Kelly Wood offers her guest a cup of tea from a kettle already boiling on the stove, a gesture that is automatic here in Burlington, Vermont. Nothing, though, could make this condo in a modest subdivision homier than it already is. A thin layer of dog hair on the couch matches the beige living-room carpet. Gardening books line a shelf next to the stairwell, ready to be consulted before Wood digs up the compact backyard.
The condo belongs to Wood, a children's librarian, in every sense except the strict legal definition. While her neighbors hold the titles to their units outright -- and shoulder mortgages that cover most of the purchase price -- Wood owns her condo but leases the land it sits on for $35 a month from the Champlain Housing Trust, a Burlington organization that owns hundreds of parcels all over northwest Vermont. She bought her previous home in partnership with the housing trust, too -- in 2005, at the height of the real-estate bubble.
"Prices were just phenomenally high. When I got divorced, my income got cut in half, and trying to buy something on a single income was hard," says Wood, who at the time also carried tens of thousands of dollars in student-loan and credit-card debt. She found a house that she loved, but the appraised price of $215,000 would have been a stretch on her income of $49,000. Instead, Wood was able to get it for a more affordable $165,000. In effect, the Champlain Housing Trust gave Wood a subsidy worth as much as she earns in a year. "I was skeptical," Wood remembers. "I was very unsure of how it would work."
The money had strings attached. When she sold the home after four years, Wood had to split the modest rise in its value with the housing trust. In fact, the trust recouped almost all the appreciation, which allowed it to keep the home affordable for the next buyer, who paid $172,000 earlier this year.
The land-trust model combines most of the benefits of homeownership with some of the best features of renting. There is no down payment, and closing costs are modest. If the home needs repairs, low-cost financial assistance is available. Even a market downturn doesn't necessarily spell disaster. While some owners have ended "underwater" -- owing more than the home is worth, money that must be repaid to the mortgage lender and to the trust before the house can be sold -- the trust has been able to reduce the debts owed by sellers if their homes had seen gains in value on previous sales. The trusts are a type of "shared equity," named for the premise that a homeowner is not alone on the journey into the risks and rewards of property ownership. By one count, 800,000 homeowners around the country have some kind of economic co-sponsor, whether they live in a housing co-op, a mobile-home park, a zoning set-aside, or a home whose deed dictates that it remain affordable over time.
Then-Mayor Bernie Sanders established Burlington's land trust in 1984, and since the housing market crash, many foreclosure-scarred cities have followed Burlington's lead, turning to community land trusts as a way to make sure middle-class workers have affordable places to live.
After peaking at 69 percent in 2004, the national homeownership rate is now plummeting back toward 64 percent, where it was from the 1960s through the 1990s. The number of renters is on the rise, a trend reflecting both the economic reality and a hardening new ideology: Many people who bought a home probably should have remained renters. While this idea has long been advanced on The Wall Street Journal editorial page and by other conservative megaphones motivated by ideological objection to homeownership subsidies ($230 billion in 2009), it is now also prevalent in many corners of the media, from the cover of Time ("Rethinking Homeownership") to the blog of Reuters' liberal Felix Salmon to The Atlantic's "Biggest Ideas of the Year" issue, which in 2008 put "renting" at No. 2.
As someone who grew up renting -- under rent control no less -- I'm all for the rehabilitation of an often-scorned mode of living. Yet I also have to wonder what we're asking people to do when we encourage them to consign themselves to a lifetime of renting. If one considers the rights, benefits, and obligations of owning versus renting, ownership still comes out ahead for all but the very poor, young, or old. The home-mortgage interest deduction alone delivers about $130 billion in subsidies to owners each year. Owners have strong, constitutionally protected property rights, the ability to use their homes as collateral for business and education loans, and a way to pass wealth to future generations. The Dodd-Frank banking reforms should give today's first-time homebuyers even greater confidence that their investment will ultimately leave them in stronger financial shape.
Renters in most parts of the country, meanwhile, pay a big price for their flexibility. They have little assurance they can stay in one place year to year or even the right to due process if their landlords move to evict. Renters also often face limited choice in where they can live. Many suburban communities zone most of their land for single-family homes, effectively locking all but the wealthiest renters out of their high-achieving school districts. This leaves most poor renters with no choice but to locate to high-crime areas. In 2000, the average low-income tenant lived in a neighborhood with a crime rate double the national mean.
