California Housing & Wealth Inequality
In March of 2020, the Coronavirus Aid, Relief, and Economic Security Act or the CARES Act became law and allows the delay of government-backed home loan payments for 90 days. While this only affected about 25% of home loans, a May 24 MarketWatch article noted that over 4 million homeowners had already stopped paying their mortgage. Four million Americans will have a balloon payment equal to all their missed payments, and their current payment due as early as August 1, 2020, and this number may be low.
The Bureau of Labor Statistics reported that in May 2020, 21 million Americans were still unemployed, meaning the number of loans that are or soon will be going into default may be much higher. Such figures indicate that there will be a flood of abandoned and evicted households in America. Aside from the pending tragedy of homelessness that will soon befall many more hardworking Americans who have due to no fault of their own lost their primary source of income and ability to pay their mortgage, the market will quickly become flooded.
In addition to those losing their jobs, there are many more working from home. The sheer number of people no longer needing to live near a job place means that places like California will soon see a dramatic increase in homes for sale. This increase in supply will, in turn, drop the price of homes.
The idea of a price drop in places like California read like a welcome home sign, but unfortunately, that doesn’t mean more people will be able to buy those homes. Instead, what will likely occur is an increase in individual property investment.
For a long time, those with a little extra money have looked to owning additional homes as retirement income, and this is part of the reason places like California have ten times the number of vacant homes as homeless. It isn’t a secret in America that pensions are few and often not as reliable as many were lead to believe. For that reason, it is not surprising that those of us with good credit hope to buy homes at low-interest rates and rent them out at least ten percent higher than the mortgage and insurance payments. Individuals investing in property as an income have become an all too common practice and artificially inflates housing and rent payments.
This type of investment must stop because it unfairly traps young people in paying a much higher percentage of their income to habitations than their parents and grandparents. According to the Public Policy Institute of California, between 2005 and 2015, the number of owner-occupied households in California shrunk by nearly 64,000, while the number of renter-occupied homes increased by 450,000 homes. It doesn’t take an oracle to see that those with some extra wealth will see opportunity in the soon plunging home prices. Again, those with additional income will snatch up the discounted houses and transform the owner-occupied residence into a rental income property, furthering a wealth divide.
To combat this probability, California must look at amending the much loved 1978 California Proposition 13, the People’s Initiative to Limit Property Taxation. California Proposition 13, if you had not already guessed is what limits all property taxes in California to no more than one percent. This law must change to allow higher tax rates on homes not owner-occupied. For example, if we placed a two percent tax on a third home, and a three percent tax on a fifth property or more, we would make such investment less attractive. These taxes could be added incrementally over time to avoid a shock to the housing market, but this must happen to make housing more affordable.