Owning a home has long been a meaningful milestone for many Americans. But as the recovering economy continues to drive up home prices and lending standards remain tight, many renters view homeownership as unattainable.
Fortunately, there is more than one way to purchase a home. One method, shared equity, allows low- and moderate-income families to purchase homes at below-market prices. In return for the subsidized purchase price, a share of the proceeds the homeowner receives from selling the home is restricted.
We evaluated nine shared equity programs made up of 683 people who applied to the programs and consented to participate in the research between June 2012 and June 2014. In our evaluation of housing outcomes for buyers under the Cornerstone Homeownership Innovation Partnership (CHIP) program, we found that shared equity programs linked low- and moderate-income people with affordable owner-occupied housing.
At the time of their application, applicants had incomes that were on average 51 percent of the area median income. Nearly half of applicants spent more than 30 percent of their income on housing and utilities.
Households who purchased a home through a shared equity program (36 percent of all applicants) received, on average, 39 percent of its value in subsidies. Borrowers contributed down payments worth an average of roughly $11,000 (5 percent of the unrestricted market value), and buyers financed the remaining balance (on average, 57 percent of the market value).
Around 20 percent of applicants purchased a home outside the CHIP program. For them, the benefits shared equity affords would likely not be favorable because they would be trading a sizable portion of the upside on their investment. On the other hand, the 44 percent of applicants who did not buy a home may be better off not purchasing a home if they are not financially ready. One benefit of a shared equity homeownership program may be helping applicants determine when they should not purchase a home.
In our comparison of households who purchased a shared equity home with those who either did not buy a shared equity home or purchased “other” non–shared equity homes (first during June 2012 or June 2013 and the last during June 2016), we found that shared equity purchasers had smaller mortgages than other applicants and that they had lower monthly payments on all credit accounts. They also were less likely to have home equity lines of credit and had higher accounts in collections.
But because we did not see consistent differences in other financial and neighborhood metrics after accounting for tests of multiple outcomes, more time may be needed to understand whether and how shared equity purchasers are better or worse off financially compared with other buyers.
Although shared equity helps lower monthly payments, it does not typically decrease credit standards for first mortgages. Roughly 29 percent of applicants had a credit score below 680 at the beginning of the study, which is too low for most conventional mortgages. Credit counseling may be an effective tool to help people increase savings, pay off debt, and improve their credit scores.
Evaluating how shared equity programs affect potential homebuyers is difficult, and more research needs to assess this relationship. Future research should focus on the following:
- Developing an approach that would establish how well these programs create more homeowners than would happen without the subsidies provided by the program
- Determining whether the benefits of reduced mortgage costs appreciably help owners over time
- Evaluating neighborhood outcomes, given that some programs in this study bought homes through funding sources that either did not prioritize relocating low- and moderate-income buyers into affluent neighborhoods or targeted distressed neighborhoods
Addressing these topics will be necessary as shared equity purchasing options become more familiar to real estate agents and homebuyers. Other options already exist, including privately financed equity-sharing models. But these market-driven approaches will neither preserve affordability nor operate in a consumer-friendly manner while generating profits for investors.
Although important questions remain, this study offers evidence that shared equity models provide homeownership opportunities to low-income household with less debt than they could otherwise achieve.