It was tempting to celebrate the news late last month that the state legislature had passed a budget that included half a billion dollars for a down payment assistance program for first-time home buyers. But well-meaning legislation, as is so often the case with policies that pump money into problems, can end up doing more harm than good.
The “California Dream for All Program” would loan qualified middle-class Californians up to 17% of a home’s value for their down payment. It looks good. If my family were lucky enough to be among those funded by the program, it could theoretically provide just enough help to help us break into the housing market.
The most likely scenario: with more money in the real estate market but not enough houses, prices will rise. Down payment assistance would allow my family to bid on a house, but we would not be able to compete with anyone who would outbid us. And that’s exactly what happens when there aren’t enough houses available.
The big winners of the grants will ultimately be the existing owners, who will naturally be looking for the best price.
This is an overwhelming realization for my wife and me. We live in East Los Angeles and have spent the past four years saving as much as we can to get into the housing market. We are both college graduates and work in non-profit jobs that, while unprofitable, would have sufficed for a modest home just ten years ago. But it seems that no matter how much we save, the prices steadily climb beyond our budget.
In March, the California Department of Housing and Community Development said 2.5 million new homes should be built by 2030 to address a housing shortage that has lasted half a century.
During this period, increasingly stringent zoning regulations stifled housing options for countless middle-class families. Townhouses, duplexes and small apartment buildings are largely banned, including on 75% of residential lots in Los Angeles and 94% in San Jose.
State lawmakers periodically try to attack the problem at its root, but ambitious bills that would fix the supply problem have repeatedly died in Sacramento at the hands of politicians fearing retaliation from voters not in my yard. Hence the politically safer but financially dubious decision to subsidize down payments for first-time home buyers.
To assess the California Dream for All fund’s chances of success, consider the effect of a homeowner’s subsidy already in effect. Research on the mortgage interest deduction shows that subsidizing homeowners’ mortgages drives up the cost of housing because buyers can afford to pay more for their homes.
The deduction does not make home ownership more accessible; it often excludes low-income buyers from the market, while wealthier homeowners disproportionately use this advantage simply to purchase larger homes.
If the government is going to subsidize someone’s housing, it should be those who need it the most. In California, 160,000 people are currently living without housing and an additional 1.5 million low-income renters are spending more than half their income on rent. Renters forced to pay 50% of their income in rent are unlikely to ever be able to afford to buy a home, even with home ownership subsidies.
While I would appreciate government assistance in buying a home, I am under no illusions that my situation is as dire as that of someone struggling to keep a roof over their head.
Instead of inviting higher real estate prices by subsidizing first-time home buyers in California, lawmakers could arm themselves against resistance from NIMBY (not in my backyard) and reform at least some zoning laws. . A California bill currently pending would remove parking minimums statewide. (Requiring a certain number of parking spaces is a common way for localities to block the construction of denser housing.) In 2019, San Diego dropped its parking requirements in areas near transit stops and saw housing construction more than quadruple.
Another bill would legalize housing in commercial corridors. Evidence from Minneapolis shows that such a move produces more housing and helps lower prices.
I would love to buy a house, but I would rather do it without taking resources that could go to those who really need them. Providing financial assistance to first-time home buyers does nothing to produce more homes — and building more homes, not just making existing homes more expensive, is the only way California can solve its housing problem.