California's newest tax credit for first-time home buyers is expected to help boost sales just like the one last year did, according to builders and advocates.
Despite California's budget woes, Gov. Arnold Schwarzenegger signed into law $200 million in home buyer tax credits March 25. First-time home buyers--those who haven't had ownership in a home for at least three years--will receive a tax credit of up to $10,000 each. $100 million will go to buyers of existing homes, and the remainder will be earmarked for buyers of brand-new houses.
The credit, offered on a first-come, first-served basis, will begin May 1 and will continue until the money runs out or Dec. 31, whichever comes first.
"The tax savings offered [through both the state and federal governments] has been a final deciding factor for many buyers, making the opportunity of buying a new home in the current market even more affordable and irresistible than ever," said Allen L. Morris, senior vice president of sales and marketing for Warmington Residential.
"It is our expectation that the new tax credit will continue to help us sell houses and prompt us to start more homes, which helps the economy in many ways, from employment to taxes and fees paid both by the home builder and the ultimate home owner."
The trickle-down economic impacts of selling new homes is expected to more than make up for the cost of the program, said Allison Barnett, legislative advocate for the California Building Industry Association (CBIA). New-home construction will generate taxes from the buyers and builders, home buyers will spend money on their new homes, and construction equals new job creation.
"You get the economic benefits now," said Barnett. "The effects are very far-reaching, and we think that the state will see the economic benefits of that."
Because of the benefits, the tax refund, which will be handed out over three years, "is expected to cost only $6 million this year," Barnett said.
Last year's $100 million of home buyer tax credits in California ran out after four months. This year's allotment is expected to serve more home buyers--not just because there's twice as much, but because most buyers only qualified to receive 70% of the $10,000 credit even though the state counted $10,000 for every buyer.
The CBIA argued that because most buyers were only able to claim on average $7,000 of the $10,000 tax credit, the new program should only count $7,000 worth of tax credit for each applicant toward the $200 million pot. They also argue that there should still be roughly $30 million left unclaimed in last year's allotment, according to Barnett.
Others are more skeptical about how much the tax credit will help the market.
"The $200 million allotted for the California tax credit is just too small to make much of a difference," said Wayne Yamano, a vice president for John Burns Real Estate Consulting. "The new-home part of the credit will last about five months based on our forecast for new-home closings this summer."
Considering the production time for new homes, a five-month window probably means that most people who will get the credit are already in the buying process or are seriously shopping, continued Yamano. "If anything, people who understand the limited number of credits will accelerate their purchase from the fourth quarter to the third quarter, perhaps making the tax credit look successful at first."