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?
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.
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
- The purchase and close of escrow must occur by 12/31/09.
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)
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
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
- 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.