Asset Building and Shared Equity Homeownership

Jeffrey Lubell, Executive DirectorCenter for Housing Policy

April 14, 2010Webinar

Homeownership at a crossroads

• Subprime and foreclosure crisis

– Downsides of traditional homeownership model

– Community impacts

– Opportunity for new thinking and new approach

• What if a safer model for affordable homeownership could be found?

– Lower risk of foreclosure / equity loss

– Leverage private markets

– Strong asset-building results

Shared equity homeownership

• Basic model

– Deep subsidy

– Resale price restrictions

– Monitoring

• Applications

– Community land trusts

– Deed restrictions

– Limited equity cooperatives

Equity sharing models

• Share of home price appreciation

– e.g., resident retains 25% of appreciation

• Area Median Income

– Resale price rises at same rate as incomes

• Affordable Housing Cost

– Home always sold for price affordable to target buyer

Subsidy Retention Example• Initial Purchase

– Market Value = $200,000

– $50,000 subsidy brings price down to $150,000, affordable to family at target income range

– Family contributes $10,000, with 30-year fixed mortgage for $140,000

• Affordability at Resale

– Home prices have increased 25% over a five-year period, so market value = $250,000

– Incomes have gone up 15%, so target family can afford a home valued at $172,500

• Asset Accumulation

– Family sells for $172,500, with transaction costs of $5,000

– Family gains $17,500 in home price appreciation plus approx. $10,000 in equity built up through principal paydown = $27,500 gain

Benefits of SEH

• Current and future affordability

• Lower risk to homebuyer

• Protection from market declines

• Opportunity for individual to generate large return on initial investment

• Community benefits from affordable housing in key locations

• Buying power of subsidy preserved

The Asset Building Potential of Shared

Equity HomeownershipRick Jacobus, NCB Capital Impact

Ownership Gap

•

Wealth is the key barrier

2%have sufficient savings

Source: Savage 2009

Renters who can’t afford ownership

Overcoming barriers

Source: Savage 2009

Strategy % of Renters who can afford to buy

Current mortgage requirements

7.6

3 percentage point interest rate subsidy

8.3

No down payment requirement

9.2

$10,000 purchase assistance

19.5

Shared Equity Homeownership

•Create Affordability: Invest significant public subsidy

•Preserve Affordability: Share in price appreciation

Research Question

•How does this form of ownership perform as an asset building strategy for homeowners?

Champlain Housing Trust

•Developed 424 homes since 1984

•Nearly all buyers <80% of AMI

Data

•205 resales of CHT homes

•Exit interviews, review of files and follow up interviews (as needed)

•Ongoing affordability

•Homeowner returns from sale

•Subsequent housing tenure

Affordability

Affordable to (% AMI)

Occupied by (% AMI)

Initial Sale 56.6% 68.6%

Resale 53.4% 67.1%

5.65%Affordability Gain

$7,889 Appreciation

5.4 Years Average tenure

$4,294 Debt Retirement

$1,348 Capital Improvement

$13,530 Total Equity at sale

$2,300 Initial Investment

25% Annual Rate of Return

Asset Building

Asset Poverty

Home Equity Percent of Asset

Poverty Level

58%At time of purchase

284%At time of sale

Asset Poverty Level

Foreclosures

629sales 1984 - 2008

9Foreclosures

1.43%Cumulative Rate

1.4%Freddie Mac 10 Year Rate

5.1%Freddie Mac > 90% LTV

2.47%7 year rate for HOME/ADDI

Buyers in Northwest

CHT

Comparison

Retention

Reid (2005) 53%

Champlain Housing Trust

<10%

Precent of low income first time buyers that returned to renting within 5 years:

