Aralyn Tucker outside her apartment in Natomas on June 11, 2022. Photo by Julie Hotz for CalMatters
First-time home buyers often rely on family donations to pay the down payment on their home. Now, California lawmakers want the government to fulfill the role of generous parent.
Lawmakers and Gov. Gavin Newsom have approved the California Dream for All program that provides first-time home buyers with either all the money they need for a down payment, or very close to it, in exchange for a partial participation in these residences.
The measure, proposed by State Senate Chairman Pro Tem Toni Atkins, comes as soaring real estate prices are widening the gap between those who own their homes and those who rent in California. Over the past year, owners of Golden State earned $141,000 in home equityon average, the housing research firm CoreLogic reported last week, more than in any other state.
California’s homeownership rate, at 56%, is the second lowest in the nation behind New York City, according to data from the American Community Survey of the census.
Atkins said the California Dream for All program aims to create opportunities for low- and middle-income buyers in a rapidly growing market, including those who have faced racial and economic barriers to homeownership. .
“The California Dream for All program will give more people the opportunity to break free from the rental cycle,” Atkins said last month. “It has the ability to change people’s lives.”
The proposal is the subject of negotiations between the Democratic supermajority in the Legislative Assembly and Gov. Gavin Newsom, also a Democrat, over how to spend a projected budget surplus of $97.5 billion. The legislature on Monday passed a budget that includes the proposal, though negotiations with Newsom continue on a final overall spending plan.
A spokesman for the governor declined to comment on the proposal, citing ongoing negotiations. It was not included in the governor’s original budget or in his May revised budget.
A multi-billion dollar fund
The fund would seek the issuance of revenue bonds of $500 million a year. Additional funds for the program should be allocated in future budgets.
How the Proposed “California Dream for All” Program Would Work
As currently proposed, the plan would be funded at $500 million per year, aimed at helping 4,000 borrowers per year. The original proposal called for $1 billion a year for the program. Here’s how it would work for a hypothetical set of homebuyers.
The program would begin issuing interest-free second mortgages covering up to 30% of a home‘s purchase price, although lawmakers expect many loans to cover 17%, asking borrowers to include 3% of their own money or link the loan with other programs for first-time buyers.
The interest-free loans would be repaid into a public fund each time the house was sold or if a larger mortgage was acquired in a cash refinance. For example, if the fund provided 20% of the purchase price of the house, the fund would recoup its initial investment, plus a 20% share of any increase in the value of the house.
The program would reinvest these proceeds, giving the fund the ability to make new loans to eligible participants, even if prices have risen significantly.
As long as house prices rise, the plan will create equity for people who would otherwise have remained renters. The program would also generate enough returns for the state to help future home buyers.
If prices fall, owners could still gain equity and the fund would absorb the losses, program planners said.
Building a generational heritage
The program aims to create as much flexibility as possible. Buyers who have lived in historically low-income neighborhoods may receive priority for some of the funds and can use shared appreciation loans to buy in their current neighborhoods or buy homes elsewhere.
“We need to make sure the state’s homeownership assistance program serves people in all parts of the state, including its high-cost areas,” said Micah Weinberg, director general of the nonprofit group California Forward, who oversaw the drafting of the proposal.
“We can’t wait for more homes to be built for these communities to start creating the generational wealth they’ve been left out of and so deeply deserve,” he told a recent legislative hearing.
The program would be open to buyers earning less than 150% of their area’s median income and would target first-generation homebuyers as well as those with high student debt.
If approved, the program would significantly improve California housing affordability for people on one of the loans, proponents say. If it had existed in 2021, for example, it would have reduced the annual income needed to buy a home at the median price of $786,000 from over $30,000 to around $90,000, according to Kate Owens, director at HR&A Advisors, Inc., one of the economic consultancies contracted to design the program.
The program differs from other down payment assistance programs in that most offer much smaller payments, often in the range of 3-5% of the purchase price, in the form of grants or loans.
The proposed state fund allows homeowners to skip a down payment, eliminating the need to save for that initial investment, which Atkins says is the biggest hurdle for many buyers in today’s market.
These equity sharing arrangements are often referred to as Shared Appreciation Mortgages. The California plan would be the largest attempt to experiment with such home loans ever created in the United States, the program’s designers said.
Fewer can afford homes
Over a 40-year period, the program could help some 157,000 families with interest-free loans, said Gene Slater, president of CSG Advisors, another consulting firm hired to design the program.
Lawmakers said they were trying to do more to support homeownership, especially now that the pandemic has spurred demand for single-family properties as remote workers seek more space and communities across the world are falling woefully short of home construction targets.
“Until California truly prioritizes affordable homeownership, a generation of Californians will effectively be excluded from one of the most reliable forms of wealth generation available – owning a home,” said Assemblyman Tim Grayson, a Concord Democrat, in April.
Rising home prices in California mean affordability has plummeted, even more for black and Latino families. Last year, only 26% of California households earned the minimum annual income needed to buy a single-family home at the median price. Only 17% of black and Latino households could afford such a property, according to a report by the California Association of Realtors, which backs the creation of the down payment fund.
“Homeownership offers working families the unparalleled ability to accumulate generational wealth and enjoy financial stability through a fixed mortgage versus rising rents,” said the California Homeownership Coalition, a group that includes real estate agents, the California Building Industry Association and Habitat for Humanity.
“These financing solutions are especially important for communities of color that still face disproportionately low homeownership rates due to decades-long discriminatory housing practices.”
Richard Green, director of the Lusk Center for Real Estate at the University of Southern California, presented a competing research proposal that was not selected by the state. He supports the objectives of the one under study but is concerned about its complexity.
“There are a lot of things in life where the political idea is great (but) executing it is difficult,” he said, adding that while the program would be only a fraction of the huge state’s housing market, it could contribute to rising prices if it got bigger. “If this program evolves, it would almost certainly have at least some impact.”
Andrew Caplin, a professor at New York University who wrote a book on shared equity programs, said he was eager to see the concept take off, but he promoted the idea widely to private investors, not governments.
Caplin hasn’t studied the California plan, but he said he’s worried politicians will feel pressured not to demand repayment and “ultimately everything will be agreed that we can’t really collect the money. – such as student loans”.
someone else’s mortgage
Had it existed, the program could have helped a homebuyer like Aralyn Tucker, 29, who moved to Sacramento in 2017 because she was out of the real estate market in her hometown of San Jose.
Tucker, who holds a master’s degree in public policy and administration from Sacramento State University, works in human resources at a private school. She was only able to afford a two-bedroom condo in Sacramento after her parents gave most of the deposit as a gift.
Buying a house was important, she said, because her family had moved at least four times before she turned 18, sometimes in unstable housing situations.
“Creating this generational wealth and creating this security was very important to my parents,” she said.
Help with the down payment was essential because her mortgage payment is only $200 more than the rent, she said, but she couldn’t save for the down payment on her own.
“People of my generation, we have so many extra expenses that we’re not able to put that money aside as a down payment,” she said.
“Here I make enough money to pay $2,200 in rent every month which I pay on time every month, and yet I wouldn’t qualify for a mortgage because I don’t have the down payment,” she said. “We are constantly behind and contributing to a system that gives us nothing back when it comes to fairness. I’m paying someone else’s mortgage.
The Business Journal contributed to this report.