Homebuilders' record deal belies industry's anxiety about taxes

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Lennar Corp.'s record takeover of CalAtlantic Group Inc. is a bullish sign for homebuilding in the U.S. Trade groups, meanwhile, worry that lawmakers are about to kneecap the industry.

Lennar said on Monday that it agreed to buy CalAtlantic for about $5.7 billion in cash and stock, a deal that would be the largest merger of U.S. homebuilders. Miami-based Lennar, which will have a stock-market value of about $18.5 billion after the takeover, will leapfrog D.R. Horton Inc. to become the country’s largest builder.

"We continue to see strength in the housing market," Lennar Chief Executive Officer Stuart Miller said on a conference call to discuss the planned merger. "We have seen new orders, home deliveries and margins continue to be in line with, or above, our expectations. There continues to be a general sense of optimism in the market as jobs are being created across the country and wages are generally moving higher."

The agreement comes as lawmakers are debating tax-overhaul plans that may threaten Americans' ability to itemize deductions for state and local property levies, potentially diminishing an incentive many people have to buy a home. Real estate industry groups have resisted revoking the tax breaks.

The National Association of Home Builders has vowed "full weapons-hot" opposition to the planned measure, signaling a “major defection” from the Republican fold, Cowen & Co. analyst Chris Krueger wrote in research note Monday. Likewise, a coalition that includes the National Association of Realtors said it "will vigorously oppose this plan."

"We remain as concerned as ever that tax reform will threaten home values, raise taxes on homeowners and put the homeownership tax incentive out of reach for the vast majority of tax filers," William E. Brown, president of the National Association of Realtors, said in an emailed statement Monday. Tax reform that lowers rates at the expense of homeowners "is a poor place to start."

Real estate industry lobbying groups may be making headway. The House of Representatives' chief tax writer said over the weekend he’ll preserve the tax break. "At the urging of lawmakers, we are restoring an itemized property-tax deduction to help taxpayers with local tax burdens," House Ways and Means Chairman Kevin Brady said in a statement Saturday.

Brady's statement was aimed at resolving an impasse between House leaders and roughly two dozen Republican lawmakers from states including New York and New Jersey over an attempt to repeal federal tax breaks for state and local levies, an issue that threatened the bill’s prospects in the House. Brady plans to introduce the actual text of the bill on Wednesday.

In the meantime, Lennar’s forecast for the industry is largely rosy, with executives taking turns on Monday’s conference call to extol the virtues of the merger. The combination would give Lennar 1,317 active communities in areas where 50% of the U.S. population lives, Lennar President Richard Beckwitt said on the call. The deal offers new access to markets in Salt Lake City and Indianapolis, and a stronger presence in Chicago. The combination would also offer direct cost savings to the company of $75 million next year and $250 million in 2019, he said.

"There's no question that this national scale with large concentrations in these local markets will drive significant shareholder value," Beckwitt said.

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