From the U-T:
A $100 million new-home state tax credit is likely to be exhausted within days, prompting builders to press legislators to add $200 million to the kitty.
Valued at up to $10,000 per buyer, the credit was passed in March as a way to clear out unsold inventory at California housing tracts and to jump-start new construction. The state Franchise Tax Board said yesterday that 9,145 buyers had claimed $88.3 million in credits, leaving less than $12 million available. The California Building Industry Association said that means the funds could all be spoken for within about 10 days.
“We knew the tax credit would be successful, but we had no idea it would be this successful or that funding would run out in just four months,” said Tim Coyle, the association’s senior vice president. He said three bills are making their way through the Legislature to add $200 million to the tax credit fund. One already has been passed by the Assembly, he said.
“We’re pushing very hard to get this done in the next two weeks,” Coyle said.
The tax board estimates that the credit might actually cost the state only $59 million rather than $100 million because so many buyers will not qualify for the $10,000 maximum.
With building permits up from year-ago levels, the builder group says every new home built generates about $16,000 in state and local taxes, thereby offsetting whatever the credit costs. Coyle said these calculations are causing many lawmakers to look favorably on an expansion of the credit, which is due to expire in March. It comes on top of an $8,000 federal tax credit available to first-time home buyers, who can apply that credit to new or existing homes.
“I’ve never seen such strong bipartisan support for a housing bill,” Coyle said.
He acknowledged that legislators are simultaneously wrestling with a potential $24 billion state budget deficit.
“The big question is, can the tax credit be extended within the budget constraints the state is under? That’s what we’re working on,” Coyle said.
The real question should be can we afford to not extend it? /snark
Just another example of how unapologetically corrupt and/or idiotic our legislators really are (as if anyone needed more evidence to see that).
“We knew the tax credit would be successful, but we had no idea it would be this successful…”
Really, you didn’t know that a program that gives money away would be successful? No wonder CA is in the shape that its in.
If the builders are supporting this then I take that as my cue to oppose it.
This is just another means of propping up unsustainable home prices. If the properties were priced right to begin with there would be no need for buyer incentives.
What, more tax credit so builders can build more new homes? And DAPs are still allowed. This just goes to say that a powerful lobby base will be able to push virtually any program through legislation to keep the developers/builders above ground. We have a drought especially in S. Cal – why do we need more homes?
Our politicians are either corrupt or incompetant. I don’t know which is worse.
We have an oversupply of homes. Using tax payer dollars to incentivize new construction makes no sense. We have an affordability problem. Using tax payer dollars to artificially prop up home prices makes no sense. At the end of the day, economic forces will bring the market back to equilibrium. Of course we can delay the inevitable, but unfortunately it will come at great tax payer expense. In the meantime, wealth will be transfered from taxpayers to banks, builders and irresponsible borrowers – and the end result will be the same.
Can we fire these people already?
Why not blow a few billion on credits?
Obama and Barney Frank are going to bail us out regardless.
At what income does one (or a household) no longer qualify for the credit?
For the state $10k credit, there is no income limit-but it’s new houses only. For the Fed $8k credit, the income limit is $75k single, $150k married, with a phase out at incomes slightly above that, and you have to not have owned a house in the past three years, and you have to live in the house as your primary residence-but resales are okay as well as new houses. There’s a bill in the Senate to extend the Fed credit, increase it to $15k, and remove all the restrictions.
Who would have think it? Free money popular?
When you look around California do you really think we need more houses to built?
I’ve figured out I think how these things happen. Laws get support when they help business and superficially sound like they help the constituents.
INSANITY!
You wonder why CA is in such trouble! When will people realize that housing was one of the main cause of this economic mess? The only way for the housing market to stabilize and bring true growth is for the price to fall within reasonable level where average household can afford an average house without exotic financing! The faster we reach that price level the faster the recovery will be. Having these so called housing credits will only prolong the inevitable and make the pain worse. It will also add more debt to the economy!!! I’ve had my mind set to retire in CA but lately I am having serious thoughts about moving to a different state. I hear FL is finally becoming reasonably affordable….
My gut reaction to this program was not positive.
Upon further reflection, I actually don’t have a problem with this program. Since this is a tax credit on just new home construction, think of it as an effective reduction in taxes that will effectively lower home prices over time. The easier way to institute this tax credit would have been for the state to reduce fees on new home construction from $16,000 to $6,000. I bet if this were the case (as opposed to a tax credit), few people would be complaining. If builders are going forward with new construction because of this tax credit, then it likely means prices are still too high. A greater supply of homes will eventually lower prices to equilibrium.
The real problem is likely that the state somehow spends $20k on bureaucrats every time a new home is constructed. That is a problem that should be solved by cutting the state fat and not by increasing fees. I’m sure the fees for new construction are remarkably low in other states.
The federal tax credit I do have a problem with since it is the government redirecting capital to the housing sector from perhaps more productive uses.
