Proposition 37 Steals from the Future to Pay the Well-Connected
Robin Hood stole from the rich to give to the poor. Proposition 37 does the opposite. It wraps itself in the language of a middle-class rescue while directing the real benefits upward to new-home developers, trade unions, realtors, and households earning as much as $400,000-plus.
The sales pitch is seductively simple. Prop 37 would empower the California Housing Finance Agency (CalHFA) to issue up to $25 billion in revenue bonds. Those bonds would provide second mortgages covering as much as 17% of the price of a newly built home. Borrowers would put down just 3%. The bonds, we are told, will be repaid by the homebuyers themselves.
No direct cost to taxpayers.
Help for the middle class.
More construction.
Yeah, right.
What could possibly go wrong?
Start with the definition of “middle class.” By any ordinary measure, the households in line are rich. The income ceiling is 200 percent of Area Median Income. In Santa Clara County, that is $411,000 for a family of four. In other high-cost coastal counties the figures are similarly high: roughly $375,000 to $400,000. These are not the wages of the Central Valley, or of most Californians. They are upper-middle incomes and, in national terms, high incomes.
If Prop 37 passes, the program’s income threshold will be, by far, the highest of any state housing authority in the country.
This help, moreover, only buys new houses, ones that already cost more. Eligible homes must be new construction or the first sale of a converted non-residential building. Existing homes – the kind most ordinary buyers can afford – are excluded.
Prop 37 steers its subsidized demand exclusively toward housing product that is often priced at a premium of 19% to 40% more than equivalent existing homes, depending on the county and time period.
Prop 37 targets expensive new homes only higher earners can buy. The proposed law includes a new home price cap of 125% of the FHFA conforming limit, which currently translates into house prices between $1 million to $1.5 million depending on the county. Because that limit rises yearly with home prices, the cap itself ratchets up and is inflationary.
The average worker in Los Angeles, or a renter in the Central Valley, is nowhere near the $400,000 income cap and cannot use the loan on the used house they might buy.
Prop 37 does not require applicants to be first-time homebuyers. The California residency requirement is just one year. Prop 37’s core focus is not first-time buyers or longtime Californian residents.
Prop 37 is not designed for the Californian middle-class buyer.
More lending in a tight market does not make any product cheaper. When more buyers with preferential financing chase a limited number of new houses, those houses become more expensive.
What Happened to the Condominium Market?
Condos were once the first rung on the home ownership ladder. California’s construction-defect law crushed condos and inflated insurance. Research from the Terner Center at UC Berkeley and others has shown that the current liability regime contributed to the collapse in condominium production by 75 to 90 percent from its mid-2000s peak. It also drove insurance three to four times higher on for-sale multifamily projects than on identical rentals.
Prop 37’s construction-defect fix is designed to support union labor. Only developers who opt into the “qualified builder” track get the more builder-friendly rules: a stronger right to repair, releases after those repairs, and less long-tail lawsuit risk. That track requires higher labor standards that, in practice, run through union apprenticeship pipelines.
Why not just fix those construction-defect rules for everyone, so homes can be built more cheaply across California without favoritism? Prop 37 keeps the rules in place to incentivized developers to walk hand in hand with the trade unions.
This might explain why big labor enthusiastically backs Prop 37.
Nothing that makes California housing so expensive is removed with Prop 37. The state can continue to layer long permit times, high construction costs, delays and a defect-liability regime that has crushed condominium production. Publicly assisted housing already shows what those rules cost: studies find affordable and tax-credit projects run 1.2 to 1.5 times market-rate housing inside California; prevailing-wage requirements on that kind of work have been associated with $83,000 to $94,000 in added cost per unit. Proposition 37 does not impose those wage rules on new second-mortgage homes, and it does not repeal them anywhere else.
Bigger is Better When the Public is At Risk
Prop 37 leaves California’s high-cost machinery standing and juices up subsidized demand into it.
What Prop 37 does do is expand the agency that operates the system, and that expansion is how California creates an institution too big to fail. CalHFA currently manages less than $5 billion in assets. The proposition’s $25 billion authorization is a potential five-fold expansion. Should voters approve Prop 37, CalHFA could become the largest state housing-finance agency in the country.
“No taxpayer cost” is a flimsy fair-weather claim.
Second mortgages are inherently riskier than first mortgages and have been shown to increase housing market risk; in a downturn they absorb losses first. The Legislative Analyst’s Office correctly notes there is no direct General Fund liability. That technical truth coexists beside a larger, more important political reality: once an agency grows this big, the pressure for taxpayer support in a crisis becomes intense.
Voters are not being asked merely to authorize a loan program. They are being asked to stand behind a $25 billion book of junior debt and then pretend the state can walk away if those loans sour.
That is how “no direct cost” becomes “too big to fail.”
Passage of Prop 37 will leave the housing shortage largely intact as new house prices move higher. Prop 37’s leverage only intensifies the scramble for whatever new product clears the existing rules. Renters will see the first rung of the ladder move farther from the ground. Realtors, labor unions, and developers, have every reason to praise the measure.
Their gain is real and measurable.
The public’s, not so much.
The official Voter Guide records that no argument against Prop 37 was even submitted. That silence is what a measure looks like when the people who would lose by its passage are not invited to a seat at Sacramento’s insider-only table.
Prop 37 does not build a wide path to cheaper homes for the many. It builds a very narrow path of expensive new homes for the few.
Vote NO on Prop 37.
Upgrade? We are already killed by Fed and State income taxes and utility costs and taxes on our utilities, our property, sales taxes, taxes on our home gas, and water.
Taxes on our trash. Annual costs for our autos is a tax.
There are literally thousands of DPA programs across America. They all operate basically the same way. The two features of this proposed DPA that are unusually flexible are (1) no income limit and (2) no requirement to be a first-time homebuyer. Without a robust housing market, many housing-dependent trades suffer: appraisers, carpenters/plumbers/painters, title and escrow companies, real estate sales, mortgage loan originators--the list is long. I'll wait for additional critiques of this program before I vote NO on Prop 37.