Understanding Affordable Homeownership
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Presentation to CA League of Cities Mayors Forum 2007
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Understanding Affordable Homeownership
- 2. What is the purpose of affordable housing?
- 3. Families? Children? Homeless? Employers? Commuters? Who is supposed to benefit?
- 4. VS Is the problem permanent?
- 5. “It would be wrong to let homeowners walk away with large windfalls when there are so many others who will never have the chance to buy anything.”
- 6. “If homeowners can’t earn equity through the program it is not really homeownership”
- 7. Competing Goals Affordability Asset Building Some programs maintain affordability over time by limiting the wealth creation for individual homeowners. Other programs offer unlimited wealth creation but don’t keep units affordable for future buyers.
- 8. Which matters more? Preserving Affordability Or Building Assets?
- 9. What is fair? Market Value: $500,000 Public Subsidy: $200,000 Affordable Price: $300,000 What should they owe when they move?
- 10. Preserving Affordability Or Building Assets? Subsidy levels are too high for only one family to benefit. Investment in housing today should create units that stay affordable for future buyers… …without additional subsidy.
- 11. Preserving Affordability Or Building Assets? Wealth matters! Rental Housing = “Getting by” Homeownership = “Getting ahead!”
- 12. Preserving Affordability Or Building Assets? Average Family Net Worth White $81,000 Black $ 8,000
- 13. Preserving Affordability Or Building Assets? Do we really have to choose?
- 16. Monterey County Population by household income level 0.000% 1.000% 2.000% 3.000% 4.000% 5.000% 6.000% $10,000 $30,000 $50,000 $70,000 $90,000 $110,000 $130,000 $150,000 $170,000 $190,000 $210,000 $230,000 $250,000
- 17. Zillow.com Approximate price for a 1,500 Sq Ft home at each location
- 18. Monterey County Roughly how much can each income group afford to pay for a home? 0.000% 1.000% 2.000% 3.000% 4.000% 5.000% 6.000% $34,609 $103,826 $173,043 $242,260 $311,478 $380,695 $449,912 $519,129 $588,346 $657,564 $726,781 $795,998 $865,215
- 21. Where are the Blue houses?
- 23. Where are the Yellow houses?
- 24. What if there were $300,000 houses? Something for these people to buy?
- 25. What if there were $300,000 houses? Purchase Price 300,000 Downpayment 15,000 Sale (10 years later) Price 540,000 Seller's Gain 240,000 Return on Investment 32%
- 26. What do we do when there are no $300,000 houses? Local programs make green houses affordable to blue buyers. Inclusionary or Subsidized Homes
- 27. When a family buys a $500,000 home for only $300,000, how much should they earn when they sell?
- 28. Market Subsidized Purchase Price 300,000 300,000 Downpayment 15,000 15,000 Sale (10 years later) Price 540,000 900,000 Seller's Gain 240,000 600,000 Return on Investment 32% 45% When a family buys a $500,000 home for only $300,000, how much should they earn when they sell?
- 30. Market Shared Appreciation Purchase Price 300,000 500,000 Downpayment 15,000 15,000 Sale (10 years later) Price 540,000 900,000 Seller's Gain 240,000 240,000 60% Return on Investment 32% 32% Shared appreciation offers comparable wealth creation
- 33. Shared Appreciation Affordable Price Purchase Price 500,000 300,000 Downpayment 15,000 15,000 Sale (10 years later) Price 900,000 440,000 Seller's Gain 240,000 140,000 Return on Investment 32% 25% Resale restrictions tied to incomes limit appreciation but protect affordability
- 34. Affordable Price Rental Purchase Price 300,000 Downpayment 15,000 Sale (10 years later) Price 440,000 Seller's Gain 140,000 0.00 Return on Investment 25% 0% Even restricted prices can generate life altering wealth
- 35. We don’t need to ask: Should homeowners earn equity? We do need to ask: Will prices continue to rise – long term? How much can we afford to spend to preserve affordability of existing homes? How much wealth should buyers earn?
