Sizing the Market for Shared Equity Homeownership Programs
Providing between $25,000 and $100,000 per unit in assistance for shared equity homeownership opportunities would allow approximately 6.6 million additional households to become homeowners according to a new working paper I co-authored with Shannon Rieger, Jonathan Spader, and Chris Herbert. Shared equity homeownership is an alternative to traditional homeownership and renting that provides a substantial upfront reduction in the purchase price of a home in exchange for a portion of the increase in equity realized when the homeowner sells. Shared equity puts homeownership within reach of households that do not have the savings for a downpayment or have incomes too low to qualify for market rate mortgages.
There are three primary formats that most shared equity programs follow: community land trusts, limited equity cooperatives, and deed restrictions (often part of inclusionary zoning). Shared equity programs tend to provide subsidies of between $25,000 and $100,000 per unit, much larger sums than traditional downpayment assistance grants that are typically on the order of $10,000. One distinguishing feature of shared equity programs compared with smaller downpayment assistance grants is that shared equity programs are designed to recapture the subsidy when homeowners sell their homes. Public or nonprofit organizations typically manage the programs, ensuring long-term affordability by reinvesting the subsidy in a new unit or keeping the same unit affordable for a new homeowner. Despite the potential for shared equity to expand access to homeownership, there has been relatively modest growth in the number of shared equity units, with fewer than 250,000 of them nationally. One of the biggest barriers to greater expansion of shared equity homeownership is a lack of a consistent source of financial subsidies that can be used to write down the cost of the home to make it affordable to the target income group.
In “The Potential for Shared Equity and Other Forms of Downpayment Assistance to Expand Access to Homeownership,” initially presented at the Symposium on Housing Tenure and Security earlier this year, and forthcoming at Cityscape, we use household-level income, assets, and debt data from the Survey of Income and Program Participation (SIPP) to assess how a broad range of upfront financial assistance would affect the ability of potential homeowners to buy the median-priced home in their county. Only 9 percent of over 51 million potential homeowners could afford the median-priced home in their county without any assistance, assuming a 3 percent downpayment and a 4.5 percent interest rate. Over 90 percent of potential homeowners are unable to afford the median-priced home without assistance because of low income, insufficient assets, or high non-housing debt. Approximately 30 percent of potential homeowners (15.2 million) could afford the median-priced home with less than $10,500 in assistance, an amount that is consistent with traditional downpayment assistance programs. Another 12 percent (6.6 million households) could afford monthly mortgage payments if they received between $25,000 and $100,000 in assistance, the range of support typically provided by shared equity programs. Subsidies of this magnitude make sense when recipient households are willing to share a portion of the equity they earn when they sell to maintain affordability for the next owner of the unit.
Our estimate that shared equity could serve up to 6.6 million households suggests that there may be substantial unmet demand for this type of homeownership program. Even if only half of these households were interested and prepared to buy, there would be enough demand for a tenfold increase in the number of shared equity units across the country. Our results also suggest that increasing homeownership opportunities through shared equity could reduce racial and ethnic disparities in homeownership. We estimate that 1.4 million African-American and 1.4 million Hispanic households are candidates for homeownership through shared equity. Shared equity, however, inherently involves limits on the wealth building potential of homeownership that do not result from more traditional downpayment assistance programs because any equity appreciation must be shared with the subsidizing organization or used to keep the unit affordable for the next purchaser. Evaluations of shared equity programs do find that homeowners in these programs realize wealth gains, but it would be particularly problematic to encourage homeownership among non-white households or other groups historically disadvantaged in terms of wealth accumulation solely through an approach that limits long-term gains.
We show that there may be much greater demand for shared equity than can be met by current programs. In addition to racial/ethnic differences in potential demand, we also estimate demand by income level and geography, finding that the most potential demand for shared equity programs providing between $25,000 and $100,000 in assistance appears to be in middle market and inexpensive areas. More than $100,000 in subsidy is often necessary in the most expensive housing markets. We do not advocate for shared equity to be the only approach to homeownership assistance. Instead, we present evidence suggesting that there may be substantial demand for shared equity as one type of program, among many, that are made available for individuals and households who face asset, income, and debt constraints to buying a home.