Home Loan Aid Fuels Demand But Not Supply

Assembly Speaker Willie Brown Jr. made many more friends on Monday. He did it by introducing legislation to establish a state-sponsored mortgage guarantee fund that would help thousands of first-time buyers purchase homes with as little as 5% down.

A major reason for the initiative, a spokeswoman for Brown says, is to attack the problem of housing affordability.

Brown is not alone in this. His legislation, backed by the California Assn. of Realtors, is expected to draw bipartisan support, and Gov. Pete Wilson has been working on a similar proposal, his housing policy chief says.

“High home prices are acting as a drag on California’s economic recovery,” Wilson said in a recent statement, adding: “If we are going to keep California competitive in the ‘90s, we’ve got to ensure that the California dream remains attainable for working-class families.”

Not to be outdone, state Treasurer Kathleen Brown recently welcomed the new director of the California Housing Finance Agency, former Sen. John Seymour, by reiterating several of her affordable housing proposals. Among them: a down payment assistance program.

Let’s accept on faith that promoting home ownership is a great idea. The trouble is that programs such as Willie Brown’s will have the opposite effect. Just as the market is forcing home prices at long last down, the proposed state mortgage insurance program will help prop them back up, especially for the cheaper homes whose prices have fallen least.

To understand this, consider an analogy. Suppose Sacramento announced a plan to give half the renters in California $50,000 each in the form of a voucher redeemable only by purchasing a home. Overnight, many more dollars would be chasing the same number of houses. Prices would soar, especially for homes within reach of a $50,000 down payment.

And what about the unlucky renters who didn’t get a voucher? For them, homes would be further out of reach than ever.

This is not merely an exercise in cleverness. Lower home prices are good for almost everybody in California. Once we get over the shock, they’ll be good for the economy, too. The high price of housing is often cited as a reason firms don’t want to expand in California.

And despite the recent downturn, homes in California remain expensive in relation to incomes. The California Assn. of Realtors says only 32% of Californians can afford a median-priced home. The national figure is 56%.

Yet many government housing policies contribute to the problem. Observes Peter Gordon, dean of the USC School of Urban Planning: “There are a lot of programs that well-meaning people believe in that push up housing prices.”

These include restrictive zoning that permits only three or four homes per acre and hefty “impact fees” levied by local governments. These charges, ostensibly to pay for the increased demands placed on sewer systems and other public services, can exceed $30,000 per home.

Aside from slowing the influx of new Californians, which may not be within anyone’s power, the best way to make home ownership more affordable is not by stimulating demand, which the Speaker’s mortgage-insurance proposal would do, but by increasing the supply of homes.

John Gruenstein, president of BPA Economics, an Oakland consulting firm hired by the state to study the feasibility of a California mortgage guarantee program, acknowledges that, “to the extent it increases demand, it would result in higher prices,” although he figures the effect would be small.

Still, he says, “I would totally agree that increasing the supply of houses, lowering the cost of development and looking carefully at impact fees and land restrictions are really the most important issues in terms of affordability.”

Besides lowering the cost of development, California could help by restricting down payment and other first-time buyer aid to purchasers of new homes, as is the case with the new Cal-Home Buyer Loan Program recently announced by the California Housing Finance Agency. At least this would stimulate supply.

Better yet, how about restricting such assistance to condominium buyers? Here’s an area where demand actually needs stimulation. A stronger market for condos would persuade more people that they aren’t such a bad investment. Condos use less land, enable people to live closer to work and are more in keeping with the way modern families have evolved. They’re also cheaper, which means any money devoted to helping home buyers would go further.

The real question is why, when the streets are full of homeless people, any money at all should be devoted to helping decently housed renters buy homes. Lower interest rates have already made homes more affordable by lowering the cost of a mortgage, and the slumping Southern California economy will probably drive prices down even further than they’ve already fallen.

So home ownership is getting more affordable, but California’s politicians better hope the voters don’t decide to give them credit for this. As Gordon says, “if they got housing prices down, there’d be moans and screams. We want high prices and affordability.”

And that’s a tough combination.