Yet in a consumer survey released by Fannie Mae last April, just 65 percent of respondents said they prefered owning to renting, down from 89 percent 15 years ago. Many are spooked by the housing crash, of course, but that's not the whole story; seven in 10 still say that owning is a safe investment. Something about renting itself -- its flexibility, the mobility in a difficult job market -- is fueling a shift in attitudes despite the glaring negatives. And of course, millions of renters have no choice. They have neither the down payment nor the credit rating to buy.
The notion that by dint of hard work and saving, and perhaps some help with down payments, these renters will eventually join the owning classes is outdated and unrealistic. Today, economic mobility is running in reverse for the majority of households, rendering the American dream a hazy myth. In struggling cities and neighborhoods, it's affordable to buy a home now, but for the wrong reasons: Jobs are scarce and property values are stagnating. Real-estate buyers face a good chance of being stuck with a depreciating home they are unable to sell.
Meanwhile, in places where real estate is likeliest to be a good long-term investment, where home prices are buoyed by access to good transit and strong job markets, banks' new reality-based lending standards leave moderate-income borrowers unqualified to buy market-rate homes. The great financial innovation that led the nation out of the Great Depression -- the long-term, self-amortizing mortgage, bolstered over the subsequent decades by government-issued insurance, guarantees, bonds, and tax write-offs -- in itself isn't enough to build a stable foundation for either those households or their communities.
"The time is definitely ripe for rethinking how the residential housing experience should be structured and packaged," says University of Chicago Law School professor Lee Anne Fennell. "I think the key is figuring out which aspects of residential tenure are most valuable to households and society as a whole. The binary categories of 'owning' and 'renting' tend to get in the way of that task."
Fennell is part of a movement of academics, bankers, and community activists brewing innovative responses to a powerful lesson of the foreclosure crisis: In order for homeownership to live up to its promise, consumers and communities have to be insulated from destructive gyrations in property values, interest rates, and other looming risks. Fannie Mae, Freddie Mac, and Wall Street built a massive home-loan production machine to automate loan approvals, assemble and trade mortgage-backed securities pools, and model risks and returns -- all of which exposed households to increasingly heavy risks. But technology also offers opportunities to engineer new models of property ownership on a large scale. Promoted by the Ford Foundation, shared equity is the most developed of these models.
Last fall, the Urban Institute issued the first national survey of shared-equity homeowners, which found that, buoyed by the real-estate bubble, they saw annualized rates of return of between 7 percent and 60 percent -- even once their sponsors had taken back their investment. At a time when one in 10 conventional homeowners and one in four subprime borrowers nationally are behind on mortgage payments, only a handful of shared-equity owners are in such straits.
"The bubble and bust of the past decade highlights mainly that homes are not primarily investments; they are shelter," says David Abromowitz, chair of the Mortgage Finance Working Group at the Center for American Progress and co-author of its paper calling for shared equity to be a pillar of national housing policy. "When Americans fully absorb that, the benefits of stable ownership to individual families and communities will become far more important than the chance to speculate on making a big payoff from owning a home."
Yet vast industries -- from construction to mortgage lending to realty to investment banking -- exist to capture wealth from homeownership as a market-based commodity (with the help of massive government subsidies). Those players will have to become willing co-conspirators in the shift of billions in federal spending toward new, and less evidently lucrative, ways of doing business.
But more likely, Congress and the administration will have to force them into it.
The 30-year mortgage that American homeowners today take for granted was the product of Franklin D. Roosevelt's quest for a stimulus that sparked the private sector into action with minimal government spending. In 1934, the new Federal Housing Administration brought together economists and industry leaders, who designed a government-run, borrower-funded insurance pool backing long-term mortgages, a product that had until then never been widely available to borrowers. The insurance pool guaranteed lenders would get paid back and helped usher in an era of stunning growth in construction and homeownership; before then, most households had rented. FDR's administration also created Fannie Mae, a giant government-run fund financing the mortgages themselves. The Roosevelt endeavor was inspired in part by 1920s experiments, such as New York City's Sunnyside Gardens, that sought for the first time to put property ownership within the reach of modest wage-earners.