Subsequent Tenure

2%At time of purchase

9%At time of sale

Owner Equity as a % of Unrestricted Market Value

50%of sellers could afford a comparable home with no increase in income

$0Additional public subsidy needed to offer this same

opportunity to future buyers

Conclusions

•We can preserve affordability and still offer life altering wealth building

•Shared equity homeownership can offer a predictable path for asset building

Asset Building and Shared Equity Homeownership

April 14, 2010Jeff Corey, Northern Communities Land Trust

Creating affordable homes and strengthening communities through the wise stewardship of land and resources

Who We AreWho We Are Non-profit 501(c) 3 corporation, Non-profit 501(c) 3 corporation, governed by Membership and Board governed by Membership and Board of Directorsof Directors

Founded in 1990Founded in 1990

Real estate developer in neighborhood Real estate developer in neighborhood revitalization initiativesrevitalization initiatives

Provide affordable housing for low and moderate income Provide affordable housing for low and moderate income householdshouseholds

Community Land Trust—work to provide affordable housing now Community Land Trust—work to provide affordable housing now and preserve the affordability of the housing for future and preserve the affordability of the housing for future generationsgenerations

NCLT HomeownershipNCLT Homeownership Qualified, income-eligible buyers can purchase Qualified, income-eligible buyers can purchase

high quality homes at affordable priceshigh quality homes at affordable prices

In exchange, Land Trust homeowners agree to In exchange, Land Trust homeowners agree to ‘pay it forward’ and pass the bargain price they ‘pay it forward’ and pass the bargain price they received on to the next owner of the homereceived on to the next owner of the home

99 year, renewable lease formalizes the 99 year, renewable lease formalizes the agreementagreement

Resale price determined by a resale formula in Resale price determined by a resale formula in the lease that ensures permanent affordability of the lease that ensures permanent affordability of the homesthe homes

Northern Communities Land Trust Northern Communities Land Trust Affordability StatisticsAffordability Statistics

There are 190There are 190 permanently affordable Land Trust homes in permanently affordable Land Trust homes in Duluth.Duluth.

Average yearly income of a Land Trust homebuyer was Average yearly income of a Land Trust homebuyer was $30,515 in 2009.$30,515 in 2009.

Average Land Trust buyer earns about 60% of median income. Average Land Trust buyer earns about 60% of median income.

Average purchase price for a Land Trust home is $88,530; Average purchase price for a Land Trust home is $88,530; average value is $131,777.average value is $131,777.

49 homes have resold to date, re-using over $2.3 million in 49 homes have resold to date, re-using over $2.3 million in state, private and federal subsidies.state, private and federal subsidies.

Northern Communities Land Northern Communities Land Trust Resale StatisticsTrust Resale Statistics

49 homes have resold to date49 homes have resold to date– re-using over $2.3 million in state, private and re-using over $2.3 million in state, private and

federal subsidies.federal subsidies.– All homes re-sold to income eligible All homes re-sold to income eligible

householdshouseholds– 80% of sellers have moved to market rate 80% of sellers have moved to market rate

homeownershiphomeownership

Urban Institute study shows Land Trust is Urban Institute study shows Land Trust is preserving affordability of homes preserving affordability of homes andand our our homeowners are building assets.homeowners are building assets.

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NCLT Resale ExampleNCLT Resale Example

1999 $64,000

Market Value

- $12,000Community Investment

= $52,000Original Purchase Price

2010 $112,000

Market Value

- $33,201Community Investment

= $78,799Resale Purchase Price (includes new windows and furnace for 8,500

and realtor commission of $4,599)

First Homeowners SpecificsFirst Homeowners Specifics

1999: Michael and Charlotte, son Peter (age 4)1999: Michael and Charlotte, son Peter (age 4)

• Michael worked as assistant manager in produce Michael worked as assistant manager in produce department of local food co-op. Char working on department of local food co-op. Char working on undergraduate degree in social work.undergraduate degree in social work.

• 44% of area median income, $17,199/year44% of area median income, $17,199/year

• Received assistance of $12,000 subsidy to lower the Received assistance of $12,000 subsidy to lower the purchase price of the home. $4,000 worth of rehab done purchase price of the home. $4,000 worth of rehab done to the home after closing—not as much as we would to the home after closing—not as much as we would have liked to do, but what we had funds for at the time.have liked to do, but what we had funds for at the time.

