Statistics from the State of California Franchise Tax Board tallying the number of new applications for the state new-home buyer tax credit should be released tomorrow. With more than 80% of the $100 million the state set aside for the program already claimed, many industry stakeholders in the state expect a sizeable surge in the number of credit applications as home buyers try to squeak in under the wire to take advantage of the $10,000 tax credit before the money runs out. If the swell in applications rivals last week's jump, where more than 1,000 applications came in during a single week, the funding will be gone in roughly another week, according to sources at the California Building Industry Association (CBIA).
The state tax credit, which offers new-home buyers up to $10,000 or 5% of the purchase price, whichever is less, has widely been credited as playing a crucial role in getting California's home building industry on sturdier footing. The state tax credit incentive has been a critical catalyst in part because it can be paired with the $8,000 federal first-time home buyer tax credit, giving select buyers a possible total of $18,000 in tax credits.
According to data from the CBIA and Hanley Wood Market Intelligence (HWMI) released June 10, sales in new-home communities of 10 units or more were up 44% in April as compared to March, although they were down 31% from the prior year. Moreover, HWMI data showed that conversion rates, meaning the rate builders convert traffic to sales, was 2.3% in April, the highest rate in a year.
However, because the state tax credit is only available at the time a new-home purchase is closed rather than contracted, the pressure is on state home builders to get their buyers in backlog to the closing table in record time.
In April--May figures were unavailable at the time of publication--there were 12,673 new homes in backlog, with just under 40% of them concentrated in Los Angeles, Riverside, and San Diego counties, according to HWMI data.
KB Home, Centex Corp., and D.R. Horton, in particular, are likely feeling the biggest squeeze. Between relatively large backlog numbers--1,012, 585, and 422 homes in backlog in all of California in April, respectively--and a sweet spot in the entry-level market, there's a need to accelerate closings or risk having some sales attrition as that lower tranche of the market, which is largely value driven, finds itself out a $10,000 tax credit.
That fear of possible contract cancellations, as home buyers spurred into action unhappily find that the state tax credit no longer is applicable to them, is causing home builders to pressure state lawmakers to extend the program.
Currently there are three tax credit-related bills making their way through the state Legislature. SB 49, sponsored by Sen. Robert Dutton, would remove the $100 million funding cap, but keep in place the provision that the home must be purchased before March 1, 2010.
AB 765, which has been passed by the assembly with bipartisan support, would increase the cap from $100 million to $300 million and allow buyers to reserve the credit at the time of the purchase agreement rather than at the close of escrow.
While both SB 49 and AB 765 are under review in the Senate Revenue and Taxation Committee, SBX 38, which similarly proposes to extend the credit, remains in special session.
It's likely that the three bills will end up rolled up in a single bill which will extend the tax credit through the sunset of the original program, which was to expire on Feb. 28, 2010, sources at the CBIA told Big Builder Online. But the big question is where the credit will fall on lawmakers' agenda during the state budget negotiations.
However, many stakeholders believe the program has a good chance of garnering a second life, particularly since it has bipartisan support.
Analysis by the CBIA also has shown that an extension of the program may cost less than expected while its benefits could significantly swell the state's revenue stream. Although most new-home buyers would be eligible for the full $10,000 tax credit--most homes in California cost more than $200,000--CBIA analysis has revealed that the true cost to the state per home buyer would likely be less than that.
Unlike the federal tax credit, California's state tax credit is not only non-refundable but also spread over three years. So, a home buyer eligible for the full $10,000 credit would actually receive $3,333 in tax credit each year for three years. Tax data has shown that many California residents owe less than $3,333 per year in state taxes, so the difference would go back into the state's coffers. As a ballpark figure, the association estimated that SB 49, for example, would cost the state a total of $59 million over three years.
Moreover, the association has argued that by extending the program, the state would see $300,000 in economic activity and the creation of three new jobs for every new home built during the life of the program.
But for all the support of the measure, the clock is ticking. An interruption in the program could prove confusing to potential home buyers and detrimental to both builders' businesses and the state economy.
Learn more about markets featured in this article: Los Angeles, CA.