Issue #148, Winter 2006

NHI Research Update: Rebuilding America's Housing Ladder

By John Emmeus Davis

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For as long as the National Housing Institute has been in existence, the nation's housing ladder has been in disrepair. In too many communities, there are broken rungs at the bottom, where persons who are homeless or inadequately housed find it hard to step into secure, decent, affordable rentals. There are missing rungs in the middle, where persons of modest means find it hard to cross the yawning gap between renting and owning. There are fragile rungs high and low on which are precariously perched the lower-income occupants of millions of units of publicly assisted housing with short-term affordability controls, millions of units of market-rate housing made temporarily affordable through adjustable rate mortgages and millions of mobile homes on lucrative lands that may be sold by their absentee owners at a moment's notice. Even the grip that many homeowners have on the houses and condominiums that are theirs can become tenuous in a time of rising interest rates, rising utility costs and rising property taxes.

During the same years that Shelterforce has been writing about America's housing crisis, a quiet experiment has been underway. Hybrid models of "third sector housing" that straddle traditional boundaries between renting and owning, public and private, market pricing and social pricing have been proliferating. New rungs have been introduced into the housing ladder, promising more security and more mobility for renters and homeowners of modest means.

In 2004, NHI began a multi-phase project to examine those models of third sector housing where residents have most of the rights and responsibilities of homeownership, including limited-equity cooperatives (LECs), community land trusts (CLTs) and deed-restricted houses and condominiums with affordability covenants lasting at least 30 years. The first phase of our study, which culminated in the publication of Shared Equity Homeownership: the Changing Landscape of Resale-Restricted, Owner-Occupied Housing, is now complete.

The report examines the rationale for shared equity homeownership (Chapter One), the characteristics of three representative models (Chapter Two), the design of the controls that lie at the heart of these models (Chapter Three), the state and municipal policies that support or impede the expansion of these models (Chapter Four) and the performance of shared equity housing in delivering a variety of benefits to individual homeowners and the larger community (Chapter Five).

Perhaps the most compelling message of our findings is that the commonalities among LECs, CLTs, deed-restricted homes and their many variations are more plentiful than their differences. Indeed, at the micro level of programmatic design and at the macro level of policy and performance, many of the distinctions among individual models of shared equity homeownership tend to disappear. Other features and findings from our study include:

Models
The report focused on LECs, CLTs and deed-restricted homes with long-term resale controls because these models come the closest to matching our working definition of shared equity homeownership. The housing is owner-occupied. The rights, responsibilities and benefits of residential property are equitably shared between individual homeowners and a larger community. Affordability is contractually maintained for many years.

The landscape of shared equity homeownership is constantly changing. Developers are dipping regularly and creatively into a deep pool of possibilities for structuring shared equity housing. They are tailoring the ownership and oversight of this housing to meet the shifting demands of funders, lenders, consumers and communities. The result is a landscape of unusual diversity, with new models of shared equity homeownership - or new permutations of older models - appearing every year.

Support for shared equity housing is expanding. The number of nonprofit organizations developing shared equity housing, and the number of private lenders financing such housing and the number of governmental agencies using their dollars and powers to assist such housing, has steadily increased. A lengthening list of cities and states now administer homeowner assistance programs, housing trust funds, inclusionary housing programs or housing incentive programs that require long-term controls over the occupancy, eligibility and affordability of owner-occupied housing as a condition of public support.

The number of shared equity homes is growing…although no one really knows how much resale-restricted, owner-occupied housing actually exists in the United States. There may be as few as a half-million units, with the majority found in limited-equity housing cooperatives. There may be as many as 800,000 units, with the bulk of them found in deed-restricted houses, townhouses and condominiums, currently the fastest-growing form of shared equity homeownership.

Design
Few of the contractual controls over the use and resale of shared equity housing are model-specific. Different models often employ controls that are much the same; conversely, the same model often employs controls that are very different. The 10 most important design considerations are:

Duration. How long should controls over the use and resale of share equity housing last?

Decontrol. What happens when homes that were encumbered with these controls return to the marketplace - and what happens to the subsidies that made this housing affordable in the first place?

Eligibility. Who may buy a resale-restricted home when it is initially offered for sale - and who may buy this home when it is resold?

Disclosure. How are prospective buyers informed of the rights, responsibilities and limitations that come with a shared equity home?

Occupancy. How is owner-occupancy ensured and how is subletting regulated?

