Shared Equity Homeownership
The Changing Landscape of Resale-Restricted, Owner-Occupied Housingby John Emmeus Davis
National Housing Institute
A National Housing Institute paper
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Preface from Shared Equity Homeownership:
The most distinctive feature of affordable housing policy in the United States in recent years has been its unrelenting focus on promoting homeownership as a social good, and on increasing the ranks of homeowners among the nation’s lower income households. To this end, a variety of strategies have been employed, including capital subsidies, down payment and closing cost assistance, and an ever-increasing array of creative mortgage instruments, offering adjustable rates, lower down payments, longer terms, balloons and other mechanisms that increase immediate access to housing at the price of future risk and uncertainty.
Perhaps as a result of these efforts, although unusually low interest rates and generally low unemployment rates have also played their part, homeownership rates have inched upward. By 2004, 69 percent of American households owned their own home, up from 64 percent in 1985. At the same time, particularly for lower income households and people of color, the downside of this strategy is becoming more and more apparent. Foreclosures are rising in many parts of the nation and, as recent research has shown, a disproportionately large share of lower income homeowners lose their homes, finding themselves back in the rental market a few years later.
While conventional homeownership may be a mixed blessing for many lower income households, the impact of these policies on their neighborhoods remains unclear. While neighborhoods benefit from the presence of stable, long-term homeowners, policies that create more transitory homeownership, while increasing the risk of foreclosures and abandonment, may end up destabilizing neighborhoods, doing them far more harm than good. In other cases, where house prices are rapidly appreciating, publicly subsidized homeownership can lead to windfalls for a few, while other less fortunate lower income households are being pushed out of their own communities.
These risks and uncertainties have brought out clearly the need for alternatives to conventional homeownership strategies. The most important alternatives can be found in what some have called third sector housing. Along with rental and conventional homeownership, this middle ground is represented by shared equity homeownership. Shared equity homeownership ensures that the homes remain affordable to lower income households on a long-term basis by restricting the appreciation that the owner can retain, preserving affordable housing in areas where rising prices are forcing lower income households out of the market. At the same time, by placing the owner within a community-based support system, such as a community land trust or limited equity cooperative, shared equity homeownership can mitigate the risks of homeownership, potentially increasing the benefits of homeownership both for the owner and the neighborhood in which she lives.
While shared equity homeownership makes up only a modest share of all owner-occupied housing in the United States, it is a growing share.Well over a hundred community land trusts exist across the country, from Burlington, Vermont to Santa Fe, New Mexico. Limited equity cooperatives, although predominantly an urban housing type, have become a more widely used vehicle for building stable homeownership and preserving affordability in mobile home parks from New Hampshire to California.With the dramatic growth in inclusionary housing during the past decade, tens of thousands of shared equity condominium units have been created across the country, in settings that range from cities such as Stamford and Boulder to the suburbs of Chicago and New York’s Hudson River Valley.
While those involved in creating shared equity homeownership share a commitment to affordable housing, the particular motivations and the choice of a particular model vary widely.While many community land trusts see creating permanently affordable housing and building a strong community as a single process, entities pursuing inclusionary housing in hot markets are most concerned with ensuring that the units will remain affordable, and creating a nucleus of permanently affordable housing in an environment where few lower income households can otherwise afford to live.
The concept of shared equity, restricting the home value appreciation that flows to the homeowner on resale, can be controversial. Some economic fundamentalists object to any limitation on appreciation as an infringement of private property rights, while others see it as hindering the ability of lower-income households to build wealth, a goal that is certainly a legitimate one. These are not frivolous concerns. It is important to remember, however, that these homeownership opportunities were created as a result of public subsidy or other public intervention, as in the case of an inclusionary unit. Sharing the equity is a reasonable quid pro quo, in light of the considerable shelter value that the homebuyer has gained as a result of the public subsidy or intervention, and the public policy value of preserving affordable housing for future generations.
Homeowners in shared equity models do build equity. In most shared equity models, they receive a return keyed to the consumer price index or the increase in household incomes.While this is far less than some homeowners may gain in rapidly appreciating markets, it is a fallacy to assume that rapid house price appreciation is either normal or inevitable. It has only been in the past decade that people have started to assume that appreciation well above increases in consumer prices in general could be counted on, an assumption wildly at odds with longer term historic trends. In the long run, owners of shared equity housing will do well, particularly in light of their modest initial equity stake; moreover, they are far better protected against downturns in the market than conventional homeowners. Such evidence as is available shows that shared equity owners are not locked in to those units, but in fact do move up to the private market, combining such equity as they have with their gains from education, training, and upward workforce mobility.
In the following pages, John Emmeus Davis, one of America’s leading authorities on shared equity housing, provides a detailed description of the principal shared equity homeownership models, and the policy and design issues they raise. He addresses the principal claims made for shared equity homeownership as a vehicle for promoting individual wealth, stability and engagement, as well as for building wealth and stability at the community level. Davis also examines the criticisms that have been raised.While recognizing that many issues remain unresolved, Davis clearly establishes the value of shared equity homeownership as a means of providing and maintaining affordable housing and strong neighborhoods.
