California home building officials believe they have a 50-50 chance of getting the state to extend a $10,000 state tax credit program for new home buyers that they believe is largely responsible for a pick up in sales in April and May.

Bob Rivinius, president of the California Building Industry Association, said at PCBC that the association originally intended to push for new budget authority, which would have been a tough sell because the state is running a $23 billion deficit. Instead, the association is supporting efforts that would allow more people to qualify for the credit.

Beginning on March 1, people buying a new home for a primary residence could get a tax credit of the lesser of $10,000 or 5% of the purchase price spread over three years. The state had received 9,150 applications through June 10 that would claim $88.3 million of the credit.

But the California Franchise Tax Board estimates that Californians on average won’t be able to use the full $3,330 per year (or $10,000 total). It estimates that instead the average home buyer will only receive $1,130 per year, or $3,400 over three years. That means the program will only cost the government $35 million, not $100 million. CBIA hopes to convince state officials to use the entire $100 million allocation.

“From the moment the tax credit took effect, we saw an increase in absorptions,” said Horace Hogan II, chairman of the association, adding that many builders worked off inventory and started production again. “We’re starting to see prices stabilize, and incentives are starting to level off.”

John Young, vice chair of the association, who builds homes in the Inland Empire of California, said the state credit helped convert many lookers into buyers. The federal tax credit led many prospects into model centers. “We’d ask them if they knew about the state tax credit. It was enough to tip the deal and get people to sign the contract,” he said.

The association is very concerned that if the tax credits aren’t extended some of the recent progress in Western markets may disappear this summer. The Commerce Department reported earlier this week that housing starts in May jumped 28.6% in the West, with much of the gain coming from California.

Rivinius said the credit actually increases revenue for the state. Each new home sold generates $16,000 in tax revenue for the state and another $3,000 for local government. Also, people who buy new homes wind up spending more money than average at home improvement and furniture stores.

“There’s no doubt in my mind that the biggest reason we’re seeing improvement in California is the combination of state and federal tax credits,” said Hogan.

There’s some concern, however, that builders may have oversold the benefits of the tax credit to buyers, many of whom will be receiving less than the full $10,000. Also, the program has been criticized in some quarters for merely clearing out unsold builder inventory, as opposed to stimulating new construction that would create jobs. Proponents note that inventory had to be cleared out before new homes could be built anyway.

Boyce Thompson is editorial director of BUILDER magazine.

Learn more about markets featured in this article: Los Angeles, CA.