Down payment assistance unjustly harms low-income savers
Down payment assistance, like other government housing subsidy programs, merely rewards one group of would-be homeowners at the expense of another group, in this instance, low-income savers. Further the criteria for doling out the rewards is capricious.
In the post Two strategies for more abundant and less expensive housing, I suggested that subsidizing low-income borrowers with tax credits would boost prices for low-end housing, and as a result, builders would provide more of it, making housing more affordable for everyone. As someone pointed out in the astute observations that day, such a policy discriminates against those who fail to qualify — and if not structured properly it would. But if housing subsidies harm people, exactly who is hurt, and how are they wronged?
Government subsidizes housing in many ways, ostensibly to make housing more available, affordable, and of higher quality. People who support housing subsidies want to improve everyone’s quality of life, and for those who receive these subsidies, they undoubtedly enjoy a higher quality of life than if they weren’t receiving the handout. However, subsidizing housing ultimately does not make housing more affordable, nor does it increase home ownership rates. Housing subsidies merely displace one group of potential homeowners in favor of another — and it’s these forgotten others who pay a hidden price.
The buyer on the bubble
The auto racing world turns its attention each May to the Indianapolis 500. To enter the field of competitors, racers make high-speed laps competing for the lowest time, and the racers with the lowest 33 times make the cut. The lowest time wins the pole position and the attention of the media, but the real drama of the time trials revolves around the driver in the 33rd spot in the field: the driver on the bubble. As each driver tries to earn a spot, the driver on the bubble nervously watches to see if he or she will get bumped from the field.
The “person on the bubble” phenomenon occurs whenever the supply of some good or service is fixed, or limited in growth sufficiently to create a shortage — like housing availability in California. Due to growth restrictions in California, demand for houses exceeds available supply, so someone has to do without; thus we have buyers on the bubble.
With sporting events the people who get served, including the person on the bubble, is determined by merit. Those bumped from the field know why they failed, and the system rewards the best performance. In most financial markets, this determination is made by money or earnings. In a housing market, people who are outbid generally realize they lost out to some family with greater means, either through savings or income. Most people find this easier to accept than if they were discriminated against for some other reason.
Affordable housing subsidies remove the focus on merit and instead put it on capricious qualification standards determined by pandering politicians. Those denied homeownership often don’t know why they were priced out — if they did, they would probably be outraged to learn their tax dollars were diverted to a family who earns less and saves less than they do. It’s a system that rewards sycophantic behavior and unjustly punishes those most worthy.
Luciana Murillo refused to give up on her dream of owning a home.
As a single mom working as a barista for $12 an hour, her options were not the best. For three years as home prices continued to rise, she tried to find a condo she could afford.
Finally, she learned about a program that would provide her with roughly $71,100 in assistance toward a down payment and $7,570 in closing costs. At the end of April, she and her son moved into a $196,000, two-bedroom condo in Serra Mesa.
“I consider myself so lucky,” she said. “… I always tell other single moms they can do it.”
We can feel good about helping the single mother who probably otherwise would never have become a homeowner. And I imagine the number of single-mother applicants for this program will outpace the supply. Hopefully, these new homeowners possess the requisite financial skills to sustain homeownership, or this program will create new problems.
These families are lottery winners. They obtained a house, not because of their good life choices, frugality, and good financial habits, but because they fit some profile drafted by a politician who didn’t stop to consider who is harmed by this program.
The families assisted by this program will outbid the current, hard-working, wage-earning buyer on the bubble and deny them their family home.
Where is the justice in that?
Do you still feel good about what this program is doing for the community?
Murillo and her 7-year-old son are among roughly 150 families a year in San Diego County that benefit from down payment assistance plans, says Springboard CDFI, a nonprofit that works with first-time home buyers.
Assistance plans are available in National City and Chula Vista. The San Diego Housing Commission, San Diego County and San Marcos have similar programs for other parts of the county but all three are out of funds until probably this summer.
National City recently resumed its program that gives borrowers up to $70,000 toward a down payment.
The loan does not need to be paid back for 30 years. However, it does need to be paid if the home is sold or the owner decides to rent it out.
It has a 3 percent simple interest rate that does not compound. For a $70,000 loan, that would be $2,100 added to the principal balance each year.
This is really a low-interest second mortgage. You know, the 80/20 program that helped cause millions of foreclosures 10 years ago.
Robert Kleinhenz, economist and executive director of research for Beacon Economics, said programs like this help address a major problem for first-time buyers.
“A lot of households are having difficulty coming up with the necessary down payment for a house, especially in expensive areas like San Diego,” he said. “… It’s actually a big impediment for home ownership.”
Kleinhenz said the down payment loan, added on top of a mortgage, could be a good financial move — even with the burden of two loans — but it is not without risk.
“They have to be counting on home prices going up in the future,” he said.
Well, we all know how well that worked out last time…
San Diego State University finance lecturer Seth Kaplowitz said the down payment programs are desirable for cities because they help keep residents.
He also said the restrictions on the loan are a good sign, such as requiring the home be a primary residence and requiring buyers to qualify for a first mortgage.
“(National City) is hedging its bets,” Kaplowitz said. “It’s saying if you can apply for a first mortgage, you can qualify for this. They know they are getting credit-worthy home buyers.”
Each statement in the three sentences above is complete nonsense. He must have been pressured by the reporter to say something positive about the program, and he couldn’t think of much.
National City Mayor Ron Morrison said in a statement that home ownership is the cornerstone of a healthy community.
“We are proud to invest in our neighborhoods and in our residents by expanding home purchase opportunities in our city,” he said.
The bluster of a pandering politician is easy to spot, isn’t it?
Down payment subsidies are not a good idea
So how is this different than the tax credit I supported in the post Two strategies for more abundant and less expensive housing? A tax credit program could be implemented in a way that avoids the “buyer on the bubble” problem. If the tax credit is offered to everyone regardless of income level, the former order of merit is restored, albeit at a higher price point. The tax credit was not intended to favor one group over another, or even to make housing more affordable overall. The idea was to raise the prices at the bottom of the market to encourage more construction — and it’s a big difference, IMO.
Please don’t misunderstand me. I am not a right-winger who opposes all subsidies because I don’t want to pay taxes for anything that might benefit anyone other than myself. If an assistance program can demonstrate value and provide real assistance to those in need, I am all for it; however, that’s not what a down payment assistance program does. This program provides no benefit to the society, and it merely rewards one group of people making questionable life choices over another group making better choices. Despite feeble attempts like this story to put a human interest angle on the injustice, I don’t support what this program accomplishes.