While the biggest political news of last week was surely the controversial Health Care Reform Bill, California also passed a housing bill that is sure to aid the state’s housing market. A few months ago I shared that Governor Schwarzenegger, in his January State of the State address, said he wanted to create state tax credits for California home buyers. Today, I’m happy to report that last Thursday he signed a bill that gives both first-time home buyers and buyers of new homes state tax credits up to $10,000.
As I understand it, this tax credit is IN ADDITION to the current $8,000 Federal tax credit that is available until April 30th, 2010. This means that if you are a first-time home buyer in California and get into contract to purchase a primary residence in the next 30 days, you could be eligible for $18,000 in tax credits!!! Quite incredible.
But as lucrative as this new California bill sounds, it is as equally illusive. Let me explain.
California passed a similar $100 million bill in 2009 that gave credits to buyers of new homes only, and funding ran out in 4 short months, even in a year that saw record-low California new home sales. This latest bill provides the same $100 million for new home buyers and an additional $100 million for 1st time home buyers. through December 2010 OR until funding is exhausted. With housing affordability at reasonable levels in many parts of the state, expect the funding for both of these credits to also dry up quickly; possibly within weeks after the May 1st commencement date!!! Consider these numbers:
- In 2009, 47% of California home buyers were 1st-time home buyers
- The California Association of REALTORS projects that 527,500 California single family homes will be sold in 2010, which means over 250,000 homes could be sold to 1st-time home buyers
- With enough funding for approximately 10,000 1st-time home buyers, this means only 4% of 1st timers will get the credit
- If 20,000 homes sold each month are to first-time home buyers (roughly 250K divided by 12 months), this means funding will be exhausted within 2 weeks
So, what’s the moral of the story? Incentives (especially illusive ones) should not drive the decision to purchase a home. Yes, another amazing incentive has been thrown at 1st-time home buyers, but it is simply the cherry on top of an already delicious ice cream sundae. If you are considering home ownership, good for you! Homes in most areas are more affordable now than a decade ago. But, be sure you’re buying to enjoy the whole sundae (home), not just the maraschino cherries (tax credits & low interest rates).
*Please consult a tax professional before assuming you may qualify for any of the aforementioned state or federal tax credits.
Matt Sundermier's Memos on Real Estate & on Life 
