California lawmakers, in an effort to make housing more accessible for low- and moderate-income earners, recently approved the California Dream for All program. This law, a response to the massive increases in the state’s home prices, is intended to help people secure a downpayment, which is often a barrier to homeownership.
This program will, essentially, provide all or most of the downpayment required to make a purchase. In exchange, the government will take a partial ownership stake in the property.
The Need for Help: Rising Prices, Low Ownership
Whether this program fails or succeeds has yet to be seen, but it appears that something needs to be done. Home prices, as we have seen over and over again, have grown significantly.
According to Redfin, one of the largest property-listing sites in the country, the median sale price for California homes on their platform is $814,000. (As of writing this article.) This number is actually a slight decline from April 2022, which had a median sale price over $844,000. In January 2018, the median price was $516,800.
In California, a purchase price of $800,000 is fairly typical. In some locations, it would be considered a bargain. A downpayment of 20% on this purchase would be $160,000. Few people have this amount in savings. Even with lower purchase prices and easier downpayment requirements, the upfront costs of homeownership can be extremely burdensome.
With such high costs, it’s no wonder that California is in a bad condition when it comes to homeownership. According to data provided by AdvisorSmith, California has the second-lowest homeownership rate among all 50 states, second only to New York. (It’s in third place if you include Washington D.C.)
Homeownership is considered an important part of financial stability and prosperity. It acts as a “forced savings account” (as the cliche goes) and helps people take full ownership of a valuable asset, which does not occur when renting. Property tends to go up in value, so purchasing a home, even with an interest-generating loan, can be seen as an investment.
But all too many California residents are missing out.
How California Dream for All Works
To best understand this program, it helps to look at how it might work. While the final results may be different (government programs are impacted by countless unforeseen factors), here’s a hypothetical example of the California Dream For All in action…
Imagine a married couple name Amanda and Barry Clemente. They live in California and have been renting for their entire adult lives. They have a reserve of cash, but have not saved the hundreds of thousands they would need for a downpayment on a typical California purchase. They have a steady combined income of $90,000, but with rent increases, as well as making student loan payments and the simple cost of living, they have little left at the end of their monthly budget.
Knowing the importance of homeownership, they enter the California Dream for All program. With program approval, they begin searching for a home and find one with a purchase price of $786,000. Amanda and Barry contribute $24,000 to the purchase, which accounts for 3% of the downpayment. California taxpayers, through the California Dream for All program, contribute the remaining $134,000, creating a full downpayment of 20%. The initial mortgage balance for Amanda and Barry is roughly $628,000 in total.
They will sell the property in ten years and reimburse the state, but what happens next depends on the housing market.
If there is no change to the overall value of the property (which seems unlikely) when Amanda and Barry sell the property they will receive $786,000 from the buyer. Assuming they have made consistent payments, their mortgage balance will be around $502,000, which they will pay off with the proceeds. The taxpayers will recoup their investment, which would stay at $134,000 since there was no increase in value. After transaction costs, Amanda and Barry still increased their equity to $79,000.
But what if trends continue and the home value increases? An annual increase of 6% is fairly typical. If this occurs, Amanda and Barry Clemente could sell their property for $1.3 million. In this case, the mortgage balance would be the same ($502,000), and the taxpayers would be reimbursed the initial payment of $134,000 plus 17% of the gains. That money reinvested into the fund would be worth $226,000.
Best of all, Amanda and Barry would see their equity skyrocket. From just a 3% initial investment, they would have roughly $481,000 in total homeownership!
What’s the Current Status of California Dream for All?
Officials are still working out the specific details of this program. It’s hoped that as California real estate increases in value and returns come when initial users sell their homes, the program will become self-sustaining. A CBS News report says that funding of $500 million is already included in the state budget, but it’s hoped that the program will have $1 billion in the near future.
It’s not available just yet, but will be soon. Lawmakers say it should be in operation within a year to a year and a half. That would put the initial launch somewhere around late summer of 2023 or perhaps early 2024.
Don’t Let Homeownership Pass You By!
If you want to learn more about the California Dream for All program, or if you want to see which downpayment assistance programs are currently available, contact our team today. We’ll make sure you have the right information to make an informed choice on your next mortgage!
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