California home prices are so high that households in many regions can’t even afford a down payment. A proposal going to the state’s voters in November would help, proponents say.
Proposition 37, embedded deep in the laundry list of potential policies that Californians will vote on later this year, would allow the state to loan middle-income residents up to 17% of the purchase price of a newly constructed home. Combined with a traditional mortgage, the loan could allow homebuyers to put down as little as 3% on their new home.
That would take a massive bite out of the amount eligible homebuyers would need to pay up front. The median home sale price in California was about $778,000 in June, according to real estate brokerage Redfin, putting a 20% down payment at roughly $156,000. That’s many times more than the median California household has in their bank account, which estimates generally put at less than $20,000.
A 3% down payment would be far more feasible, putting the upfront cost at just $23,000.
Prop 37 has racked up support from labor unions, Realtors and some researchers who say it would offer a morsel of financial assistance to families starved of affordability. But some experts argue that its benefits aren’t guaranteed, especially where it’s most needed.
How would the program work?
Prop 37 would authorize the California Housing Finance Agency, also known as CalHFA, to provide up to $25 billion in “middle-class homeownership loans,” which would cover up to 17% of an eligible home sale price. The homebuyer would have to pay at least 3% of the home’s value in down payment.
These secondary loans would have to be paired with a primary mortgage, and they’d only be available to California residents, though unlike the state’s other homebuyer assistance programs, Prop 37 wouldn’t require them to be first-time buyers. Additionally, a homebuyer could only apply for the program if they’re the first owner of the property, a requirement Prop 37’s proponents say would encourage housing development.
The program would only be available to homebuyers with median household incomes up to twice the area median income. In San Francisco, that comes out to about $260,000 for a two-person household. The home would also have to be priced below certain limits (about $1.56 million in most of the Bay Area).
CalHFA would pay for the loans by selling up to $25 billion in bonds. The homebuyers would cover the cost of those bonds, plus interest, through their mortgage payments to CalHFA, meaning the program would theoretically pay for itself.
How much would the loans help homebuyers?
By providing homebuyers with some initial cash, Prop 37 could allow them to avoid paying mortgage insurance, which is usually required for buyers who put down less than 20%. For families who don’t already own property or have a flush bank account, “this may be your only option to enter into homeownership,” said David Garcia, deputy director of policy at the UC Berkeley Terner Center for Housing Innovation.
But while Prop 37 would order CalHFA to set rates “as low as possible” for homebuyers, there’s nothing in the law itself that dictates specific levels. Scott Graves, budget director at the California Budget and Policy Center, said those rates could be as high or even higher than those offered by conventional loans.
Financing a secondary loan is somewhat risky, Graves explained, because if the homebuyer defaults, the first mortgage gets paid before the other. That means the investors funding the program would likely expect a bigger return to account for that risk – which would translate into a higher mortgage rate.
Graves also pointed out that California’s other assistance programs, such as its Dream for All initiative, defer homebuyers’ payments until the first mortgage is paid or the home is sold. Prop 37 would allow homeowners to keep more of their property’s appreciation, but at the cost of higher monthly payments.
“The question is not whether the state, in some way, should assist people, but what is the best program design given families’ needs when they purchase a home?” Graves said.
Would Prop 37 raise home prices?
Because homebuyer assistance programs grow the pool of potential buyers, they can lead to more competition for properties unless there’s also a boost in supply, experts say.
Prop 37 would try to strike that balance by only covering sales of newly built homes. That requirement could encourage developers to build more, since the program would give them more certainty that they would readily find a buyer, said Daryl Fairweather, chief economist at Redfin.
“Even though it’s structured as down payment assistance, I think in the end, it actually is more akin to a supply subsidy than a demand subsidy,” Fairweather said.
What’s less certain is where that new housing would get built. Fairweather said it’s possible developers could focus construction in California’s inland regions, where vacant land is cheaper and restrictions are looser, instead of its coastal metros. In the Bay Area, where for-sale housing construction has slowed to a crawl, there may be fewer opportunities for buyers to use Prop 37, though experts suggested that denser projects such as condos could serve as good options.
Who’s backing the proposal?
Robert Hertzberg, a former speaker of the California State Assembly, sponsored Prop 37, which has been endorsed by Democratic gubernatorial candidate Xavier Becerra.
Hertzberg told SFGATE that he spent five years drafting the proposal, and he claims it could lead to the development of thousands of new homes. (SFGATE and the San Francisco Chronicle are both owned by Hearst but operate independently.)
As of the end of June, supporters of the measure had donated nearly $13 million to its campaign, according to the latest filings. It’s been bankrolled almost entirely by Realtors and carpenters unions, but the largest single donation was a $6 million contribution from Building a Better California, a political action committee largely funded by Google co-founder Sergey Brin.
