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Resale Formulas Used in Shared Equity Programs

One of the most important technical issues with shared equity programs is determining how resale restrictions will actually work. There are numerous formulas that can be used to set the maximum resale price in shared equity programs.

Appraisal-based Resale Formula

An appraisal-based resale formula ties the “affordable” resale price to any changes in the market value of the property. For example, a homeowner might be permitted to sell the home for a price equal to the original purchase price plus 25 percent of any increase in the appraised value of the home. Appraisal-based formulas exhibit characteristics of shared appreciation loans, but require homeowners to sell the home at a below-market price rather than selling at a market price and returning a share of the appreciation.

Under an appraisal-based resale formula approach to subsidy retention, the homeowner is able to take his or her share of home price appreciation, but the public share remains invested in the home, allowing resale to the next buyer at an affordable price.

Both the ongoing affordability and the level of wealth creation under an appraisal-based approach will depend greatly on the equity-sharing percentage used and the performance of the housing market. As with shared appreciation loans, however, when home prices rise rapidly, even a conservative approach to shared appreciation may allow prices to rise beyond the level at which they are affordable to future buyers without additional subsidy. A slow housing market would limit wealth creation, but would likely maintain affordability.

Index-based Resale Formula

Another popular approach to resale pricing is to tie the price to an index, such as the consumer price index (CPI) or the area median income (AMI). A formula based on an AMI index, for example, specifies that the resale price shall be no more than the initial (affordable) purchase price plus an adjustment based on the annual change in the AMI published by HUD. Each year, as the AMI rises, the maximum resale price rises at exactly the same rate. Because increases in the permissible sale price of the home are tied to increases in income (rather than the price of market-rate homes), a new buyer with the same income profile should be able to purchase the home without any need for additional public subsidy.

For example, Boulder, Colo., uses an index-based resale formula to maintain affordability on homeownership units created through its program. The covenant-established resale price is equivalent to the seller’s purchase price plus any expected costs related to the sale of the home and a portion of equity earned (determined by multiplying the seller’s purchase price by either the change in AMI or the change in the CPI, whichever is less, with an annual cap of 3.5 percent).

Affordable Housing Cost Formula

Some programs impose resale price restrictions that are based on what a target family can afford, taking into account interest rates, property taxes and insurance rates at the time of resale. These programs use what is called an affordable housing cost formula (or mortgage-based formula), which specifies an income range (e.g., 80 to 100 percent of AMI) and a definition of affordability (e.g., 33 percent of monthly household income for housing costs including mortgage, taxes and insurance).

The risk of small changes in interest rates leading to large changes in the amount a family can afford to borrow can be considerable. Subsidy retention programs that use affordable housing cost formulas protect affordability in the face of rising interest rates, but sometimes at the expense of wealth creation. Homeowners, even in a rising housing market, may not receive any equity when they sell their assisted homes.

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