Will Tax Credit Revive Homebuilding Market?

 

A few months ago, leaders of the California Building Industry Association started using the term “depression.” When you look at the numbers, it’s hard to argue that the homebuilding industry is not in a depression, rather than a recession. That’s why builders are flogging a new, $10,000 state tax credit for purchasers of new homes.

The tax credit was part of last month’s state budget package, which appears to have had goodies for a large number of constituencies (see Bill Fulton’s Insight column). The homebuyer’s program contained in SBx2 15 (Ashburn) provides purchasers a $3,333 credit annually for three years that may be applied to the buyer’s state income tax return. The unit must not have been occupied previously, and the buyer must agree to occupy the home as a principle residence for at least two years. The program has a $100 million limit, meaning 10,000 buyers could receive the subsidy. Some buyers may also be eligible for the new federal tax credit program, although it appears the criteria don’t overlap well.

The intent of the state program is to kick-start California’s moribund homebuilding industry, which is reporting the lowest number of starts since, well … since anyone started keeping track. In January, builders pulled permits for 2,007 units, the lowest seasonally adjusted month on record, according to the Construction Industry Research Board. The low numbers caused the board to knock down its forecast for 2009 to 56,000 housing starts – or about 150,000 fewer units than were produced in 2005.

True, January is often slow for builders. Still, Santa Cruz, Merced, Madera, Napa, Solano, Sutter and Yuba counties combined issued only 15 permits for new units in January. Fifteen! These are counties with a combined 1.4 million residents.

Essentially, new homebuilding has stopped in large portions of the state. Not slowed, but stopped. But will the tax credit program actually goose construction activity, or will it simply help some big builders unload inventory?

“We should be able to see very quickly the willingness of builders to start pulling building permits again,” Lane Marceaux, chairman of the California Major Builders Council and head of Shea Homes’ Northern California division, told reporters during a recent conference call.

But Marceaux and Tim Coyle, vice president of the CBIA, declined to predict how quickly builders would respond.

“We can’t predict it will produce the outcome we expect, but it does have a track record,” Coyle said. He was referring to a federal program implemented in 1975, also during an economic slump. Congress authorized a tax credit worth 5% of home value up to $2,000 for the purchase of new homes. Home buying increased by 25% within a year and housing starts doubled in two years.

Fear and uncertainty have been keeping people out of the home buying market lately, observed Coyle. He said the tax credit should help ease consumers’ worries, but I’m not convinced. With the state unemployment rate steaming past 10% and real estate values continuing to drop, I think fear and uncertainty rule the day. Combine them with continuing tight credit for both buyers and builders, and reasons for confidence diminish further.

I have other questions about the tax credit program, such as whether it should have been targeted to certain areas or certain buyers. But I’m probably asking for too much. Give the builders credit for trying to get something going. We’ll check back later this year to see if the program seems to be working.

– Paul Shigley