Joe, do you think lenders will adjust price down by 10K when underwriting the loan? Doubt it. In fact, the government is now allowing buyers to use the federal tax credit as a downpayment. So we provide buyers 3% down FHA loans on collateral that’s overpriced by at least $10K (or $18K if you include federal tax credit). This means negative equity right off the bat. Taxpayers will be on the hook one way or the other.
I agree, I’d prefer to reduce fees by $10K, but this would push builders cost down by 10K, and thus prices down by $10K. Can’t have that, can we?
“I’m sure the fees for new construction are remarkably low in other states.”
You’re right on Joe. I was surprised to learn that in some CA municipalities, builders “fees” went from 10-20K/lot in the early part of this decade to 60-80K/lot during the boom years. The residential construction industry was a cash cow for many cities, until it was not.
I would guess that part of the rationale for this tax credit is to reduce pressure on municipalities to lower fees.
“The real problem is likely that the state somehow spends $20k on bureaucrats every time a new home is constructed.”
Joe, as they say on Wikipedia, citation needed.
Geotpf,
I was being sarcastic. I’m sure this is a money maker for the state – it must be for them to actually be able to offer a tax credit.
Let’s assume that it is in the state’s best financial interest to reduce the fees charged to home builders given the lower home prices. They have three methods to do so:
1) Lower the fees charged to homebuilders. Too permanent sounding. It is easier to remove the rebate than it is to increase the fees later (although both are likely not difficult).
2) Provide a rebate directly to the builders for each house sold. No political points for this one. It will be highlighted as the government protecting big business – if it is mentioned at all.
3) Provide tax credits to purchasers of new homes. Provides the same incentives and can be presented as a credit for working Americans (even though it will be priced into the purchase of the home).
The downside to #3 as you mentioned is that it is in the purchase price, but the home is immediately worth $10k less once original buyer takes possession. So the mortgages are riskier because the actual equity is lower than what may be assumed by the bank. On a $300,000 home, we are talking 3% of the purchase price. Not a big deal in California, in my opinion.
You mentioned FHA loans as an example. I think the real issue with FHA loans is the tax payer subsidies that result in 3% downpayments and low interest rates. When the government is buying up loans with 97% LTV or below market interest rates as is common, the banks have no incentive ensure the home is close the ‘fair’ value – besides, $10k is rounding error in California.
The federal tax credit is much much worse in my opinion as it is a ‘gift’ to all homeowners. It applies to all houses so it just inflates the housing values. Of course, subsidized mortgage rates, mortgage interest deductions, FHA loans, etc. are all gifts to those that owned homes at the time these programs are initiated and they all act to inflate home prices – especially at the low end.
So to summarize, #3 is the best option for politicians (most politically expedient), the worst option for taxpayers (subsidizes fake downpayments, makes a bad FHA loan program worse) and it effectively adds to our oversupply problem by encouraging builders to add to the housing stock.
Glad we can agree that our political class has no idea what they are doing or is corrupt.
Finally, the 10K tax credit does not generate a net 6K in tax receipts to the state. The 16K in fees are mostly sunk costs the builder generated in the entightlement, zoning and land development process for land that is already on the books. So yes, this is a subsidy to builders at tax payers’ expense. If the tax credit could be directed towards new land development (which won’t happen for a long time), then I would agree with you.
Also, I’m not sure anyone said that this policy ranks above other bad govt policies. I think the point everyone was trying to make is that this is just one more bad idea, of many, coming from our political class.
By the way, California just implemented a new foreclosure moratorium that will become effective tomorrow. Hurray! The housing crisis will now soon be over.
whoops, I forgot to add my handle (9:59 post)
Wow, so almost 300 million Americans and our money goes to just 10,000 home buyers so that builders can price their houses $10K more. This is a pretty exotic special interest, even for the government.
I guess I should have said 37 million Californians. In our state we’d kill 10 renters just to help out a homeowner, so it’s no surprise this legislation will probably pass.
SDBRI,
In a land where we’d kill 10 savers to help out a bankrupt debtor, yeah, that sounds about right.
We routinely sacrifice the good for the bad.
Chuck
“With building permits up from year-ago levels, the builder group says every new home built generates about $16,000 in state and local taxes, thereby offsetting whatever the credit costs. Coyle said these calculations are causing many lawmakers to look favorably on an expansion of the credit, which is due to expire in March.”
Either the builders group are idiots or they think that the legislators and taxpayers are idiots (or both). Just because each home sold generates $16,000 in state/local revenues and the tax credit costs $10,000 doesn’t mean the tax credit pays for itself. It all depends on how many homes would have been sold in the absence of the tax credit. You have to adjust for the free-rider costs – those buyers who qualify for the credit but would have purchased a home even without it. For example, if 1000 buyers would have purchased homes in the absence of the credit and generated $16 million in state/local revenues, and with the credit 1200 buyers purchase home generating $19.2 million in state/local revenues, but at a cost of 12.0 million in tax credits ($10,0000 to the 1200 buyers) then rather than paying for itself, the tax credit has reduced net state/local revenues from $16 million to $7.2 million ($19.2 minus $12.0). This is almost certainly the case with the new home tax credit. The free-rider costs overwhelm the benefits from the incremental new home sales.