February 2009
In this Issue
Preserving a Piece of History
Sharing the Risks and Rewards of Homeownership
Excelling in Housing and Community Design
Housing Counseling with HUD Support
In the next issue of ResearchWorks
Sharing the Risks and Rewards of Homeownership
To sustain and increase homeownership opportunities, researchers are evaluating new mechanisms that can help potential homebuyers. Shared equity is one strategy that some communities are implementing to make housing more affordable to moderate- and lower-income households. The appeal of shared equity is threefold: it increases affordable homebuying opportunities, extends the return on public investment, and boosts the long-term supply of affordable housing.
Shared equity strategies vary. In general, the equity or appreciation of a home divides at the time of sale between the seller and the lender (usually a nonprofit or government organization). Depending on the particular shared equity mechanism used, the lender's share lowers the purchase price for the next buyer, and the seller's share expands the assets for that family. In a recent presentation at a NeighborWorks® America/NCB Capital Impact symposium, Rick Jacobus, partner in Burlington Associates in Community Development, and Jeffrey Lubell, executive director of the Center for Housing Policy, explained that, to be attractive, shared equity strategies must achieve a satisfactory balance between affordability and asset building.1
One such approach, the shared appreciation loan, works like a silent second mortgage. A nonprofit or government lender subsidizes the buyer for the difference between the purchase price and what the buyer practitioner tips can afford. At the time of sale, the seller reimburses the lender for the subsidy and yields an agreed-on portion of the home’s appreciation. Jacobus and Lubell gave an example of a home purchased for $250,000 with the help of a subsidy for 20 percent of the price ($50,000). The purchase agreement specified that at the point of sale, the owner would repay the subsidy, plus an amount equivalent to 20 percent of the accrued appreciation. Several years later, the home sold for $375,000. The subsidy that made the home affordable, plus 20 percent of the appreciation of $125,000 (a total of $75,000) went to the lender, leaving a profit of $50,000 for the seller. The lender then applied this $75,000 toward making the home affordable to the next owner, thus preserving the subsidy investment.
Subsidy retention, another commonly used model, ties the subsidy to the housing unit, rather than conveying it to the buyer. This lowers the selling price to make it affordable to households of a targeted income level, such as those who earn 80 percent of the area median income (AMI). The home in the example above would receive a subsidy of $50,000, thus lowering the price to $200,000. The buyer would agree upfront to a formula-determined resale price designed to keep the house affordable for the next family. The long-term advantage of this subsidy retention strategy is that, as long as it continues, the home will remain affordable to eligible families.
Communities across the country are implementing shared equity strategies based on one of these models, and on others. They can also take the form of deed-restricted homeownerships, limited equity cooperatives, and community land trusts. Resale formulas might be based on appraised value, indexed to area median income or consumer price index, or conformed to affordable housing costs. Three examples of shared equity applications are described below:
- Howard County, Maryland, where the average sales price is $430,000, is selling three new homes. These homes, worth roughly $345,000, are available to limited-income buyers for $167,655 under a shared equity program in which the nonprofit builder will retain a 40 percent share, with a right of first option to repurchase if the owner decides to sell. The buyer will pay closing costs and the property taxes on his or her share of the home. The downpayment is provided through a county-arranged federal loan that will be forgiven if the owner occupies the home for 15 years.2
- The Housing Authority of San Bernardino County, California is making homes affordable to low-income families through a community land trust. A nonprofit group owns the land and sells new 3-bedroom homes with upgraded amenities for $132,000 to $160,000, or about two-thirds of their market value. Eligible households earn no more than 80 percent of the AMI, pay a 3-percent down payment, lease the land for $50 a month, and agree to keep no more than 24 percent of any increase in the appraised value when they sell the home, which must be sold to other income-qualified households.3
- Arlington County, Virginia offers limited equity homeownership opportunities to income-eligible families (earning less than 80% of AMI). Potential purchasers are chosen by lottery from a pool of eligible applicants. The county retains a perpetual right of first refusal to repurchase the property at a set price, or to identify another qualified household to buy the home for this amount. This price is calculated as the original sum paid, plus annual appreciation based on increases in the AMI (averaging 2 to 3%), plus the cost of any capital improvements made to the property. A modest profit in appreciation or equity for the homeowner is permitted.4
Shared equity as a strategy is also visible at the national level. Local communities using Neighborhood Stabilization Program funds from HUD to purchase and redevelop abandoned and foreclosed residential properties may include shared-equity loan assistance for low- and moderate-income homebuyers in their plans.5 The HOPE for Homeowners program, created by Congress to help those in danger of default and foreclosure to refinance into more affordable loans, features shared equity and appreciation between the Federal Housing Administration and participating owners.6
Although every shared equity program has unique advantages and disadvantages to consider in the local context (such as how increases in home prices relate to income growth), this mechanism can potentially increase homeownership, lower risk for borrowers and lenders, add stability to housing finance, preserve affordability, and enhance the housing supply for low- and moderate-income households. Such benefits have to be weighed against the plans' limits on economic gains accrued by homeowners, as well as the reluctance of the market to embrace an unfamiliar product. In addition, government agencies will need to make legislative and regulatory changes, and assign administrative responsibility for managing these programs.
1. Rick Jacobus and Jeffrey Lubell, "Shared Equity Homeownership: An Effective Strategy for Balancing Affordability and Asset-Building Objectives," Center for Housing Policy, November 2007.
2. Larry Carson, "Homes Looking for Good Owners," The Baltimore Sun, 30 October 2008 (www.baltimoresun.com).
3. Duane W. Gang, "Emerald Empire Homes Land Trust Looks to Make Homeownership Affordable," The Press-Enterprise, 15 June 2008 (www.pe.com).
4. Arlington County Department of Community Planning, Housing and Development, Homebuyer Information Packet (www.arlingtonva.us/Departments/CPHD/Documents/11121Homebuyer%20Packet.pdf).
5. See "Neighborhood Stabilization Program Grants" at www.hud.gov/offices/cpd/communitydevelopment/programs/neighborhoodspg/.
6. See "Hope for Homeowners" at www.hud.gov/hopeforhomeowners/index.cfm.