Editor's Notes
- Thanks I am not going to talk about what the state mandates – but rather what it does not mandate. There are some very important local choices that are not mandated by the state. What I still find surprising, and what I want to talk about this morning, is that, given all the state rules, given housing element law, density bonus requirements, even given redevelopment law, local policymakers still have to wrestle with some complex questions if they want to craft a housing policy that makes sense. That there are questions too small for the state to mandate is no surprise. But I think that California actually leaves open some of the biggest questions about affordable housing as well.
- What is the problem we are trying to solve?
- Who is it supposed to benefit? Families? Children? Employers? Commuters? – is the housing program a congestion management plan?
- Are we providing temporary or permanent housing? Is the housing meant to be a stepping stone or meet a lasting need? Is it a Band aid (temporarily protecting a problem while it heals) or Insulin (a permanent replacement for something the body needs but is not producing enough of?) How should affordable housing relate to market housing? Are we trying to change the broader market? Or should we be protecting the market from the affordable housing? How could it be a stepping stone if the market does not offer some of the steps? When you look at local affordable housing programs, programs that are supposed to be addressing the same state mandates, they are very different and seem to be motivated by different answers to these basic questions. It would be generous to assume that different communities debated these issues and came to different conclusions about the very purpose of affordable housing. I hope that is what is happening. I worry, though, that some of the differences are the result of not discussing these issues. Staff present technical policy issues and elected officials, driven by different answers to these basic questions, fight over the details without resolving the underlying goals. There may be nothing we can do about that. But, I want to suggest that discussing the why questions out in the open might actually make the how questions easier, might make the where questions easier. So I want to pull out one example and spend a little time thinking about it this morning. This is one of the best issues for policymakers talking and talking and never communicating. This is an issue that people love to debate. You have a choice in your local affordable housing programs, whether to plan for rental or homeownership or some mix. But as soon as anyone starts talking about ownership housing, someone says the following:
- I know that there is no chance that everyone in this room will agree on where to draw this line. But what I see everywhere is this very unproductive debate between people who say that homeowners should be allowed to earn equity on the one side and those who say that it is more important to preserve affordability on the other.
- Should homeowners be allowed to earn appreciation?
- The argument for restricting equity goes like this: Now there is a separate and important question about whether we should use limited resources for rental or homeownership. Rental works well. People will tell you that it costs less per family assisted There are a number of reasons why 1. Units tend to be bigger and better appointed – ie actually cost more to build – this is a small difference 2. Another (bigger) reason is federal policy – we have federal tax credits for rental but not ownership. This means that every local dollar goes much further (but lest anyone think that the federal government has wrestled with these challenging issues and decided that rental is better keep in mind that until recently the rest of the country was very different from CA. Here we have would be homeowners demanding assistance. People who are priced out of ownership here but, until recently would have had no trouble buying a home in most of the rest of the country. This is changing and I suspect that in the next administration we will see a major new federal homeownership initiative. But there is another way in which ownership is more expensive and, in fact far far more expensive than rental – and that is per household assisted. It costs between $50,000 and $200,000 to create an affordable rental unit. Over a 55 year period that unit will serve about 7 different families. Approximately the same amount of money can make a home ownership opportunity affordable to one family. Unless we take some special steps to preserve affordability at resale that one family will be the only one to benefit from that investment which would have served 7 families (or more). But while there is little controversy today about the need to maintain affordability in rental housing for 55 years or longer, as soon as we start talking about ownership we have a “Lively” debate on our hands.
- On the other hand there is a powerful argument for not restricting equity: There has been recent research into the importance of wealth – independently from income. It turns out that two families with the same income have different outcomes depending on the level of family wealth. The kids from the less wealthy family are less likely to attend college, more likely to have health problems. When they are older, without help from their parents, they will be far less likely to buy houses and those who do will wait longer and buy in less expensive neighborhoods, which will, in turn mean that their kids will attend less successful schools. Differences in wealth leave a more lasting impact than differences in income or education. As this research shows that wealth, in America, mostly takes the form of housing. Homeowner families are more likely to send their kids to college.
