The Housing Chronicles Blog: California's $10,000 tax credit helping new home builders

Friday, April 24, 2009

California's $10,000 tax credit helping new home builders

You've got to chalk one up for the California Building Industry Association's lobbying arm, since they definitely had a hand in crafting the $10,000 tax credit for buyers of new homes in the state. In fact, the program has been so successful that the development community has suggested lifting the $100 million cap on the tax credit program.

Yet others argue that since foreclosures are a much bigger problem in the state, creating an artificial stimulus for new home sales only prolongs the inventory correction.

I would argue that the issue is a bit more complex than that, and if we can devise a plan to help some builders limp along with a core operation until the market rebounds while also focusing even more on getting rid of existing home inventory (mostly foreclosures), then that's perhaps the optimal solution.

From a Wall Street Journal story:

California's hard-hit home builders say they're pouring more foundations and hiring more workers this spring, partly because of a state tax credit of as much as $10,000 for buyers of new homes.

Nationally, the Commerce Department said Friday that new-home sales fell 0.6% to an annual rate of 356,000 units in March, a sign the free fall in new-home sales may be over. In the West, home-builder sales rose 15%, likely reflecting a boost from California's new-home credit.

Now, less than two months after the new-home credit became available, some lawmakers in California's financially strapped government are proposing to eliminate the $100 million limit on the total amount of credits that home buyers can tap...

Despite the industry's enthusiasm, some economists say the credit is doing little to fix what truly ails California -- one of the nation's largest residential markets -- because it doesn't encourage the sale of foreclosed houses that are weighing on prices. Economists warn that if the tax credit is expanded too much, it could exacerbate the housing glut here...

Other states are considering their own subsidies to supplement the recently enacted $8,000 federal credit for certain first-time buyers of existing or new homes. But California has one of the most robust tax credits targeting new-home purchases...

The Californian Building Industry Association, which led the lobbying effort for the credit, estimates that each new-home sale generates $16,000 in tax revenue from construction workers' income, as well as from sales taxes paid on appliances and furnishings, among other home-related items...

About one-third of the $100 million tax credit allocation has been already claimed, according to the state Franchise Tax Board, which administers the program. At this rate, lawmakers expect the pool could be gone by early summer, well before the program is scheduled to end in February 2010.

For home buyers, the credits mean big savings, as home prices keep falling and mortgage rates are near historic lows. Certain first-time home buyers in California can qualify for a combined $18,000 in state and federal credits on new homes, which had a median price of $339,990 in February.