Legacy. To whom may an owner bequeath a shared equity home?

Maintenance. What are an owner's obligations in repairing and maintaining a shared equity home?

Improvements. How will later capital improvements be regulated - and valued?

Financing. Under what conditions may an owner mortgage a shared equity home?

Resale formula. How is the maximum resale price determined?

Resale process. How is the transfer of a shared equity home from one homeowner to another managed?

Enforcement. How are the durable controls monitored and enforced - and how is the cost of such oversight funded?

Policy
Public policy has been a key factor in determining where these alternative models of homeownership will thrive. Below the federal level, the three policies found to be the most critical in supporting - or impeding - the expansion of shared equity housing are:

Durable affordability. A growing number of jurisdictions are insisting on a quid pro quo for their support. They will use their dollars or powers to promote the production of housing that lower-income homebuyers can afford, but the eligibility, occupancy and affordability of that housing must be contractually preserved for many years.

Subsidy retention. In exchange for a public subsidy, reducing the purchase price of a house, condominium or cooperative apartment, homebuyers agree to limit the resale price of their homes, thereby limiting the equity they may extract at resale. Subsidies invested in making homeownership affordable are thus retained in the housing, neither removed by the departing homeowner nor recaptured by a public agency.

Equitable taxation. In assigning values and levying taxes, local assessors often take little account of the durable restrictions on subletting, resale and use that encumber shared equity homes - restrictions that significantly constrain the property's marketability and profitability. The owners of shared equity homes are frequently forced to pay taxes, not only on value that is theirs, but on value they can never gain for themselves.

Performance
The report proposes a broad set of standards and reviews a body of evidence in weighing how well shared equity housing has performed in delivering - and balancing - benefits that accrue either to the individuals who own these homes or to the communities surrounding them. The benefits most commonly claimed for shared equity homeownership, which become the yardstick against which to measure its operational success, are:

Affordability. Shared equity housing helps lower-income people to become homeowners in regions where market-rate homeownership has become elusive (individual affordability). Shared equity housing also preserves affordability over time, ensuring that the next generation of lower-income homebuyers will have access to the same opportunities made available to the present generation (community affordability).

Stability. The sharing of risks and responsibilities in most of these models, along with a readiness to intervene in times of trouble, enhances security of tenure for first-time homeowners (individual stability). Shared equity housing also insulates a portion of a neighborhood's residential property against the negative externalities of public investment and the disruptive fluctuations of private investment, stabilizing property values, protecting owner-occupancy and preventing displacement (community stability).

Wealth. Shared equity housing builds assets for lower-income homeowners. Despite the limit that is placed on an owner's proceeds when a shared equity home is resold, most homeowners walk away with more money than they brought with them when purchasing their homes (individual wealth). Shared equity housing also prevents the loss of public contributions, ensuring that scarce resources invested in affordable housing will continue to benefit the larger community (community wealth).

Involvement. Shared equity housing nurtures social networks and mutual interests among persons who reside within the same residential community, fostering collective responsibility for the condition and operation of their housing (individual involvement). Shared equity housing is also a springboard to civic engagement, fostering a wider involvement in the politics and civic associations of the community surrounding one's personal living space (community involvement).

Improvement. Shared equity housing enhances personal mobility, helping lower-income households to better their lives (individual improvement). Such housing also provides a vehicle for developing neighborhoods in which the poor have been heavily concentrated or for diversifying neighborhoods from which the poor have been historically excluded (community improvement).

Next Steps
In this comprehensive look at shared equity homeownership, treating its many forms as a single sector, we found evidence for the sector's effectiveness in delivering nearly all of the benefits described above, while maintaining an equitable balance between the interests of individuals and the interests of community. Much more research still needs to be done, however. There are significant gaps in our understanding of the performance of shared equity homeownership under different market conditions, serving different populations. We need more accurate information about the amount of such housing, state by state. We need a better assessment of the best practices for designing, financing and marketing shared equity housing and the best policies for spurring its expansion.

These unmapped areas in the changing landscape of resale-restricted, owner-occupied housing set the agenda for future research. Over the next two years, we will continue our investigation, working with teams of academics and practitioners to document the performance and prevalence of shared equity homeownership. We plan to work closely, as well, with the national organizations and networks that have long supported the development of LECs, CLTs and deed-restricted homes, identifying and promoting practices and polices with the greatest potential for bringing the entire sector to scale.

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