- And lastly let me point out the obvious – differences in wealth is one of the key mechanisms for persistent racial inequality. In spite of real progress over the past 50 years in closing racial income gaps, wealth gaps have not improved much. Still the average white family owns 10 times the assets of the typical African American family. So, for some people, if the the goal of local homeownership programs is to help people into ownership, that is because ownership is the key to wealth creation in America. If you give people homeownership, you give them a step up. And to these people, any housing program that doesn’t allow buyers to keep all the appreciation in the home price, is not really homeownership at all. It is just another way to keep poor people down.
- My message to you today is that this debate is both unfortunate and unnecessary. As I said there are some difficult choices to make but I don’t think that this is one of them. The way out of this mess is to think more clearly about what problem are we trying to solve? Why do we even have affordable ownership programs? Without answering that question we can’t possibly hope to deal with the tricky equity issues. But once we answer that question, almost whatever our answer is, the other problem goes away.
- Incomes are rising more slowly than housing costs. Even if the market slows down for several years the long term trends suggest that we are building too little housing and we can expect prices to continue to outpace incomes in much of the state. This means that in most CA communities the price of homeownership is now out of reach of moderate income households. This is the problem that has led to the growing interest in affordable housing programs in the first place. Without this problem, we simply would not have state mandates related to affordable housing.
- You often see this problem stated in terms of what income would be necessary to purchase a median priced home but I suspect that that statistic does not do justice to the problem. I want to look at it a different way now. This is a chart of incomes right here in Monterey County. This income chart is basically chart of the workforce – this is what our jobs pay. We are not just concerned about what the median income family can buy. There SHOULD be a mix of housing with options at each tier of the income ladder? Right?
- So that is the demand – not lets look at supply. Zillow.com is a web site that predicts the value of homes based on comparable sales. They have this feature which maps property values. I am sure that it is inaccurate in many ways but I think it gives a pretty good high level view of the problem. Zillow provides price per foot estimates. I asked how much would a 1500 foot house cost here on the Monterey peninsula. Looks like there are a few places where you could find one in the high 600s but most would be over 900k.
- To get a better sense of who is being served by this market we can convert these prices into the incomes that are necessary to afford these homes. This is the same chart. But instead of incomes at the bottom I am showing how much each group could afford to pay for housing. These are rough estimates but I am sure you can see the point. I am sure it is not surprising to no one that very few of the people living in Monterey County can afford even small houses on the Peninsula. But let me take this a step further.
- Just so you can see how few people we are talking about. I colored the income chart to (roughly) correspond to the map. The potential buyers here are only at the very extreme tip of the income curve. The people in red and some of the orange. Everyone else is out of luck.
- But lets go inland and look at Salinas. Here we see some yellow and (if you look closely there are a few pockets of light green). But look at the income chart and think about how still in Salinas, homeownership is only for a small part of the population at the top of the income curve. All of the people live at the other end of the curve – the Blue end.
- Here is LA.
- Oakand
- In San Francisco, it is even hard to find yellow.
- Homeownership has been a really great investment. There is really no other SAFE way to earn this kind of return on your money. There are a lot of other great things about homeownership (and some really bad things) but it is hard to explain all the excitement for it without this fact. This is a good time to note the difference between affordable and attainable. Some of the Blue families will manage to buy the green houses. Those families will either be stretching their budgets to the max of using loan products that are like ticking time bombs. For all that is great about homeownership, when people are gambling with their futures with interest only adjustable rate mortgages, it is a sign that homeownership has been oversold.
