Little Help for Southland Seen in U.S. Housing Bills
After years of neglect, Congress this year is taking up the plight of young families looking for affordable homes to buy. But in Los Angeles and especially in Orange County, where the median home resale price is now more than $237,000, would-be buyers had better not start packing the family china.
“I think it’s just a spit in the bucket, what they’re talking about in Washington,” said Southern California home builder Nathan Shappell. “Out here, it’s too little, too late.”
From Washington’s point of view, the ideas under consideration are sweeping. One bill would create a $4-billion fund to subsidize mortgages for first-time buyers. Another would allow families to tap their individual retirement accounts for down payments. A third proposal would increase the size of a mortgage that could be insured by federal funds.
The flurry of new legislation signals a determination by Congress to get back into the housing business after eight years of relative inactivity under the Administration of Ronald Reagan. Many lawmakers believe there is a very good chance that major housing relief will be enacted this year.
“Young families increasingly find their dreams of home ownership fading beyond reach,” said Sen. Alan Cranston (D-Calif.), who with 25 other sponsors has introduced an ambitious $15-billion package to spur production of affordable housing. “The goal is to provide more housing within the financial reach of the average-income American, and to ensure that the needs of low-income families are also met.”
However, like many plans Congress devises to address widespread social problems, these proposals are tailored to help the greatest number of needy people nationwide, rather than the most extreme cases in specific geographical areas.
Unfortunately for Southern California, its housing predicament is extreme. A cross-section of experts said that Cranston’s bill and the other proposals would help no more than a handful of residents buy homes in the area’s overheated real estate market.
They cite a spiraling cost of land unmatched in virtually any other area of the country, rising interest rates and the inability of many families to come up with the huge down payments needed for even modest accommodations.
Heavy Financial Burdens
Beyond that are problems related to the control of growth, population increases and the difficulty of placing jobs and affordable homes near each other. Given these trends, many young Southern California families will continue to face the prospect of being long-term renters or, if they can buy, assuming heavy financial burdens for only minimal quarters.
Housing analysts have reserved judgment, however, on the other sections of Cranston’s proposal, which would provide $3.1 billion to local governments for construction of affordable rental units and increase subsidies to build low-cost public housing.
“Congress may get a lot of mileage out of these new housing bills, and they might have a strong impact in places like the Midwest, where homes are not so expensive,” said Matt Disston, an Orange County real estate economist. “But out here, the (home ownership) problem may just be too great for any effective federal solution.”
Politically Impossible
Were lawmakers to offer the kind of extensive relief Southern California needs, officials say, it would probably be prohibitively expensive and politically impossible.
“With limited funds, you have to ask where the housing dollars will go,” said Bob Erlenbush, a Los Angeles-area housing activist. “Should somebody who wants a $200,000 home get federal aid? In this area, that kind of assistance could cost a fortune.”
And even that might not be enough. More than any other area, except perhaps New York’s Manhattan, Southern California seems to provide the starkest illustration of the housing crunch facing first-time buyers. Fueled by a vibrant economy and a seemingly insatiable demand for single-family homes, the real estate market has gone haywire.
Small, two-bedroom homes that would sell for less than $100,000 in most other parts of the country are priced at $350,000 or more in West Los Angeles. In Orange County, homes that cost $30,000 less than 15 years ago are now fetching $400,000. The median price for new homes and condominiums there last month was $225,000 and for resold units it was more than $237,000.
At the same time, the income of Southern Californians has not been rising at even close to that pace.
Nationwide, the number of people who can afford to buy their first home has been declining steadily in recent years, according to several surveys. A recent study by Kenneth Leventhal & Co., a national accounting firm, indicated that only 37% of U.S. households can qualify for loans to buy homes. Of the 32 markets surveyed, the two areas with the lowest number of people able to buy a home were Los Angeles and San Diego.
As the cost of shelter rises, couples who once planned on acquiring housing are facing difficult choices.
“The price of a home in Los Angeles is depressing, because unless you’re extremely affluent or you already own a house, your chances of buying a home are slim,” said Paula Kruger, 25, who is a marketing specialist with the UCLA Center for the Performing Arts.
“It’s even difficult to find an affordable apartment in the West Los Angeles area,” she added. “I grew up around here, but I’ve been priced out of my own neighborhood.”
Thinking of Moving
Kruger, a college graduate who earns $25,000 yearly, now lives at home with her parents while she and her boyfriend save money for an apartment or home. The couple are thinking about moving to another state, such as North Carolina, where the average price of a new home is about $73,000.
For all those who think about leaving California, however, thousands more are arriving each week, squeezing the housing supply further and forcing up prices even more.
Migration reached a post-World War II high last year, with more than 370,000 people moving to the state. The vast majority of these new arrivals come to take advantage of the better jobs California’s economy offers. But many are stunned by what they must pay for housing.
“We have a great many families that relocate here from oil-depressed areas, like Houston and Dallas, and they’re in for a rude awakening when they get here,” said Disston. “They land a better-paying job, but then they find that, after they’ve sold their other homes, they can’t even afford a down payment.”
It is for such families--and people like Kruger--that many of the current congressional housing initiatives were intended.
In one proposal, authored by Rep. Henry B. Gonzalez (D-Tex.), the government would create a $4-billion national trust fund to help first-time home buyers. These funds would subsidize mortgages and help lower interest rates, now at 10% to 11%, to no more than 6% for the life of a loan. However, they could not be used for mortgages that exceeded $104,000.
“That’s a nice idea for other parts of the country, but it doesn’t mean anything for the heavy growth areas of Los Angeles and Orange County,” said Dan Garcia, an attorney and former president of the Los Angeles City Planning Commission. “I can’t think of much housing to which this might apply, because the cost is so high here.”
