kiplinger connection
Water • Housing • Taxes

Water: Water shortage is a new business paradigm.
Housing: Sub-prime meltdown, higher mortgages, ouch.
Taxes: IRS is looking at who is an employee, who is a consultant.

Water
Get used to living with less water.
Severe droughts are here to stay.
Worst off: The South and West. But other areas also must learn to cope with less rainfall.
The shortage is not yet a crisis, and with planning, it won't ever become one.
But it still means lots of big changes.
Conservation will be the new norm.
Higher prices will help make it happen. Consumers, both business and residential, will pay more ... in some places, a lot more, with rates that’ll escalate as use increases.
Limits on use. Some will be mandatory, as is the case in a few Calif. counties now. But most communities will rely on pleading, cajoling, or tax incentives to cut water use.
More ways to save. Some businesses will add roofs that can catch rainwater, get rid of fountains, replace thirsty lawns with less-demanding plants, or install faucets that shut off automatically after a set time. Purchases of appliances that use less water ... better washing machines, air conditioners, toilets, etc ... will spike.

Recycling. Las Vegas leans heavily on a capture, collect, treat, and redistribute system, offering incentives to consumers and companies. Firms can earn rebates ... up to a lifetime limit of $150,000 per property. It’s a success story that other cities can learn from: In five years, water use in Las Vegas fell by 18 billion gallons as population surged.

Stocking up. To help smooth out dips in supply, Florida communities plan to skim millions of gallons from rivers, such as the St. Johns. The water will be pumped, cleaned, and stored. Other communities are adding reservoir capacity and putting up new water towers to prepare for future droughts.

Desalination. San Diego, for one, is pinning hopes on a new plant. The catch: It’s a drain on power.

Bucks from Congress will help, but the main burden will fall on local leaders, individuals, and firms.

Housing
Higher mortgage rates are yet another drag on starts and sales. The increase in rates ... 30-year fixed mortgages now average 6.7%, up from 6.1% a month ago ... will crimp demand in already weakened markets.
Starts are now likely to total only 1.35 million this year, 100,000 fewer than estimated before rates jumped. Expect a modest rise to 1.5 million next year, still well below the 2005 peak of 2.07 million.
Inventories of unsold homes are lofty and will go even higher. Nationally, the new-home backlog now equals about 6.5 months of sales. Surveys show that builder sentiment is the most pessimistic since 1991, when the housing market last found itself in a deep national slump.
Look for new-home sales to come in at 920,000 this year, with existing-home sales, the bulk of the market, totaling 5.9 million. Next year ... a modest improvement to 940,000 and 6 million, respectively.

Higher rates will also accelerate the pace of foreclosures. Defaults, the first stage of the process, will hit about 1.25 million this year and next, up from 900,000 last year and 800,000 in 2005.
But foreclosures will be highly concentrated in a few areas. One hard-hit patch will be the northern auto belt in Mich., Ohio, and Ind. Others are the once-hot targets of quick-flip investors: Arizona, California, Florida, and Nevada. Many homeowners also are weighed down by property taxes inflated by the boom era. It'll take a while to readjust taxes lower.

No matter what Congress eventually passes on immigration ...
New arrivals will fuel housing demand over the long term. Even if lawmakers sharply curtail the flow of immigrants in the future, those already here and their children will buy thousands of starter homes over the next 10 years, creating a firm foundation for housing sales.
Their impact will also have a much wider geographic reach, spanning out from California, Florida, New Jersey, and New York to Arkansas, Connecticut, Georgia, Kentucky, North Carolina, Rhode Island, and the Maryland and Virginia suburbs of Washington, D.C.

There won’t be many winners in the subprime mortgage meltdown.
But two do come to mind: Fannie Mae and Freddie Mac, the mortgage giants backed by the government. Accounting scandals at both a few years ago led Congress to think about reining them in. Not anymore.
Fannie and Freddie will escape the much tighter supervision sought by some because they’re needed to help stabilize housing markets. The two big companies provide liquidity by buying mortgages from lenders, which then have the capital to offer new mortgages. So the last thing that lawmakers want to do at this precarious moment is clip their wings.
That’s not to say Fannie and Freddie haven’t taken some lumps. They had to accept temporary limits on how they invest their portfolios, and their stock fell sharply ... both on Wall Street and on Capitol Hill.

Taxes
Employers beware: The IRS wants you to help close the tax gap. The IRS push to get more of the revenue Uncle Sam is entitled to will include targeting payroll tax dodges fancied by some businesses.
The top employer issue: Misclassifying workers as contractors when they're really employees. Expect the agency to take a tougher line if firms have too much control over workers to justify contractor status. The agency will use leads from workers, who ... beginning next year ... can file special forms if they think that they have been misclassified.
Congress will weigh in, too, upping fines for any violations.
Other targets: Payroll tax fraud, excess worker reimbursements for expenses, and S firm owners taking dividends to avoid payroll taxes.

Congress, meanwhile, is eyeing the tax returns of bigger fish.
Lawmakers are likely to hike taxes on a few private equity giants that go public. They’ll do it by closing a loophole that allows firms to use a 15% tax rate on profits instead of the usual 35% corporate rate.
So far, only two firms fit the criteria: The Blackstone Group, which just went public, and the Fortress Investment Group, a hedge fund.
Investment firms object, arguing that it will discourage others from going public and make it harder for the U.S. to compete worldwide.
But many on Wall Street see the bill as the lesser of two evils. They’re hoping that if lawmakers pass this bill, they won’t press so hard for a much broader measure that would apply to most private partnerships. That would hit hedge funds, venture capitalists, real estate partnerships, and many oil and gas companies, raising up to $6 billion a year.