Best of Both Worlds

Permanent affordability and asset building might seem at first blush to be contradictory goals for a low-income homeownership program, but new research says in fact they can be achieved together.

New Research

Though many working in programs that balance both goals have long said this was a false choice, for the first time, there is real data that shows that long term affordability and significant asset-building can go hand in hand.

NCB Capital Impact commissioned the Urban Institute to rigorously evaluate measurable outcomes for seven affordable homeownership programs that attempt to preserve long-term affordability. The Urban team analyzed data on home sales and subsequent resales through 2008 from three community land trusts, two limited-equity cooperatives, and two deed-restricted affordable housing programs.

Each of the programs in the Urban study imposes some form of price restriction designed to keep homes affordable. And yet, these programs nonetheless had strong asset-building outcomes at the same time.

Homeowners in these programs sold their homes after an average of three to six years. Their average total proceeds from sale ranged from $6,277 for a limited equity cooperative in Atlanta to $70,495 for owners in San Francisco’s Inclusionary Homeownership Program. In spite of the limitations, sellers received average appreciation ranging from $2,015 to $42,524.

Because, for the most part, homeowners made small initial investments, this appreciation tended to represent a very high annual return on investment. For example, in Boulder, Colo., the average Thistle CLT homebuyer invested $6,080 in downpayment and closing costs at purchase. The Boulder sellers moved after an average of 3.4 years and earned an average of $8,107 in appreciation. These buyers earned the equivalent of 22 percent annual interest on the money that they invested to buy their affordable homes (“internal rate of return”). In the programs in the Urban study, participants’ internal rates of return ranged from 6.5 percent to 59.6 percent. In all but one case, they built more equity than they would have if they had placed their downpayment in an S&P 500 index fund or a 10-year Treasury Bond.

But was it enough? The modest level of asset-building that these programs offer was enough to support sustained homeownership and to give households who originally couldn’t access the wider housing market the means to move on to buy a market-rate home.

As part of their research, the Urban Institute surveyed households that had sold affordable homes in one of the programs. In the four programs that participated in the questionnaire, a significant majority of sellers went on to buy owner-occupied

market-rate housing without any further public subsidy. Boulder had the highest rate, with 78 percent of sellers using their affordable unit as a stepping-stone to market-rate homeownership.

The annual turnover rate for the programs studied was comparable to national rates for all owners, dispatching concerns that participants would be locked into their properties.

Although assisted homeowners generally accumulated less home equity than buyers of unrestricted, market-rate homes, they also had significantly less risk. They were less likely to experience foreclosure than the average homebuyer — even though their average incomes are much lower (See Stewardship Works, SF #163). And they managed to sustain homeownership at a far higher rate. Several studies have found that roughly half of all low-income, first-time homebuyers revert to rental housing within five years. By contrast, fully 91 to 95 percent of homeowners in this study remained owners five years later, either continuing to occupy their affordable home or having acquired a market-rate home.

During a time when the housing market fluctuated drastically, the prices in all seven of these programs were remarkably stable, as were the income groups that could afford them. The result was that, because the homes remained affordable, the programs could offer safe and sustainable ownership and asset-building opportunities to a second, third, or fourth generation of buyers, generally without investing any further public subsidy. The Urban study found, for example, that the City of San Francisco was saving roughly $25 million annually by preserving affordability rather than having to introduce a new subsidy each time these homes were resold.

Affordable Ownership as an Asset-Building Strategy

Because these affordable homeownership programs can help families build wealth faster than investing in stocks or bonds with less risk than traditional homeownership, they offer a promising strategy for overcoming asset inequality. Much of the attention in asset-building policy has focused on individual development accounts (IDAs), which provide matched savings as an incentive to help lower income families build assets. While IDA programs generally serve a slightly lower income population, and they offer a way to save for important goals other than homeownership (including education and small businesses), they are often promoted as offering a path to homeownership for low-income participants. And yet most IDA participants are unable to save enough to access homeownership. Most IDA programs limit savings to $6,000 to $10,000 and the average IDA saver accumulates only $1,500. By comparison, affordable homeownership programs, even those with long-term affordability controls, seem of offer a more reliable way for low-income families to save enough to make traditional homeownership safely attainable.

Contrary to what many have thought, we do not have to choose between affordability and asset building. We can do both. By offering real equity to families who would otherwise remain renters, and providing a safer vehicle for them to attain — and retain — homeownership, affordable homeownership programs can provide a predictable avenue for asset building and economic advancement.

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