First-time buyers often rely on family gifts to afford the down payments on their homes. Now California Legislators want the government to fill the role of generous relative.
Lawmakers are proposing creating a billion-dollar fund in this year’s state budget that would provide California’s first-time buyers either all of the money they need for a down payment, or very close to it, in exchange for partial ownership stakes in those residences.
The proposal, put forward by state Senate President Pro Tem Toni Atkins, comes as skyrocketing property prices broaden the divide between those who own their homes and those who rent in California. In the past year, Golden State homeowners gained $141,000 in home equity, on average, the housing research firm CoreLogic reported last week, more than in any other state.
California’s rate of home ownership, at 56%, is second lowest in the country behind New York, according to the American Community Survey data from the census.
Atkins said the California Dream for All program is aimed at creating opportunities for lower- and middle-income buyers in a rapidly rising market, including those who have faced racial and economic barriers to homeownership.
“The California Dream for All program will give more people the chance to break free from the cycle of renting,” Atkins said last month. “This has the ability to change people’s lives.”
The proposal is the subject of negotiations between the Legislature’s Democratic supermajority and Gov. Gavin Newsom, also a Democrat, on how to spend a projected budget surplus of $97.5 billion. The legislature passed a budget on Monday 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 the ongoing negotiations. It was not included in the governor’s original budget nor in his May revised budget.
A multi-billion dollar fund
The housing proposal – which would call for issuing revenue bonds of $1 billion a year for 10 years to create the fund — is the largest in a slew of proposals intended to promote homeownership this year. The proposal also includes $50 million in the budget this year, and $150 million per year after that to pay for the administrative costs of the program and the interest costs of the revenue bonds.
The program envisions helping some 7,700 borrowers a year, according to estimates made by the program’s designers based on home price projections. A start date for the proposed program has not been indicated.
If approved, the program would begin issuing interest-free second mortgage loans covering up to 30% of a home’s purchase price, though lawmakers expect many of the loans would cover 17%, asking borrowers to include 3% of their own money or pair the loan with other first-time buyer programs.
The interest-free loans would be paid back into a state fund whenever the home was sold, or if a bigger mortgage was acquired in a cash-out refinancing. For instance, if the fund provided 20% toward the purchase price of the home, the fund would get back its initial investment, as well as a 20% share of any increase in the home’s value.
The program would reinvest those proceeds, giving the fund the ability to make new loans for eligible participants, even if prices have risen significantly.
As long as home prices rise, the plan would create equity for people who otherwise would have remained renters. The program also would generate enough returns for the state to help future homebuyers.
If prices fall, homeowners might still gain some equity and the fund would absorb the losses, program planners said.
Building generational wealth
The program is intended to build as much flexibility as possible. Buyers who have lived in historically low-income neighborhoods can 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 that the state’s homeownership assistance program serves people in all parts of the state, including in its high cost areas,” said Micah Weinberg, chief executive of the nonprofit group California Forward, which oversaw drafting the proposal.
“We cannot wait until more housing is built for these communities to begin to build the generational wealth that they were locked out of and deeply deserve,” he said during a recent legislative hearing.