First Homeowners Resale SpecificsFirst Homeowners Resale Specifics

2010: Michael, Charlotte, Peter & Kylie (age 6)2010: Michael, Charlotte, Peter & Kylie (age 6)

• Michael now manager of produce department, earning 2 Michael now manager of produce department, earning 2 X the salary as in 1999. Charlotte finished her X the salary as in 1999. Charlotte finished her undergraduate and masters degree in social work, now undergraduate and masters degree in social work, now employed by St. Louis County as a social worker.employed by St. Louis County as a social worker.

• Stable, affordable housing for 11 years allowed them to Stable, affordable housing for 11 years allowed them to more easily increase income and prepare for market rate more easily increase income and prepare for market rate homeownership once ready.homeownership once ready.

• Net profit at resale of $23,600 ($13,800 share of Net profit at resale of $23,600 ($13,800 share of appreciation + $10,800 payment on principal - $1,000 appreciation + $10,800 payment on principal - $1,000 closing costs)closing costs)

22ndnd Homeowner Homeowner

2010: Karen, single.2010: Karen, single.

• Karen is employed as an administrative assistant in a Karen is employed as an administrative assistant in a law firm.law firm.

• $27,040/year which is 64% of area median income $27,040/year which is 64% of area median income (50% of AMI for a household of 3 as were the Karsh’s)(50% of AMI for a household of 3 as were the Karsh’s)

• Received $33,201 discount in purchase prices as well Received $33,201 discount in purchase prices as well as new windows and furnace.as new windows and furnace.

LAND TRUST RESALES: LAND TRUST RESALES: Preserving affordable homes for Preserving affordable homes for

the future.the future.

2006

$81,000Market Value

- $23,000Community Investment

= $58,000Original Purchase Price

2009

$92,000Market Value

- $27,000Community Investment

= $65,000Resale Purchase Price

First Homeowners SpecificsFirst Homeowners Specifics

2006: Rain and Kris, Miles (age 2)2006: Rain and Kris, Miles (age 2)

• Rain worked in grocery store. Kris worked as a health Rain worked in grocery store. Kris worked as a health care worker.care worker.

• 57% of area median income, $28,794/year57% of area median income, $28,794/year

• Individual Development Account participant—down Individual Development Account participant—down payment of $1,850payment of $1,850

• Received assistance of $23,000 subsidy to lower the Received assistance of $23,000 subsidy to lower the purchase price of the home. $20,000 worth of rehab purchase price of the home. $20,000 worth of rehab done to the home after closing.done to the home after closing.

First Homeowners Resale SpecificsFirst Homeowners Resale Specifics

2009: Rain and Kris, Miles (age 5), Josie (age 2)2009: Rain and Kris, Miles (age 5), Josie (age 2)

• Rain still works in grocery store. Kris works part time as Rain still works in grocery store. Kris works part time as a health care worker.a health care worker.

• Stable, affordable housing for 3 years. During this time Stable, affordable housing for 3 years. During this time household income increased to $37,000. Household household income increased to $37,000. Household size also increased. These were the reasons for moving. size also increased. These were the reasons for moving.

• Net profit at resale of $2,831 (loan for closing costs of Net profit at resale of $2,831 (loan for closing costs of $4,000 at original purchase was paid off at resale)$4,000 at original purchase was paid off at resale)

22ndnd Homeowner Homeowner

2009: Kevin, single.2009: Kevin, single.

• Kevin is employed by Garda—armored truck transport Kevin is employed by Garda—armored truck transport service ocmpany.service ocmpany.

• $23,000/year which is 55% of area median income$23,000/year which is 55% of area median income

• Received $27,000 discount in purchase price. Received $27,000 discount in purchase price.

Questions?Questions?

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