Orange County residents grappling with California's high home prices may soon see a statewide measure aimed at easing the financial burden of homeownership. Proposition 37, appearing on the November 3 ballot, proposes a $25 billion down payment assistance program designed for middle-class households.
Buying a home in Orange County, where the median price for a single-family home currently stands at $1.5 million, often requires a substantial down payment. A 20% down payment on a median-priced home statewide is around $180,000, presenting a formidable obstacle for many prospective buyers, according to recent data from the California Assn. of Realtors.
If approved by voters, Proposition 37 would allow qualified homebuyers to borrow up to 17% of a new home's sales price, requiring them to contribute 3% of the down payment from their own funds. The scale of this proposed program is significant; for comparison, one of the state's existing down payment initiatives, California Dream For All, launched several years ago with $500 million, which is only 2% of Proposition 37's proposed funding.
The measure is designed to be self-funding, meaning it would not be paid for by taxpayers. Instead, the program would be financed by interest charged to borrowers on their down payment loans, which are structured as second mortgages. Governor Gavin Newsom, along with statewide unions and mayors, has expressed support for the measure. Newsom stated that Proposition 37 offers homeownership opportunities "at zero cost or risk to taxpayers."
To qualify for the program, borrowers would need to have resided in California for at least one year and earn no more than 200% of the local median income. For example, in Los Angeles County, this cap equates to a family of four earning no more than $216,200 annually. Unlike many existing assistance programs, Proposition 37 would not restrict eligibility to first-time homebuyers, but participants would be required to live in the home purchased through the program. The price of eligible homes would be restricted based on the county, generally falling between $1 million and $1.5 million.
However, the proposition carries a significant caveat: any home purchased through the program must be newly constructed. This provision, intended by architect of the proposal and former Senate Majority Leader Bob Hertzberg to spur new construction and address the state's housing shortage, could limit the program's reach due to the inherent high cost of building new homes. Hertzberg stated, "The problem is we have to increase supply."
Critics have raised concerns regarding this focus on new construction. Matthew Lewis, director of communications for California YIMBY, suggests that high prices already indicate strong demand, and Proposition 37 may do little to address the fundamental issue of building costs. He also questioned whether the assistance could inadvertently intensify bidding wars on the limited supply of new homes. Additionally, developers like Paul Schon, who builds apartments in Los Angeles County, expressed that the proposition's impact would be minor compared to state, city, and county efforts to reduce permitting times and streamline red tape.
Further questions surround the financial terms of the loans. The proposition does not spell out specific interest rates or repayment periods, which would be determined by the California Housing Finance Agency if the measure is approved. The League of Women Voters opposes the measure, citing concerns about potentially burdening residents with too much debt and the lack of clarity regarding loan terms prior to the vote.
The funding mechanism, which relies on the state issuing revenue bonds to investors, also presents potential risks. Revenue bonds are generally considered riskier than other government bonds because they are backed by the promise of revenue from specific projects, in this case, payments from individual borrowers. This could potentially result in higher interest rates for borrowers compared to other types of loans. While Hertzberg noted discussions with investors who might offer cheaper rates due to the program's objective, the final interest rates remain an open question.
While some existing down payment assistance programs offer interest-free loans, Proposition 37's loans would carry interest to ensure the program's self-funding nature. Builders could also opt into a "qualified builder" option, protecting them from defect lawsuits for 10 years if they adhere to price caps and labor requirements, though some developers are skeptical this alone would significantly boost construction.
Ultimately, Proposition 37 presents a large-scale attempt to address California's housing challenges, but comes with significant details and financial considerations that homeowners and taxpayers will need to weigh before casting their vote.
