancy Sternberg, project manager for the Business Gateway Project.
Read more about the project.
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10 Factors Drive Satisfaction with Home Builder: J.D. Power
Ten factors drive overall customer satisfaction with home builders, according to J.D. Power and Associates. These 10, and their percentage contribution to satisfaction, are:
- Builder's warranty/customer service (20%)
- Home readiness (16%)
- Builder's sales staff (14%)
- Construction manager (13%)
- Quality of workmanship/materials (13%)
- Price/value (8%)
- Physical design elements (6%)
- Builder's design center (4%)
- Recreational facilities (3%)
- Location (2%)
Power's 2006 New Home Builder Customer Satisfaction study is based on responses from 60,927 buyers of newly built single-family homes, who provided feedback after living in those homes for four to 18 months. Customer satisfaction has remained flat since 2004, according to survey results. Problems cited by homeowners varied somewhat by market.
For comprehensive ratings of builders in all 34 U.S. markets where data were collected, go online to http://www.jdpower.com/homes/ratings/home_builders/index.asp.
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New Book Connects Builders With an Emerging Market
 When NAHB member Dean Mon emigrated from Cuba 40 years ago, Latinos represented only a small fraction of the U.S. population. Now, Hispanics are the largest minority group in the United States, with 42.7 million people in 2005—more than 14% of the U.S. population. The Census projects that by 2050 the Hispanic share of population could be perhaps 25%, according to NAHB chief economist David Seiders.
Mr. Mon, of D.R. Mon Group Inc. in Shrewsbury, N.J., an NAHB Area 2 national vice president and member of the Single Family Production Builders Committee, discussed the impact of Latinos on the new home market at an NAHB news conference last month. He was joined by former HUD Secretary Henry Cisneros, editor of a new BuilderBooks.com title, Casa Y Comunidad: Latino Home and Neighborhood Design, as well as Seiders.
The Hispanic population is destined to be a big part of the American future and a big part of the housing industry’s future, said Mr. Cisneros, chairman of CityView, which is focused on producing affordable housing in America’s cities. “Builders who recognize the significance of Latino population growth for the housing market and the vast potential of Latinos as home buyers will sell more homes while contributing to the economic advantage of their communities,” he said.
“If you have an interest in this market, then Secretary Cisneros’ book, which I read this week, is a great resource,” Mr. Mon said.
Order the groundbreaking publication, Casa Y Comunidad: Latino Home and Neighborhood Design online.
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Register On Site for Custom Builder Symposium at Lake Las Vegas
While the deadline has passed for advance registration for NAHB's popular Custom Builder Symposium, you can still register on site and take advantage of the first-rate educational program and valuable networking opportunities for which this meeting is known.
On site registration begins at 3 p.m. on Thursday, Oct. 26, in the north lobby of the Hyatt Regency Lake Las Vegas Resort. Hotel rooms are still available at the MonteLago Village resort, where a free shuttle is available to transport you to the conference hotel 24 hours a day. Call 866-787-1945 and reference the National Association of Home Builders or Code 1034WA to reserve your room.
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National Housing Quality Award Winners Announced
 Three builders recently were honored with National Housing Quality Awards by the NAHB Research Center. The 2006 winners of the award, patterned after the Malcolm Baldrige Quality Awards, which recognize quality processes as well as finished products, are:
“The award is not about sophisticated systems, fancy pictures or elaborate applications,” said Frank Alexander, NHQ Programs director. “It focuses on the degree to which builders integrate quality into their businesses. Builders of any size are capable of achieving this, and we encourage all quality-driven builders, large and small, to apply.”
In applying for the award, builders examine their practices in eight categories: leadership, strategic planning, performance management, customer satisfaction, human resources, construction quality, trade relationships, and business results.
For many applicants, the NHQ Award feedback that is offered—whether or not an applicant goes on to win an award—is their main source of information on how well they apply quality principles. Former NHQ Award winners credit the valuable feedback they received with helping them achieve a higher level of performance and continuing on to win an NHQ Award the following year.
For more information on the National Housing Quality Award contact the NAHB Research Center at 800-638-8556, x6225 or visit www.nahbrc.org/quality.
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Mid-2007 Predicted to Usher in Another Record-Setting Decade
After leading GDP growth for several years, the slowing housing market has become a drag on the economy, according to Michael Carliner of NAHB's Economics Group. However, the rest of the economy is doing reasonably well and housing is expected to pick up again in mid-2007, if mortgage rates do not increase, he told single family builders at NAHB's Fall 2006 committee meetings in Salt Lake City.
Overall, the economy is expected to grow more slowly in the years ahead. Employment, for example, is growing at about 100,000 to 150,000 jobs per month, compared with 200,000 in the 1990s, Mr. Carliner said. He urged builders to keep an eye on payroll employment numbers when assessing the market for housing locally.
Of the nation’s 126 million homes, 16 million are vacant, but about half of those vacancies are second homes. Most existing homes on the market are occupied, but there has been a jump in the number of vacant existing homes for sale, reflecting holdings by speculators, Mr. Carliner said.
“We were building more than we can absorb, so there has to be a correction,” he explained. “Housing starts were near record, more than the underlying fundamentals would support.”
Go online to view Mr. Carliner's PowerPoint slides.
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