- If the goal is to have housing for a mix of incomes we have to promote the mix – actively We have to intervene in the market. we create that opportunity – either by inducing a developer to create a small number of $300 units or by providing subsidy to make homes available at that price.
- Now in this light lets ask the question again, what is the appropriate split of equity at resale. As I said before there are a lot of options. We could offer the homeowner all of the appreciation and let them keep the 200k in public money to boot. We could ask for the 200k back but let them keep all the appreciation Or we could split the appreciation in some way
- One thing we clearly should not do is let them sell the home and keep the subsidy. If a 300k house rises to 540K, the 500k house will rise to 900K In that case the family walks away with 600K instead of 240K. If 240 was a fantastic leg up, 600K is winning the lottery!
- Even if we ask for our 200k back, they would have 400k – far more than they would earn if we didn’t have this housing market problem in the first place.
- To me, the most generous option that makes any sense at all is proportional shared appreciation. San Francisco, for example calculates the discount that you received as a share of the market value and then recaptures that share of any appreciation. Now instead of buying the house for 300k they pay 500k but get a 200k loan. When they sell for 900k later they owe back the 200k plus 40% of any appreciation. The result is that they earn equity on the house that they could afford in spite of the fact that no such house was available in the market. This means that a family selling this shared equity house earns less appreciation than their neighbor. Some people react to this by saying that we have created an inferior form of homeownership for lower income families. If this same family were able to purchase a 300,000 house without assistance, would anyone complain that they earned less equity than someone who bought a 600,000 home? Notice that, even if there were 300k homes, this family might prefer this shared equity home. Instead of living in a 300k house and earning appreciation on 300k they live in a 500k house (in a 500k neighborhood with 500k schools) and earn appreciation on 300k.
- With the shared appreciation loan we sell the house for 900k. Sure we recapture $360k to reinvest in another buyer but it turns out, most of the time it will take more than that to help another BLUE buyer. Instead, what some jurisdictions do is limit the resale price so that it only increases at the rate that incomes rise – that way it stays affordable to blue buyers in the future. Notice that we have taken action against the actual problem – We have slowed down the rate at which the problem grows.
- If we are trying to address this problem in the market where we don’t have houses at a given price level, there is sound reason to try to maintain that solution for more than one generation of homebuyer. We create a set of houses that will always stay BLUE. – they won’t move up the spectrum every time the market rises. But that comes at a cost: In this example that means that the homeowner only receives $140K in appreciation – a mere 25% return. This is less great but still pretty powerful asset building.
- This is – I think - life altering wealth. Especially if the alternative was rental housing. Shared equity (of one form or another) not only allows them to live in safe decent housing with reasonable monthly costs, it allows them access to the kind of wealth creation that people have come to expect from homeownership. What are their other options? They could rent and save money – could they ever save enough to catch up? They could take out an interest only adjustable rate mortgage and squeeze into a 500k house. - High foreclosure rates They could buy a substandard house Lower income people’s homes appreciate less. Or they could add an hour and a half to their morning commute – and lets not even talk about how much that costs.
- If you are going to have homeownership as part of your housing strategy, there is one question I think you don’t need to answer: Should owners earn equity? And three that I think you need to answer instead: Do we expect housing prices to continue to rise faster than incomes? How much can we afford to spend annually to preserve the existing level of affordable housing? How much wealth should assisted buyers expect to earn? How much is enough? So instead of this grand ideological choice, I think instead we face a rather technical and mundane choice between depriving the homeowner of $100,000 or requiring the community to come up with $100,000 at regular intervals to maintain a supply of affordable homes. Either way the homeowners have access to an avenue of wealth creation far and away superior to any other they might find and the community is protecting the value of its scarce housing resources so that they are available to serve future families. Precisely because housing is a fantastic wealth generation engine, we need to create opportunities for lower income households to get in on the game. But if we are serious about this project, then we need more than a handful of these opportunities, these homeownership opportunities, these wealth creation opportunities. We need a lot of them if we are going to make a real difference.