Now the Obama administration is tackling the same sorts of questions. At press time, the administration was set to release a proposal on the future of housing finance, focused on what will replace government-sponsored Fannie Mae and Freddie Mac as the driving engines of the mortgage market. The creation of a new housing-finance system offers a precious opportunity to also reinvent the mortgages -- to create a 2011 innovation as transformative, and empowering, as the FHA mortgage was in 1934.
But unlike Roosevelt, who entered office surrounded by the wreckage of failed banks, Obama has a lot to lose. His administration is still counting on traditional ownership with existing government supports as an engine of economic recovery. Those supports, which make mortgages available for not just home purchases but also rental apartments, are threatened by congressional Republicans determined to pull government out of the real-estate business entirely. "With the Obama administration coming in, the market in extreme chaos, it seemed like there was a moment to think much better about the possibilities," says Rick Jacobus of NCB Capital Impact, a community-development financial institution that is a leading sponsor of shared-equity housing. "That moment may not have passed, but it certainly feels different now."
Under a directive buried in the Dodd-Frank financial-reform bill, the U.S. Department of Housing and Urban Development is recommending regulations for "shared appreciation" mortgages. Like shared equity, shared appreciation pairs buyers with co-investors who put up some of the funds and then claim a share of proceeds upon sale. While shared appreciation can be used to help cash-poor buyers purchase homes, the immediate purpose of the measure is to help bail out homeowners who are underwater on their mortgages and owe more than their homes are worth.
Some consumer advocates are wary. Unlike shared equity, shared appreciation puts no limits on the gains either the owner or investor can reap. "The public sector and the private sector are converging on similar concepts," suggested Andrew Caplin of New York University's Stern School of Business in a 2007 report for the Fannie Mae Foundation. "One way or another, the newest innovations weaken the distinction between renting a home (with no rights to the home equity) and owning a home (with full rights to all home equity)."
The shared-equity movement has been careful to spell out the distinctions between Caplin's shared-appreciation concept and its own agenda.
"How do we create a class of housing that has attributes that fall between rental housing and ownership that improve affordability and make better use of scarce public resources?" asks Jeffrey Lubell of the Center for Housing Policy. "If you're investing $50,000 in a home to make it affordable to a low- to moderate-income family, we want to make sure that subsidy stays in the unit over time. We want to capture the value of the subsidy not just for the first buyer but for future buyers."
Shared-equity advocates use the metaphor of a ladder -- as a step up toward ownership for those who have been shut out of or exploited by the market. "We hated the whole frenzy of the push for homeownership, and then watching low-income people being raped of equity," says Brenda Torpy, CEO of the Champlain Housing Trust. "Poor people never get rich in the real-estate market. If prices go up, you can't afford to buy a home. But if prices go down, you lose tremendous value."
Torpy has been with the Burlington shared-equity project from the beginning. Initially, Mayor Sanders rejected the idea because he objected on principle to treating low-income people differently than everyone else. But at the time Burlington, like many cities, was besieged by condo development and under immense pressure to do something to preserve affordable housing. Staff members eventually persuaded Sanders to allow a test run of the model, and since then, more than 400 homes in and around Burlington have become part of the land trust. Of the more than 230 participants who have sold their homes, at least half have gone on to buy real estate in the unsubsidized market.
It's long been clear to Torpy and other shared-equity advocates that they will have to reach critical mass to build a steady stream of demand from consumers and financing from lenders and, perhaps most crucially, secure stable sources of the subsidies that put the "equity" into shared equity. "Ten percent of the market is a reasonable goal," the Ford Foundation's George McCarthy says. "The question now is how do you get there?"
One obvious source of funding would be the home-mortgage interest deduction, which has been one of the prime targets of the federal deficit commission. The deduction does nothing to increase homeownership rates -- only the price of homes. Almost all of its benefits go to the wealthiest households. But even if the deduction does get scaled back, the savings are likely to go toward deficit reduction, not housing aid.
