The Young and the Rentless

Can shared equity make homeownership safe for Millennials?

When Estevan Muñoz-Howard and his wife, Elisha, purchased a house in the Brighton neighborhood of Seattle in 2011, they were a three-person family living on a single income (they have since had another baby). From all outward appearances, they are the consummate Obama Coalition family: Estevan does development for a nonprofit that promotes arts education for low-income children. Both Estevan and Elisha are biracial; he is white and Latino, she is white and Japanese. Doing emotionally meaningful work is important enough to them that Estevan makes less than he would in other lines of work. And they live in one of the nation’s most progressive cities.

In buying their house, a 1920s Craftsman, the couple used a financing scheme called shared-equity housing. The process was facilitated by a community land trust, or CLT, which provided subsidies to bring down the home’s sale price and make it affordable to lower-income families. When the couple sells the house—which, Estevan notes, they don’t ever plan to do—a cap will be placed on its resale value, preserving the subsidies and allowing it to remain affordable for the next buyers. Forget the white-picket-fence kind of homeownership, handmaiden of suburbia, apple pie, and white flight. Forget casino-style homeownership as well. This is homeownership that cash-strapped young people want—and can afford.

By now, “Will Millennials become homeowners?” is a question that’s been asked so often that many journalists could rattle off a think piece in their sleep. The numbers tell a very clear story so far: the generation of Americans born roughly between 1980 and 2000 has earned its reputation for reluctance. Despite a recovering housing market, rising employment, and the oldest Millennials now pushing thirty-five, the generation has been relatively slow to enter homeownership.

This isn’t for lack of desire. According to Time, “In a recent survey, forty-six percent of respondents ages 18 to 34 told Zillow [an online real estate database] they believe ‘owning a home is necessary to being a respected member of society,’ and 65% said ‘owning a home is necessary to live The Good Life and The American Dream.’” A higher percentage of Millennials agreed with these statements than any other generation, and given how strongly American society has stacked the deck in favor of owners over renters, that’s entirely rational. The federal government has guaranteed mortgages for decades, homeowners are given many subsidies through the tax code, and renter protections in the U.S. are pitiful compared to those in the rest of the developed world.

So why the delay? Part of it is simply that Millennials are getting married and forming families later. Buying a home before reaching these major life milestones seems premature (and expensive). But looming largest is the fact that, quite simply, Millennials’ finances are a mess. By entering the workforce around the time of the Great Recession, they’ve suffered from low wages, high unemployment, precarious job security, and a tight labor market. They’re also what economists call “asset poor”: they lack financial resources, such as stocks and other investments, that could be used as a down payment on a house or as a rainy-day fund during hard times.

All across the country, particularly in its most expensive regions, housing developers are becoming increasingly convinced that shared-equity housing can help solve this problem. Designed as a “third way” between owning and renting, shared-equity programs promote the idea that the primary benefit of homeownership isn’t necessarily wealth building, it’s stability.

In shared-equity housing, a third party provides a one-time subsidy to prospective homebuyers, allowing them to purchase a home they wouldn’t be able to afford otherwise. The third party tends to be a governmental housing agency or an affordable-housing nonprofit, but either way, according to a 2010 report by the think tank New America, the effect is to make buying a home easier, “either by lowering the price of the home which a lower-income family is attempting to buy or by reducing the down payment which a lower-income family must bring to the deal.” However, along with that subsidy comes a critical caveat: when the time comes to resell the home, a cap is placed on how much the owners can get for it.

According to Rick Jacobus, a housing consultant who coauthored the New America report, price controls are the key to the entire system. In market rate transactions, families that receive housing aid are still able to sell their property for whatever price they can get, effectively pocketing said housing aid for themselves and diminishing other low-income families’ ability to afford the property. In shared equity, Jacobus says, “you have to sell [the home] for a below-market price. We’re going to have a formula that determines what that price is.” A formula that’s calculated correctly will both allow families to build meaningful wealth while they own the home and preserve the affordability of the unit over the long term.

