It was tempting to celebrate news late last month that the state legislature had passed a budget that included half a trillion dollars for a program providing down-payment assistance for first-time home buyers. But the well-intentioned legislation, as is so often the case with policies throwing money at problems, may end up doing more harm than good.
The “California Dream for All Program” would lend qualified middle-class Californians up to 17 percent of a home’s value for their down payment. Sounds good. If my family were lucky enough to be one of those funded through the program, it theoretically could provide just enough assistance to help us break into the housing market.
The more likely scenario: With more money in the real estate market but not enough houses, prices will rise. The down-payment help would enable my family to bid on a house, but we’d be in no position to compete with anyone who wants to outbid us. And that’s exactly what happens when there aren’t enough houses available.
The big winners of subsidies will ultimately be existing homeowners, who will naturally seek the best price.
That’s a crushing realization for my wife and me. We live in East Los Angeles and have spent the past four years saving as much as possible to enter the housing market. We’re both college-educated and work nonprofit jobs that, while not highly lucrative, would have provided enough for a modest home just a decade ago. But it seems no matter how much we save, prices steadily climb beyond our budget.
In March, the California Department of Housing and Community Development said 2.5 million new homes would need to be built by 2030 to address a housing shortfall that has been half a century in the making.
Over that span, ever-tightening zoning regulations have choked off housing options for countless middle-class families. Townhouses, duplexes and small apartment buildings are widely banned — including on 75 percent of residential land in Los Angeles and 94 percent in San Jose.
State lawmakers periodically try to attack the problem at its root, but ambitious bills that would address the supply problem have repeatedly died in Sacramento at the hands of politicians fearing retribution from not-in-my-backyard voters. Hence the politically safer but financially dubious move to subsidize down payments for first-time home buyers.
To assess the prospects of success for the California Dream for All fund, consider the effect of a homeowner subsidy already in effect. Research on the mortgage interest deduction shows that subsidizing homeowners’ mortgages pushes up the cost of housing because buyers can afford to pay more for their houses.
The deduction does not make homeownership more accessible; it often prices lower-income buyers out of the market, while better-off homeowners disproportionately use the benefit simply to buy larger homes.
If the government is going to subsidize anyone’s housing, it should be those most urgently in need. In California right now, 160,000 people are living without a home, and an additional 1.5 million low-income renters spend over half their income on rent. Renters stretched to paying 50 percent of their income on rent are unlikely ever to afford to buy a home, even with homeownership subsidies.
As much as I’d enjoy government assistance in buying a house, I’m under no illusion that my predicament is as dire as that of someone struggling to keep a roof over their head.
Instead of inviting higher housing prices by subsidizing first-time home buyers in California, lawmakers could steel themselves against NIMBY (not in my backyard) resistance and reform at least some zoning laws. A California bill now under consideration would remove parking minimums across the state. (Requiring a certain number of parking spots is a common way for localities to block 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 bring down prices.
I would love to buy a house, but I would prefer to do it without taking resources that could go to those truly in need. Providing financial assistance to first-time home buyers does nothing to produce more houses — and building more houses, not just making existing ones more expensive, is the only way California can solve its housing problem.