Asset Building and Shared Equity Homeownership Jeffrey Lubell, Executive Director Center for Housing Policy April 14, 2010 Webinar

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 Homeownership Rick Jacobus, NCB Capital Impact

Ownership Gap

Wealth is the key barrier 2% have sufficient savings But the wealth gap is both an effect and a cause of the homeownership gap. Wealth barriers (including high debt and lack of savings are by far the most significant barrier to homeownership for today’s renters. While 72% of renters suffer from both lack of income and lack of wealth, only 2% have enough income but not enough wealth while 26% have enough income but lack savings. Renters who can’t afford ownership Source: Savage 2009

Overcoming barriers 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 The census bureau studied the range of potential strategies to see which would make the most difference in the ability of lower income and minority renters to access homeownership. They found that reducing mortgage rates by as much as 3 percentage points had virtually no impact on the number of renter families that could afford ownership while removing all downpayment requirements would increase the number of renters who could qualify for ownership by only 2 percentage points. Providing purchase subsidies on the other hand had a more dramatic impact. A subsidy of $10,000 would increase the number of renters who could qualify for ownership by 12 percentage points - roughly 5 million families. This study found that purchase subsidies of $10,000 would make homeownership attainable for 768,000 additional African American families and 587,000 Hispanic families - which would cut the racial homeownership gap by about one third. In light of this research, you might be surprised to learn that, while we spend billions of dollars annually on programs to expand homeownership only a very small fraction is currently invested in purchase subsidy programs. This is so even though purchase subsidies are currently the dominant strategy for supporting affordable rental housing. The reason for this seems to be that purchase subsidies are more expensive – at least when they are structured as grants to homebuyers. We now routinely preserve the affordability of subsidized rental housing so it can serve one generation of tenants after another but, for the most part, we make very little effort to preserve our investment in homeownership. Source: Savage 2009

Shared Equity Homeownership Create Affordability: Invest significant public subsidy Preserve Affordability: Share in price appreciation (more than downpayment assistance)

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 5.65% Affordable to (% AMI) Occupied by (% AMI) Initial Sale 56.6% 68.6% Resale 53.4% 67.1% 5.65% Affordability Gain

Asset Building 5.4 Years Average tenure $2,300 Initial Investment $7,889 Appreciation 25% Annual Rate of Return $4,294 Debt Retirement $1,348 Capital Improvement $13,530 Total Equity at sale

Home Equity Percent of Asset Poverty Level 284% At time of sale This is impressive given that 70% of families in asset poverty remain in asset poverty 5 years later. 58% At time of purchase Asset Poverty Level

7 year rate for HOME/ADDI Buyers in Northwest Foreclosures CHT 629 sales 1984 - 2008 9 Foreclosures 1.43% Cumulative Rate Comparison 1.4% Freddie Mac 10 Year Rate 5.1% Freddie Mac > 90% LTV 2.47% 7 year rate for HOME/ADDI Buyers in Northwest

Champlain Housing Trust Retention Precent of low income first time buyers that returned to renting within 5 years: Reid (2005) 53% Champlain Housing Trust <10%

Subsequent Tenure

Owner Equity as a % of Unrestricted Market Value 9% At time of sale 50% of sellers could afford a comparable home with no increase in income CHT Home prices grew at less than half the market rate but leverage allowed home equity to grow faster than the market - allowing low income families to catch up. On average, CHT homeowners would need to increase their income by only 4.3 percentage points relative to the AMI in order for their CHT equity to be sufficient for them to afford to buy a comparable market-rate house without assistance. 2% At time of purchase

$0 Additional 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 CLT 101 Asset Building and Shared Equity Homeownership April 14, 2010 Jeff Corey, Northern Communities Land Trust Jeff Corey - Northern Communities Land Trust

CLT 101 Creating affordable homes and strengthening communities through the wise stewardship of land and resources Jeff Corey - Northern Communities Land Trust

Who We Are Non-profit 501(c) 3 corporation, CLT 101 Who We Are Non-profit 501(c) 3 corporation, governed by Membership and Board of Directors Founded in 1990 Real estate developer in neighborhood revitalization initiatives Provide affordable housing for low and moderate income households Community Land Trust—work to provide affordable housing now and preserve the affordability of the housing for future generations Jeff Corey - Northern Communities Land Trust

