Last year, I read an interview conducted with Margery Austin Turner about the conflict between people-based investment and place-based investment in the field of community development. This topic is one that has been under continual debate in community development, with strong arguments on both sides. Tuner advocates for a hybrid approach, something she calls “place-conscious,” where there is simultaneous investment in neighborhood development and individual capacity building, building up the places where people live while, at the same time, connecting those people to jobs and opportunities in their larger regions.
Over the past year, I’ve been reading a lot about affordable homeownership, and the positive externalities (such as increased educational attainment and reduced crime) associated with getting low-income people into ownership positions. So, I want to get on board with housing developers building units for affordable homeownership. But, when thinking about affordable homeownership, I am troubled by the conflict between building equity for low-income families, and maintaining the housing stock as affordable in perpetuity. One of the reasons that the federal government has promoted homeownership so strongly for the past 80 years is the potential for families to build equity through ownership, for housing prices tend to rise, and people tend to make money when they sell. But, if families buy these homes at “affordable” prices, build that equity, and then sell high, the housing that unit is no longer affordable.
This conflict reminded me of Margery Austin Turner, and the people versus place investment debate. Should we be investing in permanently affordable housing (similar to place-based investment) or should we focus on helping families build equity and move out of poverty (people-based)? Following Turner’s lead, I would like to advocate for a solution to this problem, an “equity-conscious” approach: community land trusts.
Community Land Trusts (CLTs), which have been gaining momentum since the 1970’s, are a model by which homes are sold to income-qualifying buyers, but the ownership of the land beneath the homes is maintained by the Trust. Buyers receive an extended-term ground lease, whereby they rent their land, are able to use it as if they were owners, but don’t have to pay the high purchase cost of the land itself. In an era where land, especially in urban areas, is sometimes deemed more valuable than the structures built upon it, this is a huge benefit to low-income buyers.
So, land trusts achieve the goal of helping low-income people buy homes. But how do they become that hybid, “equity-conscious” strategy that helps build equity while simultaneously maintaining a supply of permanently affordable housing? The magic happens when these homeowners decide to sell. Typically, built into the ground lease is a clause stating that the CLT has first right-of-refusal to purchase the home, but that otherwise, the home must be sold to an income-eligible buyer (often, someone that has an income of 80% or less of the Area Median Income). Upon making a decision to sell the home, the owner must notify the CLT, who will contract to have a third-party assessment of the home conducted to determine market value. Then, the buyer and the CLT split the equity built on the home (by a percentage split predetermined in the ground lease, typically 75% for the CLT and 25% for the homeowner). This allows the homeowner to gain some equity from the sale, and simultaneously for the CLT to re-apply their portion back to the cost of the home, essentially re-subsidizing it for the next buyer. The sale, therefore, benefits the homeowner with limited equity, but does not take the home out of the affordable housing market.
Since CLT’s are an a-traditional model of buying a home, it’s important that people know what they’re getting into when they purchase through a CLT. Today, 95% of the over 200 CLT’s that exist in the United States require a CLT-specific homebuyer education program, and provide prospective buyers with CLT and homeownership manuals (such as this one, from the Diamond State CLT in Delaware). In addition to ensuring that buyers are prepared for ownership in general, and for CLT ownership specifically, CLTs often stay involved post-purchase to ensure that their homeowners are able to stay in their homes. A study by Emily Thaden from Vanderbilt University showed that, at the close of 2009, homeowners who purchased through traditional prime mortgage lenders had a foreclosure rate that was 4.9 times higher than the rate of owners who purchased through a CLT. To me, that sounds not just equity-conscious, but also socially-conscious.
Guest Columnist: Margot Elton