California proposes subsidy to cover almost half the cost of first-time buyer's homes

Lawmakers in California have come up with a dramatic new proposal that, if it comes into being, would offer hope to first time buyers that are struggling to find a home to buy in the state.

California Senate Democrats have included a new program in a budget proposal unveiled last week that would massively subsidize the cost of buying a first home.

The California Dream for All program is a part of the Democrats’ larger Build Back Boldly program that was first outlined in April. Last week, lawmakers provided more details, saying the plan would subsidize up to 45% of the price of a home for a first-time buyer in the state, effectively slashing the price almost in half.

"Generation after generation, those with wealth get wealthier, and those without fall further behind," the budget plan said. "As has been the case so often throughout the nation's history, this has been made worse by racist barriers constructed to hold communities back, and the impacts of those barriers are still evident today. The first step to reaching the California dream of thriving in the middle class and building family wealth starts with homeownership."

The plan is a bit complex. The California Dream Fund would receive a one-time infusion of state and federal funds. Then, the state would sell shares of the fund to private investors who would then benefit from earning tax free returns on the appreciating value of the homes that money funds. So those investors in effect, become silent partners of home buyers who take advantage of the subsidy. The homeowers would be responsible for all of the maintenance costs, property taxes and insurance premiums, and they would have the option to buy out the investors’ share in their home at a later date.

Lawmakers said the program could save first-time buyers up to $12,000 a year through subsidized costs, and is targeted at “underrepresented homeownership communities” and those with high levels of student debt. Eligibility for the program would be based on income levels, and the eligibility of homes in the program would be based on their price. The exact requirements would differ from region to region to reflect the differences in the levels of income and home values throughout the state.

Proponents of the plan cite the inability of a rising number of Californians to buy their first home. A March survey by the Public Policy Institute of California found that nine out of 10 respondents said they considered housing affordability to be a serious problem. Almost one in three respondents said they were considering leaving the state due to their inability to buy a home.

Like everywhere in the U.S., home prices in California have grown rapidly over the last year. There has been a surge in demand for out-of-town homes due to the rise in remote work for example, while builders have struggled to keep pace with demand due to shortages of building materials and appliances.

The California Dream Fund isn’t without critics though. Reason.com associate editor Christian Britschgi said the most obvious problem with the scheme is that it could be abused by existing homeowners, who he says would simply increase their prices to capture most of the value of the subsidies.

He gives the example of a home priced at $400,000. The idea is that the first time buyer would stump up $220,000 with the fund covering $180,000. But in such a case, Britschgi said the seller could simply increase their price to $728,000, as this would still be in the range of someone that can afford the $400,000 asking price, so long as they use the subsidy. That would mean the seller nets an additional $328,000. Buyers that aren’t in a position to take advantage of the subsidy would not be able to compete, Britschgi argued.

“Should that happen, this new program would produce no improvement in housing affordability, and potentially make the problem worse for those who don't end up qualifying for subsidies,” he wrote. “It would also be a massive gift to current homeowners who'd see the value of their own homes increase, exacerbating the racial wealth gaps the program is intended to eliminate.”

The plan would certainly need to be well thought out to avoid such a scenario, though the proposed eligibility rules for homes may prevent some of this abuse of the system.

In any case, lawmakers say they’re pushing ahead with the plan, and will sit down with Governor Gavin Newsom this week to negotiate the state’s next budget.