Need help with a down payment? California Democrats want the state to chip in for homebuyers

California could get in the business of helping first-time home buyers make down payments under a new proposal that aims to lower barriers to ownership in an era of sky-high housing costs.

A coalition of seven Democratic senators formally announced the “California Dream for All” program last week as part of a larger budget proposal they want Gov. Gavin Newsom to consider.

The state would serve as a “silent partner” to first-time owners, in exchange for up to 45% ownership of a house. By their calculation, that means someone eyeing a $400,000 home could buy it for “a more affordable price” of $220,000, with the state picking up the other $180,000.

Owners would still have to maintain the property, pay taxes and manage insurance. Eligibility would hinge on income levels and housing prices, though the two metrics would vary regionally.

Senate President Pro Tem Toni Atkins, D-San Diego, called the program part of one of the “most daring proposals yet,” and said it would create a “once in a generation chance for transformational change.”

To fund the program, a “state-sponsored corporation” would make a one-time deposit using available dollars into a “new revolving fund.”

The state would then sell shares to investors to generate new revenue. As home values increase, so would the fund’s value, the Democrats say.

There is a chance that private companies and investors would replace the state-sponsored corporation to finance the fund, the plan’s blueprint includes. The state would provide tax incentives to inspire investment. The Democrats’ proposal states that the investors would help keep costs to the state low.

“So, Win-Win-Win,” the Democrats’ announcement reads. “Win #1 – homebuyers that can now afford a home and can thrive in the middle class and begin to build wealth; Win #2 – investors that get to protect and build their wealth by investing in California real estate; and Win #3 – California taxpayers and state budget that will face only minimal new costs.”

California affordability crisis

Homeowners could eventually “buy out” the fund to acquire a house completely. And because the program includes no residency time limits, owners could stay long enough to leave their home to family members.

The legislators argued that the program would help dismantle a decades-long affordability emergency that’s made buying a house all but impossible for middle-class Californians. The lawmakers said the state’s partnership would reduce wealth disparities by creating an important economic opportunity for these residents.

The average single-family detached home in California sold for $699,980 in January, according to the Department of Finance’s March 2021 bulletin, a near-22% increase from the year before. Prices in parts of Southern California have jumped 15% since last year to an average $619,750. Across the four counties of the Sacramento region, the median home price hit $530,000 in March.

Democrats want the program to target Californians with significant student debt, and those who lost homes during the Great Recession.

“We need to stop the perpetual cycle of poverty. And it’s my firm belief that a key strategy or component to this is making homeownership a reality for our residents,” Sen. Anna Caballero, D-Salinas, added. “Owning a home fundamentally changes family, and it is the fastest way to wealth creation in our country.”

Real estate ‘out of reach’

The proposal has taxpayer advocates and housing experts waiting for more details.

Jon Coupal, president of the Howard Jarvis Taxpayers Association, underscored the importance of helping first-time homebuyers.

“But,” he added, “the state of California has an unfortunate history of not executing well on efforts to help average Californians.”

Coupal raised questions of how applicants would be vetted, or how much money would actually be made available in the fund through the investment process.

David Garcia, policy director for the Terner Center for Housing Innovation at UC Berkeley, also said it’s unclear exactly how the program would work, or whether it would function “seamlessly with the real estate market.” He said sellers and banks might not want to work with the buyers.

But, Garcia added, the program could offer hope for aspiring homeowners in a time when buying a house has become “increasingly out of reach.”

“I think any innovative solutions they can come up with to drive home ownership is needed,” Garcia said. “We have good data on the fact that homeownership is increasingly falling out of reach for moderate income households in California, not just in high-income areas.”