Shared-equity housing is not for anyone who wants to get rich in real estate. Jacobus estimated the annual return on investment at 6 or 7 percent—enough for homeowners to earn consistent equity in their home, but nothing like the massive appreciation that many homeowners were used to in the 2000s. As far as he’s concerned, that’s the point. “We found that people, over a reasonable sample size, earn steady and very predictable returns,” he said. “More important than the equity gain is the stable cost.”

While buyers won’t get wealthy, they also won’t have to see their equity vanish if the value of their home drops. A couple of tools are built into shared-equity housing to shield owners from the full force of the market. First is the subsidy used to purchase the home. If the home value depreciates, the downside comes out of the third-party “gap money,” rather than the equity invested by the family. Second, the institutions that provide this gap money, such as municipal governments, CLTs, and affordable-housing nonprofits, also provide services like counseling and accounting to homebuyers. (After all, those institutions are still party to the mortgage.) When the housing market takes a dive, or a family faces personal or career misfortune, they have outside resources they can call on.

As a result, owners of shared-equity housing have far lower rates of foreclosure and delinquency than their market-rate counterparts, despite also having lower incomes. The Champlain Housing Trust, a CLT in Burlington, Vermont, built 424 units in the twenty-five years leading up to the 2008 economic bust. There were only nine foreclosures during that time. According to the National Housing Institute, a nationwide study “showed that prime-rate … mortgage loans were 5.9 times more likely to be in the process of foreclosure than CLT mortgages at the end of 2009.” And even during the volatile housing market of the late 2000s, many shared-equity participants continued to get a modest return on their investment, allowing them to stay in their homes and keep building up wealth. At the very least, if home prices plummet, the house acts as a forced savings mechanism.

Rentless in Seattle: The Muñoz-Howard family was able to pay much less through shared equity than they would have if they had bought
a home normally.

What remains to be seen is whether this system can be scaled up beyond the cluster of liberal, relatively affluent cities where it’s already most popular. Entrusting housing policy to CLTs, local nonprofits, and progressive local governments is an easy sell in Burlington, Seattle, and Boston. It’s also no coincidence that the cities where shared equity has taken off are among those with the highest housing prices in the country. But Jacobus says that significant subsidies are needed to make this system work on a larger scale: “There’s a lot more that could be spent, but it’s not a solution where we just make housing affordable out of thin air with no cost. Somebody has to invest in it.”

One common solution is to create shared-equity housing via inclusionary-zoning programs, of which there are about 500 nationwide. In a report on shared-equity housing, the Department of Housing and Urban Development pointed to San Francisco as a model. Since 1992, the local government has required developers to set aside 15 to 20 percent of new units for affordable housing. Even so, San Francisco’s below-market housing program has only produced about 850 units: a great help to those families who’ve managed to get one, but a drop in the bucket compared to the city’s overall housing demand.

Areas like Brighton, where the Muñoz-Howards live, are less dense than the typical San Francisco neighborhood, but according to Estevan, they face many of the same issues. In particular, he and his wife gravitated toward shared equity as a way to mitigate gentrification. Brighton and nearby Columbia City have a long history as African American neighborhoods that later became home to Vietnamese and African immigrants, and they remain relatively racially integrated. The point of living there, Estevan says, should not be to get rich: “This is a social-justice issue for me. If I’m able to extract as much equity as I possibly can out of this home, that is actually to the detriment of the community that’s already here.”

The biggest drawback of shared-equity housing is baked into its very premise: low-income families need to accept limits on the appreciation of their home value. “Obviously that was something that was in line with our values,” Estevan said, but it was still a hard decision for a family that lives on a nonprofit salary. The system relies on the continued generosity of nonprofits and city governments, which have limited resources. And it won’t provide any first-time, low-income homebuyers with obscene amounts of wealth. But for most Millennials, any amount of wealth building, no matter how slow, still sounds like a good deal.

Jordan Fraade

Jordan Fraade is a Brooklyn-based freelance journalist. His work on
urban planning, city politics, and the Millennial generation has been
featured in Gothamist, CityLab, The Baffler, and Al-Jazeera America.