Our proposal: We propose Californian’s legislature create a program to allow future first-time homebuyers to set up savings accounts specifically to be used for down payments.
Why: In the aftermath of the 2008 recession, slow wage growth and high rents have crippled Californians’ ability to save. This is especially true in the state’s most populous coastal cities, where the average renter spends nearly half of their income on rent.
Nationwide, 68% of would-be homebuyers cite saving for a down payment as the biggest obstacle to homeownership, according to Zillow.
Much like a health savings account (HSA) operates, these accounts will:
- accept tax-free income as deposits;
- accrue tax-free interest; and
- have the opportunity for employers to make tax-free contributions.
These types of savings accounts will reduce state tax revenue. But they will promote homeownership for more qualified residents, which is ultimately a boon for a more stable housing market and the state’s economy.
For perspective, California’s homeownership rate is one of the lowest in the nation, averaging below 55% in the decade following the 2008 recession, about ten percentage points below the national average.
Helping renters save up to become homeowners is much preferred to other solutions to California’s low homeownership rate. For example, many first-time homebuyers receive assistance in the form of down payment gifts from relatives. Still others put down as little as 3% of the purchase price on their first home.
These tactics prevent skin-in-the-game, making it more likely for homeowners to fall underwater and default.
But a tax-free down payment savings program allows homebuyers to use their own money. The main difference is that they can grow their savings more quickly so they will be able to put down more money, sooner.
What you can do: Real estate professionals can encourage renters to save for a down payment by using their marketing campaigns to target large rental communities.
Compile a selection of marketing materials aimed specifically at renters and include these rental communities at least once a month on your regular FARM schedule. Unlike current homeowners, renters are essentially “up for grabs” in the real estate world, so becoming known as the local first-time homebuyer expert will steadily increase your clientele in the coming years.
Editor’s note — Members of first tuesday’s CalPaces program for brokers with 16 or more agents have access to the free first-time homebuyer guide, a valuable resource for anyone new to real estate.
Check out first tuesday’s full selection of free, personalized FARM letters here.
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