At first glance, deed-restricted affordable condominiums seem like a strong policy tool to address the housing shortage. Homeownership has long been a source of stability and wealth creation for the middle class, so it makes sense to lower the barrier and open those opportunities up to lower-income residents. As a developer, we have seen many communities prioritize the creation of deed restricted homeownership units through their inclusionary development policies.
However, due to the current structures governing deed-restricted condos, the people most in need of housing stability would be far better served by encouraging multifamily housing for its inclusionary housing creation.
Under current regulations, deed-restricted affordable condominiums have strong restrictions on resale price. Typically, the maximum resale price is usually set by a small annual appreciation (usually enough to match inflation) along with any capital improvements made by the owner.
While this policy is clearly intended to prevent an affordable lottery winner from immediately flipping the property at market rates, this security restriction has also had consequence of cutting the owner off from most of the benefits of homeownership. They cannot enjoy the generational wealth that can be generated from long term property ownership. Nor can they utilize the flexibility of home equity gained through market growth to finance unforeseen life events or necessary improvements to the property.
System Out of Step with Reality
At the same time, while much of the benefits of ownership are lost, most of the costs and risks remain. While there are programs in place to help a low-income buyer receive financing, an affordable unit’s buyer still has to come up with some level of down payment and closing costs, all in a rapidly rising rate environment that is squeezing buyers at all levels. In environments like this where rates are changing daily but the housing authorities’ requirements only update every year, there can be a large disconnect between the income requirements for the lender and the deed restriction, often leading to scenarios where the only people qualified to buy an affordable unit cannot qualify to finance it.
Even if the buyer is able to finance and close on the purchase, the costs of homeownership continue to mount. While these units have reduced tax assessments, insurance premiums and condo fees than market-rate units in the same complex, these still represent substantial additional monthly payments. This is not to mention the costs of maintaining the property, something that does not scale down with a unit’s affordable status and would be the responsibility of the landlord if the unit were a rental apartment.
In the end, the homeowner is paying more upfront with substantially more monthly cost and aggravation than they would if their unit were an income restricted rental with none of the offsetting long term benefits.
Small Changes Make Better Alternatives
But it doesn’t have to be this way. With some small tweaks, these policies could shift their focus more towards providing benefit and away from preventing abuse.
These resale restrictions could burn off or reduce after years of continuous ownership; preventing the quick flip while still giving the owner an opportunity to vest more equity in their home.
The allowable appreciation could be greatly increased beyond just matching inflation into the range of average market growth, allowing more equity to accrue over the long term.
Profit-sharing provisions could be incorporated into a future market rate sale so that the benefits could be shared between the buyer and the local housing authority, helping to finance future opportunities for the next buyer in need.
As many communities, including Boston, have recently begun examining their inclusionary zoning policy, it is time to recognize the different roles that rental and condominium units can play in an area’s housing policy and stop regulating them the same way.
In trying to maintain inclusionary condos as a continuous part of the affordable housing inventory, these policies cut off the life-changing opportunity these units could represent to their buyers. Multifamily rental housing and its inclusionary units are better equipped to focus on the macro, providing an ongoing affordable housing resource to a community and its residents most in need. Condo units are currently missing their opportunity to lift up the individual.
If these restrictions on resale were loosened, it could serve as the on-ramp to better opportunities that homeownership has represented for generations.
Stephen Whalen is managing partner and Clifford Kensington is director of acquisitions at Boston-based developer City Realty Group.