On January 13, 2010, Governor Schwarzenegger outlined his proposal for a $10,000 California state housing tax credit as part of his California Jobs Initiative. The credit would provide $200 million worth of tax credits for the purchasers of newly-constructed or existing homes, twice the amount that was available to homebuyers under the last state housing tax credit. The governor has proposed this latest tax credit based on the high demand for the last round of state tax credits, and in hopes that the credit will keep providing a steady stream of buyers, thereby boosting employment in the construction industry.

Will it pass muster with the state legislature? The real estate and construction industries certainly have a vested interest in making home buying attractive. However, opponents of the new tax credit consider this proposed tax credit a waste of funds in light of the massive cuts being made to other business sectors, and the overall weakness of the state economy.

While the governor may have good intentions, he has entirely ignored the massive inventory of foreclosed properties in the pipeline. Whether it is allowed to trickle slowly onto the market or released in a flood, a shadow inventory of future foreclosures still exists. If this proposal becomes a bill, is passed by the legislature and causes the construction industry to start building anew, it will be a disaster for prices in an already volatile housing market.

What the state needs to do is fix its foreclosure problem before it looks to encourage the entry of new housing into the market. To do otherwise is tantamount to building on quicksand; it’s only a matter of time before the property is sucked under. Unfortunately, fixing the foreclosure problem can only be accomplished if the federal government gives cramdown authority back to bankruptcy judges.

In the meanwhile, brokers and agents in the know need to be aware this new housing tax credit is not the way to fix the housing market. It only serves to drag out what previous government interference has already structured as a lengthy recovery. The return to a stable, healthy market does not depend on artificial supports such as tax credits (which do not create ready, willing and able homebuyers), but rather on houses correctly priced in a market of sustainable buyers consisting of owner-occupants with stable incomes — jobs.