Last week my colleague Blake Warenik wrote a piece, “For young adults, does the American Dream still mean homeownership?,” that contextualized the challenges that might keep young adults from owning a home in the near future. Homeownership continues to elude young adults due to barriers such as low wages, high unemployment, a tightened credit market and looming student debt. It’s not just the harsh economic reality keeping them out of the homebuyers’ market. This generation has seen family and friends get trapped in underwater mortgages, foreclosures and ultimately loss of wealth from the same asset that was perceived to build it.
While a majority of young people still want to own a home for reasons of financial independence, many question whether this is a housing stock that will be sustainable or even appealing as they experience delays in career development, household formation and asset-building. Cultural preferences are also shifting towards a return to the city with increased demand for planning and design that emphasizes density, transit accessibility, access to entertainment and services 24/7 and lower energy emissions.
Let’s focus on the many young adults who continue to see homeownership as a marker of success and as a natural next step, whether that home is in the city, the suburbs, or a rural town. There are policy options that could make the dream of owning a piece of the pie more real for them.
- Access to Credit. Since the housing crisis in 2008, the credit market has tightened making it difficult to get a mortgage. Lenders are skittish and the shape of future regulation remains unclear. As the larger debate on mortgage finance reform continues, policymakers should continue to be mindful of how tightening the market prevents access to homeownership as well as puts pressure on the rental market to catch the windfall.
For example last year, U.S. Department of Housing and Urban Development (HUD) along with the four bank regulators, the Security and Exchange Commission and the Federal Housing Finance Agency released this risk retention proposal, as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The rule would require that sponsors of asset-backed securities retain at least five percent of the credit risk of the assets. The proposal also defines qualified residential mortgages (QRMs) which are loans that are exempt from the risk retention requirement. The underwriting standards for QRMs laid out in the proposal include 20% downpayment, strict debt-to-income ratios, and borrower credit history restrictions. Affordable housing stakeholders including NHC rallied to fight these burdensome requirements that would have unnecessarily thwarted access to credit for low- and moderate-income families.
NHC submitted a comment letter outlining why unduly restricting the definition of a QRM to exclude low-wealth borrowers could therefore exclude them from access to affordable mortgage finance for years to come. The housing community must continue to ensure that Congress and regulatory agencies do not overcorrect the mortgage market, restricting credit too much in pursuit of safety.
- Shared Equity. Shared equity is describes options that give homeowners a middle ground between owning and renting. Owning provides long-term fixed costs, requires up-front capital for a downpayment, helps to build household wealth, and allows less mobility. Renting exposes the household to year-to-year rent increases, , and requires little capital up front. Subsidy, often from federal block grants like HOME or CDBG, helps a family to offset the cost of a home, allowing a purchase with an affordable 30-year fixed-rate mortgage. When the family sells the home, they benefit from the home appreciation value and the property stays affordable.
The Center for Housing Policy’s Jeffrey Lubell explains the concept: “Let’s say the price of a decent-quality market-rate home in a particular market is $250,000, but using appropriate underwriting criteria a buyer at the target income level can only afford a 30-year fixed-rate mortgage of $200,000 and a down payment of $10,000. Under this model, a $40,000 subsidy is provided, reducing the first mortgage amount to $200,000.” Using Lubell’s example, here are some hypotheticals to further explain how the model works.
- Different programs have different resale formulas, but let’s say the program in our example calculates the resale price as the original price plus an increment tied to increases in the area median income. So if the area median income has gone up 20 percent in seven years, the family can sell the home for 20 percent more than the original $200,000, or $240,000.
- Because the increase in home price has tracked increases in income, the home remains roughly affordable to the next buyer at the same income level (subject only to fluctuations in interest rates), while the original buyer earns $40,000 on the sale, which is augmented by roughly $24,000 in paydown of principal (assuming a mortgage at 5-percent interest). While the buyer’s recovery is reduced by transaction costs, which will vary depending on the method of sale and the jurisdiction, the buyer nevertheless sees a very high rate of return on his/her initial $10,000 investment.
- There are different types of shared equity homeownership programs that provide the in-between as described above, including community land trusts, deed-restricted homeownership, and limited equity cooperatives and others.
- Shared equity is a proven way to get folks into homes even if they haven’t built up the wealth beforehand to put down a hefty downpayment. Upon sale, the owner can build up enough wealth to potentially make a downpayment on a market-rate house. It also provides reliable occupancy in a community, fixed monthly costs and greater financial independence because as families can build equity that would otherwise have eluded them. In addition, such families also gain the opportunity to live in a location-rich neighborhood with access to good transportation and jobs because many shared-equity homes are located in hard-to-access housing markets.
- Housing Counseling. Pre-purchase housing counseling is a proven tool to help homebuyers understand if they are ready for homeownership. Studies show that pre-purchase housing counseling decreases borrower delinquency by 19-50 percent. It’s not just a good policy for new homeowners; it can help existing ones as well. If facing delinquency post-sale, counseling can be a positive intervention to avoid foreclosure and give families an opportunity to connect with safer and more affordable mortgage products. Learn more about the benefits here from a national study conducted by the National Foreclosure Mitigation Counseling (NFMC) Program.
- Housing counseling faced an uphill battle in the federal budget the last few years, with HUD’s housing counseling program zeroed out in FY 2011. After heightened advocacy in FY 2012, the program was authorized at $45 million. Advocates must show members of Congress how instrumental this program is in making potential homeowners feel comfortable with the largest investment they will likely make in their lives.
- Even though housing counseling has proven to prevent delinquency, homeowners do not see the benefit of taking a housing counseling course reflected in their access to credit. An obvious area for policy improvement would be to provide a tangible credit benefit to those who undergo counseling proportional to the drop in delinquency risk connected with counseling.