A Shell Game That Existing Homeowners Can’t Lose : Housing: Deukmejian’s proposal to help first-time buyers would accomplish the opposite of what he seeks--more affordable homes.

Gov. George Deukmejian wants to help first-time home buyers realize their dream. In reality, what the governor proposed in his State of the State address last week is nothing more than a shell game that would enrich existing homeowners at the expense of renters. This contradictory result can be easily demonstrated.

Deukmejian seeks to provide first-timers with loans to acquire a down payment or obtain mortgage interest rates at below market rate. He would finance his plan by issuing bonds.

This assistance can be thought of as “free money” to be spent on housing. The availability of the money would lead to an increase in the demand for housing, resulting in higher prices. This is because the first-time buyers would be bidding against each other for existing homes. Since it takes time to add to the housing stock, the initial impact of the governor’s proposal would chiefly be higher housing prices.

Current renters who failed to qualify for the free money would be significantly worse off. Their dream house would be even more expensive and, as taxpayers, they would have to help pay for the free money (bond issues are not cost-free to taxpayers).

For those lucky enough to qualify, their success in buying their first house would depend on a number of factors, such as the amount by which housing prices increase, the actual value of the free money and, as taxpayers, their share of the cost of the plan. It may well be that this group, at best, will do no better than break even.

Deukmejian’ rhetoric on the virtues of his housing plan is similar to that heard 12 years ago when Proposition 13 was being ballyhooed. Its proponents also promised that the measure would lead to more affordable housing. As it turned out, the chief beneficiaries were owners of real property (homes, apartments and commercial buildings). Future home buyers picked up the tab.

What, then, can be done to make housing more affordable? The key is to increase supply, not demand. Subsidizing loans and providing tax rebates to home developers, and easing regulations that hamper housing construction, are two ways to increase the supply. More houses under construction means lower prices.

Under such proposals, existing homeowners would be the big losers, since the price of their homes might fall, or at least not rise as much. Furthermore, as taxpayers, they would have to absorb part of the cost of the programs.

Renters, on the other hand, would be winners, though their gain in terms of lower housing prices would be partly offset by their share of the program’s cost. Also, developers would benefit from reduced interest costs and other tax advantages, but they can expect stiffer competition as a result of increased supply.

Another alternative is to do nothing, letting the market do the work. At present, the “real” cost of housing is falling substantially in numerous parts of California. But because of the way housing prices are measured, this large decrease is not reflected in the reported statistics. In this world, there are no new winners or losers.

Deukmejian’s choices should be clear-cut. If the governor wants potential homeowners to gain at the expense of current homeowners, he should introduce measures that increase the supply of housing. If he wants current homeowners to gain at the expense of renters, Deukmejian should stump for his latest proposals, which would simply increase the demand for housing. Finally, if he believes the market works, he should not intervene.