California Steps Up Big Time on Home Buyer Tax Credit Plan
This is the post on the California Building Industry Association site:
A plan passed by the Legislature early Thursday to close a $42 billion budget gap included a homebuyer tax credit supported by CBIA.
SB 15XX, sponsored by Sen. Roy Ashburn (R-Bakersfield), contained CBIA’s tax credit concept. It had been introduced Saturday as the Legislature entered the final stages of putting a budget deal together and passed both the Senate and the Assembly by overwhelming margins. Though greater details on the homebuyer tax credit will be forthcoming, the following provides a brief summary of what SB 15XX authorizes:
• A tax credit of up to $10,000 (5 percent of home price or $10,000, whichever is less) for the purchase of a newly constructed, previously unoccupied home.
• Available starting March 1, and running until March 2010 or whenever the $100 million funding authority runs out.
• Allocated by the state’s Franchise Tax Board on a first-come, first-served basis (details still to be worked out).
• Paid out to home purchasers over three tax years in equal amounts (i.e. $3300 for 2009, $3300 for 2010, etc.).
• Purchasers must reside in the home for at least two years.
• There are no income limitations that have to be met by purchasers.
• There is no first-time homebuyer requirement.
• There is no repayment requirement (unless the purchaser sells or rents out the property before two years expire).
To help homebuilding companies prepare their marketing plans for the new tax credit, CBIA will soon be meeting with the Franchise Tax Board to iron out the mechanics involved in administering the program.
California’s one of the six to eight ground-zero states for new home builders, and a program that potentially catalyzes new-home purchases from among discretionary buyers who’ve been parrying on the sidelines waiting to seize the right moment could function as a pump primer and an example, perhaps, for other states.
Here’s what UBS home building analyst David Goldberg top-lined on the California program this a.m.
Credit Will Drive New Home Sales
* Recently, we’ve hosted calls with builders in the 4 main CA mkts. A consistent theme has been that prices were being driven down toward foreclosure levels, where profitability was close to zero or negative. Given that this credit is only available for new construction, it should significantly ease pricing pressure should this be signed into law.
We Continue to Forecast a 2H09 Trough
* That said, we believe the benefits from this plan won’t be sufficient to overcome the negative impact on consumer confidence from rising job losses. We still expect housing to trough (nationally) in 2H09, as the economic downturn slows.
Michael Rehaut, senior home building analyst at JP Morgan, also believes the upside effects of the program will be constrained by a dismal jobs and broader economic outlook. Here are some notes he’s recorded on the measure.
We believe this represents only a modest positive and does not materially alter, in our view, the overall negative trends currently in place in CA, led by high foreclosure levels and rising job losses, as well as weak consumer confidence, which should further push home prices downward. Critically, we note that the credit, which is received by homebuyers over three years, only applies for newly built, previously unoccupied homes, and therefore does not help move foreclosures or existing home inventory, which we believe is the core of the supply problem. In addition, the funding authority has a limitation of a $100 million budget, which, divided by $10K/home, results in only 10K homes being impacted at the most. Accordingly, while we believe this might provide a modest positive boost to homebuilders with above-average CA exposure, including KBH (N) and SPF (UW), overall, we do not believe this credit to be material enough to change our ratings on these names, and from a broader view, our negative sector stance.
Yes, we think housing’s price correction is not finished; and yes we believe that consumer confidence tied to job insecurity will govern behavior. But, we also believe in a counter-fear possibility. If people start to believe they will miss the opportunity of a generation to buy a new home, and they can attain the financing to do it, this type of incentive may be what the doctor’s ordered.
It’s worth trying. Standing inventory and deteriorating communities are a growing enemy, not only economically but from a morale standpoint.
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