Without new sources of funding, further progress in reinventing ownership has to draw on the meager resources currently directed to renters, such as a block-grant program that gives local governments $2 billion a year that can be used to encourage either owning or renting. Shared equity is just one means of tearing down the wall between the two. NCB Capital Impact has already begun to describe the model as "long-term affordability" -- a label that quite deliberately sidesteps the question of whether this is owning or renting at all and syncs neatly with the priorities of rental advocates.
The hard truth is that reimagining homeownership won't be enough. Millions of households have had their credit devastated in the mortgage crisis, and they will have to rent. Renting must become a more tolerable mode of living.
During the mortgage bubble, many renters seized the opportunity to own not as a way to build economic standing but simply to control their environment. In this year's Fannie Mae survey, the most common reason respondents gave for wanting to buy a home as opposed to renting was "quality of local schools," followed closely by "safety." Both outranked economic reasons as a driving motive. In other words, it isn't ownership the respondents seek but access to better environments and services.
Homeownership, of course, has long represented much more than that. Ever since racially exclusionary, federally financed subdivisions like Levittown were developed in the 1940s, homeownership has been a way for Americans to physically separate themselves from those denied access. Even after the Fair Housing Act of 1968, redlining ensured that ownership would endure as a force for segregation. The gap between white and black homeownership rates now stands at 25 points and is widening again after a brief era of convergence. The majority of black and Hispanic households continue to rent. That racial divide is reflected in household wealth, even leaving aside home equity. According to Brandeis University's Thomas Shapiro, for every dollar in net assets a white household has, a black household has just 10 cents. Asset-building policies tied to ownership, especially the home-mortgage interest deduction, account for an important share of that discrepancy, amplified through generations.
Meanwhile, it remains perfectly legal to say a neighborhood can't have apartments or can only have four homes on an acre -- effectively shutting out renters. The University of Southern California's Jenny Schuetz evaluated Boston suburbs and found that three out of five communities allowed apartment buildings on less than 20 percent of their land. Meanwhile, Jonathan Rothwell of the Brookings Institution and Douglas Massey of Princeton University have found a close correlation between residential density and segregation. The more densely developed an area is, the lower its racial segregation is likely to be.
Owners have powerful incentives to limit new development. In Fennell's analysis, many are "overstaked" in their housing -- they have so much wealth tied up in it that they make choices that are unhealthy for society at large but very good for their property values. Underwater homeowners and renters, meanwhile, are "understaked" -- they have no investment in their housing, and that, too, has a host of negative consequences.
Many of the positive qualities past research has ascribed to homeownership -- more involvement in civic affairs, better outcomes for kids in school, even a greater propensity to garden -- arise from two simple facts: Owners stay in one place longer than renters, and they have a literal investment in their community. Fennell has suggested offering renters an investment share in their region's housing market.
A similar idea is already at work in Cincinnati, where the Cornerstone Community Loan Fund offers "renter equity," in which residents of its rental buildings receive credits each month, provided they satisfy the terms of their lease. Tenants finish accumulating credits after five years and end up with the cash equivalent of about $3,500. At a White House conference in October on the future of rental housing, Andrea Levere of the Corporation for Enterprise Development proposed taking Cornerstone national. "How do you embed in residents the same pride as in the pride of ownership?" Levere asks. "Part of it is creating a financial incentive, applying behavioral economic principles."
In the 1950s, cowed by homebuilders with product to sell, Congress designed rental programs exclusively for the poor. Now, policies will have to be retooled to be more inclusive of people at higher income levels. Landlord lobbies have eviscerated state and local rent-control laws, and a resurgence is unlikely. It may be time for the poor and middle class to find common cause around rental housing, just as they have united around public schools and health care.
At the White House conference, Marc Jahr of New York City's Housing Development Corporation proposed a sizeable increase in the qualifying income for housing financed by federal tax credits, which would enable developers to serve a much wider universe of tenants than they do now -- from the homeless who are too poor to currently get in the door to middle-income families who currently qualify for no federal rental aid.
The last time that idea came under serious consideration, advocates for low-income tenants killed it. But if renters are to become more than second-class citizens, such walls will have to start coming down. And those renters should have the option to do more than choose between two unforgiving masters, landlord or bank. Like Kelly Wood, they'll benefit from a chance to invest soundly in their own future.