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California has a housing affordability problem. Homes are expensive. Down payments are enormous. Young families are struggling to buy their first house.
So, what’s California’s latest idea?
Get into the mortgage business with $25 billion in borrowing authority. Apparently, when housing becomes too expensive, the answer is to help people borrow even more money.
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Welcome to Proposition 37.
Couple admiring the view from the living room of their new house.
The $25 billion mortgage experiment
On November’s ballot, California voters will consider a proposal allowing the California Housing Finance Agency to issue up to $25 billion in revenue bonds to finance down-payment assistance.
Here’s how it works. Buyers put down as little as 3%. The state-backed program provides a second mortgage covering up to another 17%. The buyer finances the remaining 80% through a traditional mortgage.
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Sounds terrific.
Except there’s one little detail. The 17% isn’t free money. It’s another loan. And by the way, isn’t this the kind of strategy that sparked the last Great Recession of 2008? By offering people more and more money they couldn’t afford?
And this distinction matters enormously.
Let’s do the math
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Imagine buying an $800,000 California home.
With a traditional 20% down payment, you’d need $160,000 upfront and borrow $640,000. Under Proposition 37, you could potentially put down just $24,000. The state-administered program would lend you another $136,000.
Your first mortgage would still be $640,000. You’ve reduced your upfront cash requirement by $136,000. But you’ve also increased your total mortgage debt by $136,000.
Assume a hypothetical 6.5% interest rate on the first mortgage and 7% on the second, both over 30 years.
Get into the mortgage business with $25 billion in borrowing authority. Apparently, when housing becomes too expensive, the answer is to help people borrow even more money.
Your monthly principal and interest payments would increase from approximately $4,045 to $4,950. That’s roughly $900 more every month. Property taxes, insurance and maintenance aren’t included.
Congratulations. You got into the house with less cash.
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Now you have a bigger monthly bill. Actual program interest rates haven’t been established, so those numbers are illustrative.
The government isn’t giving away $25 billion
To be fair, Proposition 37 isn’t a $25 billion taxpayer-funded giveaway. The proposal uses revenue bonds intended to be repaid through borrowers’ mortgage payments, not California’s general fund.
The state’s independent legislative analyst estimates no direct state or local government costs. Supporters argue that helping buyers finance newly constructed homes could encourage builders to increase supply.
That’s a legitimate economic argument. But it raises a bigger question. Does helping people borrow more money make houses cheaper?
Not necessarily. It could actually make prices go up. We just saw this during COVID-19.
You can’t finance your way out of a housing shortage
Imagine a neighborhood with 100 families trying to buy 80 homes. Now give more families access to larger financing packages. How many homes are available?
Still 80.
Unless builders increase supply, additional purchasing power can put upward pressure on prices. That’s basic economics.
California needs more homes, not simply more creative ways to finance expensive ones. Make it easier to build.
Reduce unnecessary permitting delays. Address construction costs. Allow more housing where people actually want to live. Those measures attack the underlying shortage.
Your first mortgage would still be $640,000. You’ve reduced your upfront cash requirement by $136,000. But you’ve also increased your total mortgage debt by $136,000.
More borrowing primarily attacks the down payment. Those are not the same problem.
The question California should answer
There are families with excellent incomes who can afford monthly mortgage payments but struggle to accumulate six-figure down payments. A carefully structured loan program could help some of them become homeowners sooner.
But helping buyers qualify for debt shouldn’t be confused with reducing the price of housing. And the second mortgage still has to be repaid.
California’s proposal illustrates a question every homebuyer should ask before accepting financial assistance: Am I buying a more affordable home, or am I simply finding another way to afford the home?
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Because those are two very different financial outcomes. And no matter how creatively California packages the financing, one rule of personal finance never changes.
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Borrowing more money doesn’t make something cost less.
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