An Investment that Keeps on Giving

Market Watch says, “Falling home prices draw house hunters away from big cities despite having more employment opportunities.”

Is your company concerned about a lack of affordable housing for its employees and those of its suppliers?

The shared equity housing scheme is an interesting idea worth considering as an employee assistance or CSR opportunity that might fit in your portfolio.

As the nation works its way out of economic turmoil and the housing foreclosure crisis, many families, who are your relatives, friends, employees, members of your community, are in need of affordable housing and looking at their housing options.

For those who qualify, current interest rates have not been this attractive for decades. And while prices have declined, such housing may still be out of reach for some.

Here may be a way to help.  Most people think of housing as either owner-occupied or rental. But there is another option. Actually, it’s a variation on owner-occupied housing called “shared equity.”  

An article I read by a former colleague reminded me of it. Jeffrey Lubell, executive director of the Center for Housing Policy, wrote an article in the National Housing Center’s November 9, 2011, NHC’s Open House Blog entitled, “Moving Forward: A Third Way: Tenure choices between renting and owning.”: 

The idea is to use a subsidy funded through a philanthropic donation or government program to reduce the purchase price of the housing to an affordable level. Then, when a homeowner sells the home it sells to a qualifying buyer at an affordable price.  A resale formula is used to determine the purchase price after the initial purchase.

A paper sponsored by the Center for Housing Policy, the Cornerstone Partnership, and The Annie E. Casey Foundation describes three common approaches to setting the resale price (PDF):

• “Shared Appreciation/Appraisal-Based Resale Formula – A “shared appreciation” or “appraisal-based” resale formula is based on the market value of the property. The value of the home is appraised upon resale and the homeowner shares a certain portion of any market price appreciation with the program that subsidized the initial home purchase. Several well-established programs, such as the Champlain Housing Trust, provide sellers with about 25% of any appreciation upon resale. Using CHT’s program as an example, if a buyer pays $180,000 for a home with a market value of $300,000, and then sells the home some years later for $400,000, the seller would receive $25,000 (25%) of the $100,000 in home value appreciation. The other $75,000 would remain invested in the home (along with the original $120,000 subsidy that the program provided to bring down the original sale price of the home), helping to keep the home’s price affordable to the next purchaser
• Area Median Income (AMI) Resale Formula – This formula allows the homeowner to sell the home for the original purchase price plus an increment based on the change in area median income. A credit is generally provided for eligible capital improvements. The goal is to ensure that a home that was initially made affordable to a family at the target income level will stay affordable to families at roughly the same income level over time. 
• Affordable Housing Cost (AHC) Resale Formula – This formula limits the resale price to the exact level that will make the unit affordable to a buyer at the target income level at the time of sale.  The resale price calculation works backward from current mortgage interest rates, current tax rates, estimated insurance premiums, and other basic housing costs, to determine the maximum amount an income-eligible buyer can afford to spend in buying the home.

The short paper (PDF) provides some helpful analysis of each approach and how they react under various market conditions.

The shared equity housing scheme is an interesting idea worth considering as an employee assistance or CSR opportunity that might fit in your portfolio.