For over three decades the National Housing Institute has sought and encouraged innovative solutions to the housing crisis in America, a crisis that is affecting increasingly greater numbers of people as wealth inequality grows, wages stagnate and housing costs spiral.We are hopeful that this volume will generate further interest and
Epilogue from Shared Equity Homeownership:
“Third sector housing has received little attention outside the ranks of those who labor day to day to make it a reality. Such neglect has not stopped the spread of privately owned, socially oriented, price-restricted housing, nor has it discouraged hundreds of nonprofit, community-based organizations from developing such housing. Furthermore, it has not prevented dozens of municipal governments from devoting an increasing proportion of their tightening budgets for affordable housing to nonmarket models and nonprofit organizations dedicated to perpetuating the hard-won affordability of publicly assisted, privately owned housing. On the other hand, because national attention and national resources have been directed elsewhere, this third sector housing movement has remained relatively small in the United States. Being out of the spotlight has slowed the process of evaluation, refinement, and legitimation that transforms an innovation into an institution. It has delayed the day when the preservation of affordability is as common a priority of public policy as the construction of new housing or the rehabilitation of old.” (Davis, 1994: 25)
Twelve years after publication of the passage quoted above, the day has still not arrived when a commitment to durable affordability is universally a “priority of public policy.” Although the number of jurisdictions requiring long-term controls over the use and resale of owner-occupied housing created with the assistance of public dollars or public powers has been rapidly rising, the total number of resale-restricted homes has remained relatively small. The “process of evaluation” has also been slow, as the present study has amply demonstrated. Despite the number of governmental agencies and nonprofit organizations that are now utilizing the contractual controls and organizational vehicles of third sector housing, these innovative models have yet to become an institution on a par with other tenures long favored by the market and the state.
What can no longer be said is that third sector housing remains “out of the spotlight.” More conventional forms of tenure are still the leading ladies of public policy. They still command the lion’s share of national attention and national resources. But they no longer have the stage all to themselves. The performance and potential of a new generation of tenures is being noticed at last. A mounting chorus of critical opinion is now suggesting that the time has come to “redefine homeownership” (Hockett et al., 2005), to “rethink rental housing” (Retsinas and Apgar, 2005), and to expand the use of “alternative tenure options that fall between rental housing and homeownership” (National Housing Conference, 2005: 1213). After waiting in the wings for many years, third sector housing is now reaching a broader audience and winning wider support.
This has been a spur to innovation at both ends of the tenure continuum.We have concentrated on homeownership here, but it should be noted that new models of private, nonmarket rental housing have also been appearing on the national scene. Most are designed to give tenants more security while preserving the affordability of the housing that is theirs. Some give tenants a greater degree of control over management and maintenance. A few, by establishing dedicated escrows or individual development accounts tied to residency in a particular project, enable tenants to accumulate a small amount of wealth. Thus, at a time when the sponsors of shared equity homeownership continue to tinker with the design and structure of their models, refining those features that reduce risk, share responsibility, enhance security, build wealth, promote mobility, and preserve affordability, many sponsors of nonprofit rental housing are engaged in a very similar enterprise.
As these hybrid forms of tenure quietly proliferate, the prospects improve for slowly rebuilding a housing tenure ladder that increasingly delivers neither security nor mobility. In too many communities there are broken rungs at the bottom, where persons who are homeless or temporarily housed find it harder to step into secure rentals that are decent and affordable. There are missing rungs in the middle, where persons of modest means find it harder 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 profitably sold by their absentee owners at a moment’s notice. Even the grip that low-income and moderate-income homeowners have on the housing that is theirs can become tenuous in a time of rising interest rates, rising utility costs, and rising property taxes.
Third sector housing is hardly a corrective for every defect. Even the most constructive innovations can be overwhelmed by larger social, economic, and political forces that are warping and weakening the housing tenure ladder, nationally and locally. And, in most communities, these private, nonmarket models are too new and their holdings too few to have yet had more than a minimal impact on the locality’s overall housing problem.
Where third sector housing approaches a critical mass, however, in both variety and quantity, a less wobbly system of affordable housing is created, one that promises more security and more mobility than ever before. Low-income and moderate-income people are offered housing that is buttressed with social and operational supports, strengthening the hold they have on their homes, in good times and bad; preserving the affordability built into their homes, for this generation and the next. They are able to choose a bundle of rights and responsibilities that more closely matches the current state of their finances and abilities. As their circumstances change, whether for better or for worse, they can more easily move from one form of tenure to another in smaller steps. Tenure is tailored to meet the needs of people, not the other way around.
This is a vision that is neither impractical nor remote. Indeed, the foundation is already being laid for such a choice-enhancing system, with innovative models of shared equity homeownership and flexible forms of nonprofit rental housing regularly appearing amidst the rigid dichotomies that have historically dominated housing provision and housing policy in the United States. New rungs are being added to the housing tenure ladder in hundreds of communities. More resources are needed to bring these private, nonmarket models to scale. More research is needed to refine their design, improve their performance, and ensure their longevity. But public and private support for them is growing. There is reason to believe that the resources will be found and the research will be done, allowing them to play a larger role on the national stage. There are encouraging signs that third sector housing has finally arrived.
John Emmeus Davis
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