Get more, spend less: How to support sustainable homeownership
As a nation, we are making massive investments in subsidizing homeowners through the mortgage interest deduction, home capital gains exemptions, state and local property tax exemptions, and the exclusion of net imputed rental income. But researchers have consistently found that these policies do little, if anything, to encourage homeownership in the first place. At the same time, housing has become more and more out of reach for many low- and middle-income families.
A better approach to encouraging ownership that is affordable and relatively cost-efficient over time is shared equity homeownership—which is different from a shared appreciation mortgage. Under a shared equity approach, the market cost of the home is shared between the buyer and the entity administering the program, and the program keeps a share of the equity. When the buyer later sells the house, the buyer is able to access a share of the profits, but the house will remain affordable to the benefit the next low-income homebuyer. Shared equity is a broad designation that includes the following community land trusts and deed restricted programs (e.g. inclusionary zoning).
Despite its promise, shared equity homeownership has remained a niche market segment. The Urban Institute recently released baseline findings from our evaluation of nine shared equity programs across the country. In addition to examining the attributes of applicants, we also explored what it takes for these programs to work and expand to scale. Three themes emerged.
Securing stable funding to operate the program is critical for groups that do not have sufficient program revenue to cover all operating expenses.
Shared equity programs usually require a portfolio of 300-plus homes to generate enough fee income to cover the program’s operating expenses. As many programs do not have a portfolio this large, securing funding to cover operating expenses is vital. These programs don’t require a large staff, however, so modest government grants can go a long way toward supporting smaller programs as they grow.
Identifying and accessing a source of capital to buy, rehabilitate, and develop homes is essential for expanding these programs.
Developing or purchasing homes that can be sold at below-market rates is no easy feat. To be successful, shared equity programs must provide homes at a substantial enough discount from their market value to attract buyers who will agree to resale restrictions. That means having a steady flow of housing units, as well as subsidies that make up the gap between buying, rehabilitating, and/or developing homes before receiving proceeds received from the initial sales of shared equity units. Given that the required amount of gap financing can be quite large (perhaps $40,000, but this varies considerably across markets), shared equity programs require substantial subsidies. Of course, these same subsidies will be recycled to help additional buyers, meaning that, over time, the cost of helping each buyer drops considerably.
Working with lenders to develop and offer mortgage products to shared equity buyers is vital for sales.
Because shared equity is such a small share of the market, many national mortgage lenders are unfamiliar with its structure and are unwilling to issue standard mortgage products for shared equity homes. Shared equity programs often have greater success working with local lenders. And program staff work hard to maintain relationships with lenders who have more flexibility with their mortgage products and underwriting standards. But even when programs are able to ease access to financing, finding buyers who can meet the underwriting standards is a challenge. Shared equity buyers are typically first-time homeowners who are employed, but have lower incomes and wealth. In addition, only 25 percent of total program applicants met the credit history or FICO score criteria required by their lenders. As such, to grow further, these programs need additional sources of financing, including access to FHA loans, which is currently difficult.
Even with the turmoil in the housing market over the past few years, many Americans still want to buy their own homes. It is important that we create and fund programs that help make affordable homeownership a reality for low- and moderate-income households. However, we also need to give these programs the tools and resources to be successful. That means increasing public- and private-sector collaboration to help programs build and sustain operations, develop and buy homes, and help buyers access financing.