CLT 101 NCLT Homeownership Qualified, income-eligible buyers can purchase high quality homes at affordable prices In exchange, Land Trust homeowners agree to ‘pay it forward’ and pass the bargain price they received on to the next owner of the home 99 year, renewable lease formalizes the agreement Resale price determined by a resale formula in the lease that ensures permanent affordability of the homes Jeff Corey - Northern Communities Land Trust

Northern Communities Land Trust Affordability Statistics CLT 101 Northern Communities Land Trust Affordability Statistics There are 190 permanently affordable Land Trust homes in Duluth. Average yearly income of a Land Trust homebuyer was $30,515 in 2009. Average Land Trust buyer earns about 60% of median income. Average purchase price for a Land Trust home is $88,530; average value is $131,777. 49 homes have resold to date, re-using over $2.3 million in state, private and federal subsidies. Jeff Corey - Northern Communities Land Trust

Northern Communities Land Trust Resale Statistics 49 homes have resold to date re-using over $2.3 million in state, private and federal subsidies. All homes re-sold to income eligible households 80% of sellers have moved to market rate homeownership Urban Institute study shows Land Trust is preserving affordability of homes and our homeowners are building assets.

Original Purchase Price CLT 101 NCLT Resale Example 2010 1999 $64,000 Market Value $112,000 Market Value - $12,000 Community Investment - $33,201 Community Investment = $52,000 Original Purchase Price = $78,799 Resale Purchase Price (includes new windows and furnace for 8,500 and realtor commission of $4,599) Jeff Corey - Northern Communities Land Trust

First Homeowners Specifics CLT 101 First Homeowners Specifics 1999: Michael and Charlotte, son Peter (age 4) Michael worked as assistant manager in produce department of local food co-op. Char working on undergraduate degree in social work. 44% of area median income, $17,199/year Received assistance of $12,000 subsidy to lower the purchase price of the home. $4,000 worth of rehab done to the home after closing—not as much as we would have liked to do, but what we had funds for at the time. Jeff Corey - Northern Communities Land Trust

First Homeowners Resale Specifics 2010: Michael, Charlotte, Peter & Kylie (age 6) Michael now manager of produce department, earning 2 X the salary as in 1999. Charlotte finished her undergraduate and masters degree in social work, now employed by St. Louis County as a social worker. Stable, affordable housing for 11 years allowed them to more easily increase income and prepare for market rate homeownership once ready. Net profit at resale of $23,600 ($13,800 share of appreciation + $10,800 payment on principal - $1,000 closing costs)

2nd Homeowner 2010: Karen, single. Karen is employed as an administrative assistant in a law firm. $27,040/year which is 64% of area median income (50% of AMI for a household of 3 as were the Karsh’s) Received $33,201 discount in purchase prices as well as new windows and furnace.

LAND TRUST RESALES: Preserving affordable homes for the future. CLT 101 LAND TRUST RESALES: Preserving affordable homes for the future. 2006 2009 $81,000 Market Value $92,000 Market Value - $27,000 Community Investment - $23,000 Community Investment = $58,000 Original Purchase Price = $65,000 Resale Purchase Price Jeff Corey - Northern Communities Land Trust

First Homeowners Specifics CLT 101 First Homeowners Specifics 2006: Rain and Kris, Miles (age 2) Rain worked in grocery store. Kris worked as a health care worker. 57% of area median income, $28,794/year Individual Development Account participant—down payment of $1,850 Received assistance of $23,000 subsidy to lower the purchase price of the home. $20,000 worth of rehab done to the home after closing. Jeff Corey - Northern Communities Land Trust

First Homeowners Resale Specifics 2009: Rain and Kris, Miles (age 5), Josie (age 2) Rain still works in grocery store. Kris works part time as a health care worker. Stable, affordable housing for 3 years. During this time household income increased to $37,000. Household size also increased. These were the reasons for moving. Net profit at resale of $2,831 (loan for closing costs of $4,000 at original purchase was paid off at resale)

2nd Homeowner 2009: Kevin, single. Kevin is employed by Garda—armored truck transport service ocmpany. $23,000/year which is 55% of area median income Received $27,000 discount in purchase price.

Questions?