The Asset Building Potential of Shared Equity Homeownership

In this paper, we review the literature on homeownership as an asset building strategy for lower income households. We then present a real world case study, examining wealth building and household mobility among buyers of 424 resale-restricted, owner-occupied houses and condominiums developed by the Champlain Housing Trust (CHT) in Burlington, Vermont between 1988 and 2008. We conclude by comparing the asset building potential of shared equity homeownership to the rewards and risks associated with other strategies for helping lower income families to accumulate assets and build wealth.

Social policy in the United States has long focused on income-based measures of poverty and inequality. Since the late 1980s, however, there has been a growing attention to asset poverty and asset inequality. Wealth is distributed more unevenly than income, and wealth disparities have grown wider over the past few decades. Homeownership has long been the primary means through which middle-income families have built personal wealth and research supports the widely held belief that homeownership can be a superior investment for many families. And while there is clear evidence that lower-income and minority homebuyers face greater risks and generally earn lower returns than middle income white buyers, homeownership remains virtually the only consistent source of wealth building among lower-income households.

But homeownership has not been available to everyone. Low-income and low-wealth families face several independent (but interrelated) economic barriers that impede the path to homeownership. Credit barriers including, but not limited to, discriminatory practices in home mortgage lending make it difficult for some potential buyers with sufficient income to purchase homes because they cannot obtain an appropriate mortgage product. Other potential buyers, including many with adequate credit scores are unable to purchase because of income barriers—the entry level housing prices are simply beyond what many families incomes can support—whatever mortgage product is used. Lastly, buyers face wealth barriers if they lack savings for a minimum downpayment. Renters who face one constraint are likely to face one or both of the others as well, with a lack of wealth looming as the single greatest barrier to homeownership.

And yet, the clear majority of federal spending on homeownership is targeted at overcoming credit and income constraints. Only a small minority of federal investment is targeted at overcoming wealth barriers. Homeownership assistance programs generally fall into three categories:

          <div style="margin-left: 40px;"><b>Financing Product Innovations</b>, including mortgage insurance programs like FHA and mortgage market supports like Fannie Mae and Freddie Mac, seek to overcome credit barriers by encouraging private lending to targeted homebuyers.<br>&nbsp;</div><div style="margin-left: 40px;"><b>Mortgage/ Interest Rate Subsidies</b> address income constraints by offering below market mortgage interest rates to lower-income buyers.</div>    <div><p style="margin-left: 40px;"><b>Purchase Subsidies</b> address both wealth and incoem barriers by either providing significant capital subsidies to either developers or qualified homebuyers at the time of purchase.</p><p>While there are would be buyers who benefits from each of these strategies, several studies have found that purchase subsidies make the greatest difference for families priced out of homeownership. In spite of this research, purchase subsidy programs have never received the level of support enjoyed by other homeownership support strategies. One concern is that purchase subsidies can be more expensive. Shared Equity Homeownership programs address this concern by preserving affordability so that a one time public investment can make homeownership possible for one lower-income family after another. In this way, shared equity programs can dramatically reduce the cost per beneficiary of homeownership subsidy programs. But these programs achieve this result by limiting the rate at which the prices of assisted homes appreciate.&nbsp;In exchange for significant public support at the time of purchase, these programs require owners to pass that benefit along to future lower income buyers by reselling at an affordable price. Shared Equity homeowners build wealth both by paying down their mortgage and through their (limited) home price appreciation but in an expanding market, they earn less than unrestricted market rate homeowners.</p><p>But even with lasting affordability controls, shared equity homeownership programs can offer buyers a very significant asset building opportunity, one that, in many cases may outperform other investment opportunities available to low and moderate income families. The extent of homeowner asset building that occurs in shared equity homeownership programs has not previously been studied. This paper evaluates the asset building potential of this general approach to affordable homeownership through an in depth analysis of the outcomes from one such program. We draw on a recent performance evaluation conducted by the Champlain Housing Trust in Burlington, VT, including data on 205 resales of price restricted homes between 1988 and 2008.</p><p>The average CHT homeowner, reselling after 5.4 years, received $7,889 in equity, as her share of the home’s price appreciation. Because CHT’s homeowners make only a small initial investment, this gain represented an average annualized Internal Rate of Return of over 25 percent. In addition to their share of appreciation, the average CHT homeowner also earned $4,294 at resale because of the pay-down on her mortgage, plus $1,348 as a credit for capital improvements made to the home after purchase. While the resale restrictions on CHT’s houses and condominiums succeeded in maintaining the affordability of these shared equity homes, as they were transferred from one income-eligible homebuyer to another, the average homeowner who left CHT still walked away nearly $14,000 richer than she had been when first entering CHT’s homeownership program.</p><p>Compared to other asset building strategies realistically available to lower income households, CHT’s homeowners accumulated family wealth much faster and with less risk. The average buyer invested savings equivalent to 58 percent of the asset poverty level and received equity at resale equivalent to 284 percent of the then-current asset poverty level. She was able to accumulate wealth far beyond what Individual Development Account (IDA) participants typically save and to move on to unassisted homeownership at a higher rate than is typical among IDA programs.</p><p>Although CHT’s homeowners generally accumulated less home equity than buyers of unrestricted, market-rate homes, they had significantly less risk. They were far less likely to experience foreclosure than the average lower income buyer. And they managed to sustain homeownership at a far higher rate. Several studies have found that roughly half of all low-income, first-time homeowners revert to rental housing within five years of buying a home. By contrast, fully 90 percent of CHT homeowners remained owners five years later, either continuing to occupy a CHT home or having acquired a market-rate after leaving CHT. Seventy-three percent of CHT’s sellers purchased another home when they moved out of the shared equity home they had purchased from CHT, including 5.7 percent who bought another CHT home and 67.4 percent who moved into market-rate homes.</p><p>There are a number of factors that help to account for this high rate of success, both in keeping first-time homeowners in their homes and in moving lower income households into market-rate homeownership. Security is enhanced by CHT’s continuing oversight of the affordable homes that public monies and public powers helped to create, a commitment to post-purchase stewardship that is a defining feature of most forms shared equity homeownership. Mobility is enhanced by the amount of money that CHT’s homeowners were able to pocket when reselling their homes. The equity they realized from sharing in their home’s price appreciation and from the steady wealth building from debt retirement—and, in some cases, by receiving a credit for post-purchase capital improvements—were enough to make the difference for most sellers. While all of CHT’s homebuyers had been priced out of the market initially, half of them left CHT with a nest egg that was large enough that if they used it as a downpayment on a comparable home on the open market they would have been able to afford the resulting mortgage payments, even if they had experienced no relative increase in their household income. This occurred in spite of CHT’s strict resale controls that enabled CHT’s homes to resell at affordable prices to families with slightly lower incomes than the initial buyers. These homes not only remained affordable across one, two, or three resales; they became more affordable over time, without any additional public investment.</p><p>Shared equity homeownership is a promising approach to securing and supporting homeownership for lower income households. Under shared equity homeownership, a governmental or nonprofit agency invests substantial public funds to reduce the price of purchasing a home for prospective homebuyers of modest means. In return, homebuyers accept a durable, contractual limit on their equity appreciation in order to preserve affordability for future lower income buyers. Less frequently acknowledged has been the contribution these programs can make to asset building for lower income families, wealth creation that occurs despite the limitation that is placed on the equity a homeowner may remove from her home on resale.</p><p><a href="/downloads/Shared_Equity_Jacobus_Davis_1_2010.pdf">Click here</a> to read the entire paper.</p></div><p>&nbsp;</p>