California could pay homeowners $40,000 to build a tiny home in their backyards. It's 'vital' for increasing the housing supply in the state, one expert said.

• California set aside $50 million in the state budget for homeowners building backyard homes.
• The cash plays a "vital" part in the state's ability to increase housing supply, one expert said.

California is planning to pay homeowners to build housing in their backyards.

The California budget, signed by Gov. Gavin Newsom in late June, includes a $50 million pot to incentivize more people to build accessory dwelling units, also called ADU.

It's a revival of a previous program — though that one had a $100 million budget — that distributed funds through 2022 and aimed to increase ADU construction amid the state's dire housing shortage.

The previous program gave homeowners grants of up to $40,000 to develop at least one additional housing unit on their property. The state anticipated that the funding would be distributed by the end of 2022 and expected 2,500 new housing units to be built, according to a bulletin.

"This money is vital" because it's one of few government programs that funds and incentivizes home construction, Muhammad Alameldin, a policy associate at the University of California-Berkeley Terner Center for Housing Innovation, said.

It's an affordable way for the state to promote housing construction, he added.

However, the guidelines for the current ADU-grant program aren't set, the Los Angeles Times reported. CalHFA, the department in charge of distribution, told the Los Angeles Times that they were still working out how the cash would be doled out and that there wasn't a date set for applications to open.

ADU financing is hard to find

Nearly 20% of homes built in California are ADUs, according to data from the state's Department of Housing. More than 60,000 permits have been approved since the state started rolling back legislation in 2018.

But despite the fact that low- and moderate-income Californians are most affected by rising home prices, Terner Center's research showed that most Californians who put an ADU in their backyard lived in wealthy enclaves of the state.

"While ADUS have potential to bridge the racial wealth gap and add financial stability for lower- and moderate- income homeowners, to date comparatively affluent, and in many regions, whiter homeowners have disproportionately built ADUs," Terner Center researchers said in their report.

That's because it can cost a few hundred thousand dollars to build, and financing is hard to come by. Programs that make accessing financing ADUs easier also help to close this gap.

The only thing the state could do to spur more widespread development of ADUs across the economic spectrum is to provide a larger grant, which would cover more costs for those with limited financing options, Alameldin said.