California Politicians Craft Nifty New Idea To Increase Housing Costs

Lawmakers are proposing to create a "California Dream Fund" that would subsidize up to 45 percent of the costs of a new home.

Home prices are surging across the country. Naturally, California politicians have an innovative new idea to drive them even higher.

On Tuesday, Democratic lawmakers in the state Assembly and Senate unveiled their joint legislative budget plan for 2021–22, which includes a plan to create a "California Dream For All" program that would subsidize nearly half of the cost of purchasing a new home, reports CalMatters.

"The first step to reaching the California dream of thriving in the middle class and building family wealth starts with homeownership. But taking that first step is even more challenging as the cost of California homes grows higher and higher," reads California Senate Democrats' April-released Build Back Boldly budget plan, which first outlined the idea. "The California Dream For All first time homebuyer program aims to address historical and economic barriers to homeownership with a new way for Californians to buy a first home and get a foothold in the middle class."

Under this program, the state would establish a "California Dream Fund" that would cover 45 percent of the costs of a home purchase for first-time buyers in exchange for a partial ownership stake in the home.

"Eligibility for the homebuyer will be based on income levels, eligibility of homes will be based on the home price," reads the Senate Democrats' outline of the plan. It adds that these income and home price limits would vary by region and be on a sliding scale to avoid any eligibility cliffs.

To start things off, a California Dream Fund could receive a one-time infusion of available state and federal funds (California is currently sitting on a massive budget surplus). Afterward, shares of the fund could be sold to private investors who could then earn tax-free returns on the appreciating value of the homes they've bought into.

Homeowners would be responsible for 100 percent of maintenance costs, property taxes, and insurance premiums for their property. They would also have the option of buying out investors' shares in their homes.

While seemingly well-intentioned, one can spot a couple of obvious problems with this scheme. The first is that home sellers would capture most of the value of these subsidies by simply raising prices.

The Democrats' program outline gives the example of a $400,000 home that, with the aid of the California Dream Fund, would only cost the individual purchaser $220,000, while the fund would cover the other $180,000.

In an alternative scenario, one could imagine a home seller raising his sale price to around $728,000. The cost to an individual buyer would still be $400,000, meaning the seller wouldn't price out any potential customers who could have afforded the original price. He would, however, stand to net an additional $328,000 courtesy of taxpayers and these envisioned private investors.

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. 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.

This latter scenario is more likely for the same reason that homes are unattainable for so many Californians in the first place: restrictions on supply.

Restrictive zoning, lengthy permitting times and fees, urban growth boundaries, easy-to-abuse environmental review laws, and bureaucrats' discretionary ability to shoot down new housing all contribute to California's current housing shortage and sky-high home prices.

Subsidizing demand while leaving those barriers to new supply in place will inevitably produce more price increases. More money will be chasing the same number of homes.

The pandemic-era housing market illustrates this principle pretty well. The past year has seen a lot more people looking to buy homes, and fewer people interested in selling them. Median home prices have thus increased by over 10 percent in most metro areas, reports The Wall Street Journal.

Indeed, in order for the California Dream Fund to work as described in the Build Back Boldly outline, it'll have to make housing affordability worse: The program can't attract investors, and new homeowners can't build wealth through it, unless home prices continually rise.

CalMatters reports that lawmakers' legislative budget proposal is meant to start negotiations with Gov. Gavin Newsom, who released his own spending plan in May. A new budget will have to pass by June 15.

The plan, according to Senate Democrats' Build Back Boldly proposal, is for the budget to include instructions for the state's treasurer and the governor's administration to iron out the details of the California Dream For All program, which would go back to the legislature for approval.

Let's hope that gives lawmakers a little more time to think about their novel idea.