The affordable units provided by IZ are subject to various controls to protect the long-term affordability of the units. The following addresses one of the key aspects of those controls: how the maximum price and income limits are set for the resale of the affordable ownership units.
The principal purpose of these particular controls is to ensure that the public stake in this housing is never lost. This refers to the value of the price reduction that has been engineered by these programs – or more specifically, the current difference between the initial market value of the unit and the initial permitted affordable selling price but as adjusted to the time of the resale.
In effect, under these controls, when an affordable unit is resold within the control period (now typically 30 or more years), it can be resold only at or below the permitted price and to a corresponding income-eligible household of the same size. Units sold after the control period can be sold on the open market, but the home seller only receives the current value of the permitted sales price, while the remainder of the value goes to the municipality for re-investment in affordable housing.
These controls are also affected by another consideration. All of the affordable ownership programs attempt to provide the owners with some reasonable share of the equity gain whenever the units are resold. This equity sharing is considered necessary to promote the proper upkeep of the unit, and also to help the owners to sell and move on when they want.
These two considerations are somewhat in conflict, and this leads to two different equity-sharing approaches that will be noted shortly.
Some of the programs set the limits in terms of price and others in terms of income. But they come to the same thing because one can be readily converted to the other using the current loan-to-income ratios determined by the prevailing mortgage interest rates and related factors. This is important because the programs in a sense must operate in two languages: the developers are most concerned about price and not income, and policymakers about income and not price.
(Note: the PPS definition does not treat them as interchangeable, and that is just one of the many unnecessary complications raised by this flawed definition.)
The resale price and/or income limits are set according to an index or formula registered in the title of the affordable unit when first sold, and then passed from owner to owner whenever resold. This same index or formula is used for the resales within and after the control period. As already noted, the only difference is where the public stake goes; it is either locked into the price of the unit, or it goes to the municipality.
There might be as many as a dozen indices or formulas that have been used to set the permitted resale price in affordable ownership programs in the US and Canada. For example, these include the CPI, a fixed percentage, and a fixed percentage with a cap. Many have been found wanting because of the skewed results that can occur when used over a long term.
Two of these make the most sense, and have used in the great majority of the affordable ownership programs. One is price-based and the other income-based.
The income-based approach uses the local median income as the index. So, for example, if the developers were required to sell the unit initially at a price affordable to a household at 80% of local median income, that unit can be resold to another household of a corresponding size at 80% of the median income as adjusted over time. The US government facilitates this approach by annually providing the median income for each household size for every jurisdiction in the country.
(Note: the income data needed to use this approach is not available. To be more specific, what is lacking is median income data for every jurisdiction that is updated annually and broken down by household size.)
The price-based approach uses average market price as the index. So, for example, if the unit was initially sold at 75% of the average market price, the homeowner can resell it only at 75% of the new market price current at the time of resale.
Two approaches lead to different equity-sharing arrangements, which serve two different policy objectives. The homeowners share in the price-based approach are likely to be much lower than the income-based because incomes generally have risen at a much lower rate than prices. Nevertheless, nearly all IZ programs use this approach because their objective is to provide and maintain affordable housing over the long term. Strictly speaking, this can only be done by ensuring the housing continues to go to households at the same income level.
The price-based approach, on the other hand, is used in programs where the emphasis is on using homeownership as a way of building household wealth and financial security. Notably, Habitat for Humanity takes this approach. Under this approach, the affordability of the units from an income viewpoint will steadily erode at each resale, but the price will always remain below the full market price.
The duration of home ownership is not relevant in these controls. For example, homeowners are not required to own the unit for (say) five or more years as a protection against windfall gains. Under these controls, the unit could be flipped the day after purchase because no special or unearned benefit will go to the seller.
The programs do not guarantee the permitted sales price; they only put a cap on it. If there is a downturn in the housing market, or if the housing is not maintained, the affordable homeowner will suffer the consequences like any conventional homeowner.
RD 22Feb2018
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