In today’s high-priced housing market, it can be impossible for first-time homebuyers to break into homeownership. But imagine if they had the ability to cut the price of their home purchase in half.
California lawmakers are proposing to create a “California Dream Fund” that will potentially subsidize up to 45% of a first-time homebuyer’s home purchase.
Home prices are skyrocketing across the country, and California is no exception. Prices for low-tier homes in California are up 18% from last year, as of April 2021. First-time homebuyers most commonly purchase within this lower-third tier of homes, with home prices presently averaging below $632,000.
Lawmakers in the California Assembly and Senate recently revealed their budget plan for 2021-2022. It includes a plan to create a program to reduce the price of a first home by up to 45%.
This Build Back Boldly Plan aims to address historical and economic barriers to homeownership. As the cost of California homes continues to rise faster than incomes, only renters with access to significant savings (or the bank of mom and dad) can qualify to buy. This leaves low-income residents unable to break into homeownership, greatly hindering income mobility.
Under the proposed program, the state will establish a “California Dream Fund” which will cover nearly half of the costs of a home purchase for first-time homebuyers in exchange for a partial ownership stake in the home. This “silent partner” will own a minority share of up to 45% of the home.
Eligibility will be based on homebuyer income level, whereas eligibility of homes will be based on home price. These income and home price limits will vary by region and be on a sliding scale to avoid any cliff effects on eligibility.
Outreach efforts to target beneficiaries of the program will be made to:
- underrepresented homeownership communities;
- those who have not returned to homeownership after losing homes in the Great Recession; and
- those with high student debts.
The budget plan presents the proposal as a triple whammy win, enabling:
- first-time homebuyers to buy a home, thrive in the middle class and begin to build wealth;
- investors to protect their wealth by investing in California real estate; and
- California taxpayers and the state budget to face minimal new costs.
Given that it passes, the plan will be implemented through statute in 2022.
Supply and demand influence real estate prices
Although the “California Dream Fund” initiative proposed in the Build Back Boldly plan is in fact bold by allowing investors and private companies to subsidize low- and mid- income homebuyers’ first home purchases, it does raise questions of how it will work in practice.
For starters, what will happen when a homeowner defaults on their payments on a home purchased under the program? Do the investors lose their investment? Or is the homeowner or state somehow liable? The budget plan offers no explanation for what will happen in a foreclosure scenario.
Worse, the program does not address the underlying problem which has caused outsized home price increases. The problem of restrictive zoning is the main source of California’s current housing shortage and gargantuan home prices. Subsidizing demand without addressing zoning barriers which restrict supply will only produce more price increases.
Our current supply and demand imbalance is driving real estate prices faster than the pace of incomes. In 2021, supply is low due to a lack of residential and multi-family construction leading into the 2020 recession. Since 2020, the construction situation has only worsened, as builders cautiously watch for the impending rise in vacancies once the foreclosure moratorium expires. Additionally, lumber prices have increased dramatically in 2021, leading to higher prices of new homes and riskier opportunities for builders.
On the other hand, demand is high due to historically low interest rates the Federal Reserve (the Fed) introduced in 2020. Also, buyers are experiencing an emotional reaction to the housing market, driven by their fear of missing out (FOMO), animal spirits dictating purchasing decisions and irrational exuberance, or the tendency for buyers and investors to lose sight of clear warning signs.
All this has culminated into a supply-demand imbalance, and thus, rapidly rising prices. Restrictive zoning will persist, and prices will still rise. This legislation is a well-meaning attempt at reducing the barriers to homeownership in California, which has one of the lowest rates in the nation, but it does not address the roots of the problem.
Real estate professionals, contact your local representative and let them know your views on this historic piece of legislation which is aiming to be passed by 2022.
Related article:
