Shared equity homeownership tools were developed principally to address the problems caused by hot housing markets. When housing prices rise rapidly, the costs of helping working families to achieve homeownership also rise, reducing the number of families that communities can serve with a set amount of subsidy. Shared equity homeownership solves this problem by ensuring that communities benefit from a portion of the home price appreciation - either through lower resale prices for the next buyer or through the return of appreciation to the community to facilitate larger loans to the next buyer - while still allowing a robust build-up of assets by the assisted family.

Now that housing markets are declining in most areas, does shared equity homeownership still make sense?
The short answer is yes, but it does require some additional analysis to determine where and when to apply it. Here are some factors to consider:

Is the decline in prices likely to be temporary or permanent?
While it is impossible to predict how long the decline will last or when the market will recover, over the long-run, housing prices in most high-cost communities will rebound and resume their inexorable rise. This is particularly true in the metropolitan areas surrounding cities with robust economies, which include most of the areas with strong housing markets during the first half of the 2000s. This is because many of these areas are already built-out and little new land is available for development close to the urban center. As the economies grow, new jobs will be generated, attracting additional residents, which will drive up demand. Demand for housing will also increase with the projected continuation of the longstanding decline in household size. With demand up and supply relatively fixed, housing prices are bound to rise over time.

Even if housing prices decline further or stay flat for a period of years, implementing a shared equity homeownership policy now will protect the buying power of the community's subsidy once home price increases resume.

Is there a need to preserve the affordability of homes near public transit and job centers?
With energy prices rising, the demand for housing close to public transit stops and job centers is likely to rise significantly. This will increase housing prices in these desirable locations, even if the market as a whole is flat or declining. It also will likely increase the demand for more compact development in these areas, which could create opportunities to include affordable and workforce housing within this new development.

Studies show that working families pay a larger share of their income for transportation costs than other families, making them particularly vulnerable to increases in energy prices. Shared equity homeownership can be a critical tool for helping to create and preserve affordable housing opportunities in these areas that facilitate a reduction in household transportation costs.

One way to take advantage of this opportunity is to increase the allowable density of areas near existing and planned public transit stops and job centers and create an inclusionary zoning mandate or incentive to reserve a certain percentage of this new development for affordable and/or workforce housing. By putting all of the affordable and workforce homeownership units into a shared equity homeownership program and imposing covenants requiring all affordable rental units to be rented at affordable levels indefinitely, communities can preserve the affordability of these units over time. Because it is essential in this instance to preserve the affordability of these specific units - rather than improve affordability over all in the broader market - a subsidy retention approach to shared equity is preferable. Common subsidy retention approaches include: community land trusts, limited-equity cooperatives, and deed-restricted homeownership.

Other approaches for creating these affordable units include using publicly-owned land as an implicit subsidy or tax-increment financing.

Click here for an overview of other housing policies that can help communities address the implications of increasing energy costs.

Are there other specific locations where shared equity is important?
Yes. Neighborhoods experiencing or likely to experience gentrification [link to glossary] pressures are excellent candidates for shared equity homeownership to help preserve affordable housing opportunities as homes prices rise.

Are there other housing policies that should also be considered when shared equity homeownership is applied to retain affordability in specific neighborhoods?
As noted above, inclusionary zoning [link to glossary] requirements or incentives work well in areas of new or expanded development to create affordable housing opportunities that can be preserved through shared equity homeownership. Allowing a local housing authority to purchase a percentage of the affordable units, as the inclusionary zoning policies do in Montgomery County, MD and Fairfax County, VA, can help make some of these units affordable to very poor families.

In addition, strategies to preserve the affordability of existing and newly created rental housing are likely to be important in the same areas where shared equity homeownership makes sense: near public transit and job centers and other areas experiencing gentrification pressures.

Are there circumstances in which shared equity homeownership does not make sense?
Yes, although even in these circumstances, shared equity homeownership often can be applied constructively if a community is willing to incur the additional expense of a large subsidy now in order to secure ongoing affordability down the road.

