Housing Opportunity Committee
Taxation Committee
Legislative Committee

The following is for study only and has NOT been approved by the Housing Opportunity, Taxation, Legislative or Executive Committees, or the Board of Directors.

Issue:
The California Building Industry Association (CBIA) intends to introduce a bill in the 2009 Session of the California Legislature to create a "Homebuyer Tax Credit" for purchasers of newly constructed homes in California. What should the C.A.R. position on this proposed legislation be?

Action:
Optional

Options:
1. Support the CBIA Proposal.
2. Oppose the CBIA Legislation unless it is amended to cover all purchases of all homes.
3. Oppose the CBIA Legislation unless it is amended to include all first-time homebuyer purchases of new and re-sale homes.
4. Other

Status/Summary:
CBIA intends to introduce a bill in January that creates a "Homebuyers' Tax Credit" that works as follows:
- A 5% of the home price tax credit, not to exceed $10,000.
- Applies to the purchase of newly constructed for sale housing.
- The home must be used as the principal residence for at least one year.
- The purchase and close of escrow must occur by 12/31/09.

Discussion

The CBIA Proposal

CBIA believes Congress set a precedent back in 1975 for the utilization of a homebuyer tax credit to stimulate a floundering economy. Congress enacted a tax credit at that time aimed at stimulating sales and returning to a status of healthy new housing construction. It was believed then that prospective homebuyers, who had been sitting on the sidelines waiting for prices to hit bottom, would "jump" at the opportunity offered by a temporary tax credit and enthusiastically re-enter the housing market.

The 1975 credit was set at 5% of the sale price, with a cap of $2,000. It was limited to purchases of newly constructed homes intended for use as principal residences, and it was only available for nine (9) months. CBIA maintains that this tax credit worked, as home purchases increased by nearly 25% in the first year following the credit's enactment. Home values began a steady recovery, and new housing starts doubled in two years.

CBIA applies a mantra to this proposal that "Housing = Jobs, a housing stimulus for economic recovery." It further maintains that "a healthy real estate market relies on buying, selling and building" housing, all occurring simultaneously at normal levels, if a strong economic condition is to be restored in California. CBIA also advocates this tax credit because it will help stop the downward spiral of home prices, put people back to work, revive the state economy and increase tax revenues. Stating that prospective homebuyers are reluctant to return to the housing markets because of consistently declining home prices, record foreclosures, tighter borrowing requirements, sinking consumer confidence and simple fear, CBIA believes that "construction is critical to the California economy and housing is a key element of the industry." It points to housing-driven employment losses, in addition to those in the construction industry, as further justification of its proposal, stating that workers such as truckers, cabinet makers, furniture manufacturers, building suppliers, appliance distributors, lenders, accountants, insurers, painters, and many more have experienced job losses as a consequence of the housing crisis.

The National Association of Homebuilders (NAHB) Proposal

Fix Housing First, which consists of more than 600 organizations, home building companies and manufacturers continues to add new members on a daily basis, is spear-headed by NAHB and is pressing for a major stimulus package to stem the decline in home values, stabilize financial markets and reignite consumer demand. To get the economy moving again, the coalition is urging Congress to support enhancements to the home buyer tax credit and provide below-market 30-year fixed-rate mortgages for home purchases.

The coalition cites a similar plan that worked in 1975, when the nation was also in the midst of a recession. Congress then passed a short-term $2,000 tax credit for all new homes ($12,000 adjusted for today's median home prices) along with subsidized mortgage rates. The stimulus jump started the depressed economy and the effects continued long after the measure expired. The 2008 housing stimulus proponents are calling for significant enhancements to the current $7,500 tax credit for first-time home buyers. Among the improvements:

- All primary home purchases between April 9, 2008 and Dec. 31, 2009 would be eligible.

- The credit amount would be increased to 10 percent of the price of the home, capped at 3.5 percent of FHA loan limits, bringing the credit to a range of roughly between $10,000 and $22,000.

- The current recapture provision would be eliminated. Repayment would only be required if the home were sold within three years.
 
- The credit would be available at the time of closing, making it easier to be used as a down payment.

The second component of the stimulus plan would provide qualified home buyers with 30-year fixed-rate mortgages at 2.99 percent on contracts closed until June 30, 2009 and 3.99 percent on closings between July 1 and Dec. 31, 2009.

The coalition has also announced its support for continuing foreclosure prevention measures to keep people in their homes.

To help buyers in California and other high-cost markets, NAHB is also calling on Congress to permanently keep the FHA/Fannie Mae and Freddie Mac conforming loan limits at $729,750. Under current law, the loan limits for high-cost areas will be reduced to $625,500 on Jan. 1, 2009.

State Taxation Considerations

Given the state's projected budget deficit for the balance of this fiscal year and the 2009-10 fiscal year of a projected $40.1 billion, it is quite likely that CBIA's proposed legislation will not be well received by the Legislature. With the Governor's rejection of the Democrat-approved budget gap package of bills in mid-December, and his calling of a third special legislative session to deal with the fiscal emergency he declared, the Legislature finds itself struggling mightily to identify the program cuts and tax increases needed to breach the budget gap.

In addition, although the federal tax credit enacted in 1975 may have been effective that does not necessarily mean that a state tax credit will work now. State income tax rates are significantly lower than federal rates and, as a result, the benefit to potential homeowners of a state-only tax credit may be too low to significantly increase home buying.