Garcia noted that housing costs are lower in outlying communities such as Riverside and San Bernardino. But he said those affordable places “might as well be in Outer Mongolia, because they’re miles away from where the majority of jobs are in this area.”
Face Long Commutes
The difficulty of placing jobs and affordable housing in the same area is one of the most vexing problems facing Southern California. While developers can build lower-cost homes in a community 70 miles from Los Angeles or Orange County, new owners face lengthy commutes on badly congested freeways to reach their jobs, further aggravating the area’s already severe transportation problem.
“Without a solution, you could be jeopardizing the long-term viability of the whole area,” said Nelson Rising, a Santa Monica-based developer and member of a Los Angeles task force on affordable housing. “Out here, the problem is the high cost of land and the demand for shelter. I don’t know what the federal government can do to solve that problem.”
One solution, proposed in Cranston’s bill, would make it easier for first-time buyers to come up with down payments. People who had not purchased a home in the previous three years could use $10,000 of the money in an IRA or 401k account for this purpose.
“There’s a lot to be said for this approach, because anything that helps a young family get over the margin and into a home is valuable,” said Michael Meyer, managing partner of the Orange County office of Leventhal & Co. “The down payment is often the most crucial barrier of all, and I can’t think of a better investment for this kind of money.”
However, some experts question how much difference this would make in Southern California, where 15% and 20% down payments are common on homes and condominiums.
“Let’s say someone manages to save $10,000 in an IRA account,” said Shappell. “In the time they’ve saved the money, the price of a house will have gone up more in cost than $10,000. They’ve fallen behind, because the market is simply out of reach.”
Recognizing that first-time buyers are shut out of the market by high down payments, Cranston’s bill goes one step further: It would greatly expand the size of mortgages that are insured by the government under the Federal Home Administration program.
Currently, FHA covers mortgages up to $101,000 nationally. Under the program, the government helps eligible buyers acquire homes with low down payments by fully insuring the mortgages provided by banks and other lenders. In the event of a default, the government is eligible for the balance of the unpaid loan.
The FHA program enabled hundreds of thousands of Americans to acquire their first homes after World War II, often for down payments as low as $100. But Cranston said the program needs to be updated, to reflect the higher cost of housing in many areas.
Under his bill, FHA could cover mortgages up to 95% of a state’s median home sales price. Last year, the average California resale price was about $150,000. But, in a key provision, the secretary of housing and urban development could approve even higher mortgage ceilings for regions such as Southern California, where housing prices are greater than the state average.
3% Down Payments
Also, the revamped FHA program would reduce down payments to 3% of the full amount of the mortgage for first-time home buyers who complete what sponsors call “an approved financial counseling program.”
“This is definitely a move in the right direction,” said Peter Morrison, who directs the RAND Corp.’s Population Research Center in Santa Monica. “The problems out here are in the high-priced areas, and that’s what this would target.”
But even with these inducements, supporters of the Cranston bill concede that many first-time home buyers will have a hard time breaking into the Southern California market.
Three percent of a six-figure price is still a hefty sum. And the monthly house payments on the remaining amount--up to 97% of the home’s cost--could be huge.
With the gap between housing prices and what many families can afford to pay widening every year, no amount of tinkering with down payment provisions may ease the problem for many people, conceded Gary Squier, Los Angeles Mayor Tom Bradley’s housing coordinator.
“To get people into the Los Angeles ownership market is going to cost money, because here the gap is so enormous,” he noted. “Only 17% of Los Angeles-area households can afford to buy the average-priced home. The rising cost of housing makes it very difficult.”
Squier explained that a family earning the county median of $35,000 a year could, under normal circumstances, qualify for a $130,000 mortgage. However, the median Los Angeles house price in the latest reporting period was $198,655, according to the California Assn. of Realtors.
“The gap is $30,000 to $35,000,” Squier said. “Where is that going to come from? I don’t know if the federal government can afford to subsidize homes at $30,000 a pop.”
Aiding $90,000 Families
Still others question the wisdom of providing FHA assistance to middle-income buyers. If the mortgage ceiling in Los Angeles or Orange County rose to include $200,000 homes, for example, the government might be subsidizing families that earn $90,000 a year, according to Steven Doehler, vice president of the Mortgage Insurance Companies of America.
“You’d be significantly increasing the pool of buyers and it will become more of a seller’s market,” he said. “That will increase prices up and down the board. It makes things even harder for the guy earning $40,000. He’s pushed even farther away from home ownership.”
Given these barriers, what can the federal government do to help first-time buyers in Southern California? Many experts say that Congress should try to cut the costs of home ownership, but only in concert with state and local officials.
More Housing Needed
Rising said, for example, that it makes little sense to provide increased funds for home buyers if there is not a simultaneous push to increase the supply of affordable single-family homes and condominiums.
“By simply putting more money in people’s pockets, you’ll be increasing demand and driving up prices even more,” he noted. “We just don’t have enough housing to meet the demand.”
Indeed, some say the federal government should condition the availability of funds on regional efforts to increase the housing supply, especially in low-density areas. But others say that building more homes in crowded areas is not the answer.
Southern California “may have to come to terms with some unpleasant realities, that it can’t keep growing forever,” said one member of the Los Angeles City Council, who asked not to be identified. It may be necessary for other areas to experience additional growth, instead of densely populated areas such as Los Angeles and Orange County, the lawmaker said.
In the meantime, no short-term solutions are on the horizon, at least in the federal government. And Southern Californians may have to accept the unpleasant consequences.
“We’re becoming a nation of housing haves and have-nots,” said H. James Brown, who directs the Joint Center for Housing Studies at Harvard. “Increasingly, the whole issue of whether you’ve made it in this society seems to focus on housing. And home ownership is slipping away from thousands of people each year.”