Even in housing markets or neighborhoods where housing demand is strong or expected to rebound, families may not agree to a shared equity homeownership arrangement when the subsidy amount is relatively small or where they can purchase unrestricted homes for a similar amount in nearby communities. Communities where prices have declined may choose to reduce the amount of subsidy provided to each household to a level where homebuyers will not be willing to agree to a resale price restriction. This will save the community dollars in the short-run - which may be important given declining property taxes - at the expense of preserving affordable homeownership opportunities over the long-run.

In these cases, the choice is often about priorities: a community may be able to achieve its immediate goals of promoting homeownership for working families at a lower initial cost if it forgoes equity sharing restrictions. But it loses the opportunity to preserve affordability over the long-term.

In other cases, shared equity restrictions may actually conflict, or appear to conflict, with other community housing goals. For example, neighborhoods struggling to attract higher-income residents to reduce concentrations of poverty and achieve greater stability may have greater trouble accomplishing this goal if restrictions on equity accumulation deter higher-income purchasers. Similarly, neighborhoods at risk of de-stabilization due to high numbers of foreclosures may be unable to attract sufficient buyers quickly enough with shared equity restrictions - unless the units come with substantial additional subsidy to make them move quickly.

In both cases, spending priorities again come into play. While foreclosed homes may not sell quickly at market prices when resale restrictions are attached, they may well sell quickly if the restrictions come with a significant subsidy to make the homes affordable to working families. Indeed, many communities are considering acquiring foreclosed properties to start or add to a community land trust to expand the long-term availability of affordable homeownership opportunities.

Similarly, while higher-income purchasers in a struggling market may be deterred by permanent resale-price restrictions, moderate-income families - whose incomes may still be above the neighborhood average - may well accept the restrictions if subsidies help bring the homes within reach. A combination of deeply subsidized homes targeted to moderate-income families with shared-equity restrictions and homes with shallow subsidies with no restrictions or only a modest restriction (such as a five-year forgivable loan to prevent flipping) may be a good solution for many communities.

Even in circumstances where shared equity homeownership may not be the best solution today, it is important to continually monitor housing conditions and be ready to institute a shared equity policy should circumstances change. Many of the neighborhoods that have gone through gentrification were struggling at one time. To keep public costs down, it is essential to get ahead of housing market trends rather than try to play catch-up.

What are the implications of home price declines for residents of existing shared equity homes?
It depends a lot on the precise subsidy levels and shared equity arrangement, but here are some general observations:

• In some cases - particularly when subsidy levels are high - residents of shared equity homeownership may be protected from equity loss due to declining home prices. For example, assume a home valued at $600,000 was sold to a shared equity purchaser for $400,000. When the family sells the home, market prices have declined by 10%, but incomes have gone up by 20 percent. If the resale price of the home is tied to increases in the area median income, the maximum sales price will be $480,000, while the market value of the home will be $540,000. In this example, the shared equity buyer may well realize the full maximum asset-building potential, whereas a market-rate purchaser would have lost $60,000.

• In other cases, residents of shared equity homeownership may lose less than owners of market-rate homes. When subsidy levels are lower or market price declines greater, shared equity residents may lose money, but often much less than market-rate buyers. Assume, for example, a home valued for $300,000 was sold to a shared equity purchaser for $200,000. Home prices decline by 20 percent, while incomes go up 20 percent. Here, the market value of the home ($240,000) is the same as a maximum resale price tied to changes in income, but buyers are unlikely to agree to pay full market-value for a home with shared equity restrictions. If the family sells for $200,000 -- $40,000 below market -- they lose only the sales commission and other transaction costs. By contrast, the purchaser of a comparable home without shared equity would have lost $60,000 plus the sales commission and transaction costs.

• In some cases, shared equity homes may no longer be attractive financial propositions at their maximum resale price. This is not necessarily a problem, since there will presumably be some price at which the shared equity homes are still attractive. As illustrated in the prior bullet, while owners of the shared equity homes will not realize their full hoped-for asset accumulation, they will generally lose less than they would have if they had purchased the home through a standard market-rate transaction.