Demystifying Deed-Restricted Affordable Homeownership: Is it Right for Your Community?

Like the conventional housing market, affordable housing can be divided into two broad segments: renter-occupied properties and owner-occupied properties. These segments achieve different objectives when it comes to ensuring an adequate supply of affordably priced housing.

The primary policy objective of below-market rental housing is straightforward:

1. Provide subsidized affordable rental housing units to households that otherwise would not be able to afford to live in a community.
2. Ensure these units remain affordable for a prolonged period of time as tenants cycle through them.

Keeping rental costs to (typically) less than 30% of a household income allows renters to comfortably afford other necessities, provides housing stability, and, ideally, gives them the ability to accumulate savings that can help them transition into a market-rate rental unit or homeownership.

When it comes to affordable homeownership opportunities, policy objectives can be at odds. One policy goal is to offer low- and moderate-income renters an opportunity to buy into the housing market at a lower price than could be accessed in the open market.

A somewhat conflicting policy goal, however, is to allow homeowners to build equity in their homes and benefit from increases in real estate values over time when they eventually sell their homes. Allowing a property owner to benefit from the full increase in their home’s market value means that the home can no longer be offered at an affordable price in the future.

On the other hand, disallowing any benefits from property appreciation removes one of the primary motivations for homeownership.

Striking a Balance

Deed-restricted homeownership attempts to strike a balance between these conflicting goals.

A deed restriction is a clause in a home’s deed that limits how the homeowner can use the property. A home under an affordability deed restriction is typically governed by one or more restrictions designed to ensure the home remains affordable to future homeowners. These restrictions may include:

• Resale Price: The future selling price is capped or controlled to prevent market-driven increases. Examples of ways resale price is controlled include:
  • Index formula or fixed appreciation formula that pegs allowable appreciation to a consumer price index or otherwise caps appreciation to a fixed percentage
  • Affordability formula that caps the resale price at a level affordable to buyers at a certain area median income (AMI)
  • Equity formula that allows the seller to capture only a certain percentage of home appreciation realized during homeownership
• Eligibility of Buyers: Potential buyers (including future buyers) must meet income and/or asset limit criteria to qualify for purchasing a home.
• Occupancy Requirements: Owners are often required to live in the home as a primary residence and cannot rent it out to tenants.
• Duration: Restrictions may last for a specific number of years or indefinitely.

Restrictions must be formulated in a way that allows for a large enough eligible buyer pool. Eligibility requirements that are defined too tightly risk narrowing the pool to only a handful of buyers who are both interested and qualified.

For example, if household asset limits are set too low, the number of buyers able to afford the necessary down payment may be overly restricted. Further, as interest rates rise, the minimum income needed to afford mortgage payments on a home of a set price can increase substantially, potentially squeezing the pool of eligible buyers. Such requirements may need to be adjusted over time as market conditions change.

Drawbacks of Deed-Restricted Homeownership

While not without its benefits, the structure of deed-restricted homeownership unavoidably creates disadvantages that don’t exist with conventional homeownership, including:

• Homeowners may opt to make fewer improvements on their property, knowing that the extent to which they can increase their property value is typically limited to a certain amount.Many deed restrictions cap improvements at 1% of the acquisition price per year of homeownership. If improvements beyond this amount are needed, the homeowner may not make them, leading to property neglect.
• Most deed restrictions limit the ability to “pass down” a home to a family member, which may also create a disincentive for keeping the property well-maintained.
• Owners may have to obtain permission from state or local agencies before they can refinance their mortgages.
• Inability to rent the property to a tenant to generate income (or even leave the property vacant) limits options for a homeowner in the event they need to move in the future, leading them to sell the property when they would otherwise prefer to hold it.

Understanding these drawbacks is important to ensure that desired affordable housing goals can be achieved. For instance, deed-restricted homeownership units in certain housing markets may not be appealing to prospective homebuyers if these disadvantages are seen to outweigh the benefits of purchasing a conventional home in another part of the region.

Consider an example where typical home prices in a desirable neighborhood offering a short commute are unaffordable to a moderate-income family, but the same family can afford a suitable home 20 minutes away or a substantially larger home a half hour away. They may be willing to trade the shorter commute or better school district for the flexibility of a conventional homeownership opportunity with greater wealth-building potential.

This may be especially true of metropolitan areas in the middle and upper-middle price tiers where relatively affordable housing exists within a reasonable distance of more in-demand areas.

In these markets, it is important to ensure that deed-restricted affordable homeownership options are competitive with “naturally occurring” affordable housing. Therefore, when developing local housing policy, it is essential to understand regional market dynamics and the local market’s role within the regional market.

Advantages of Deed-Restricted Homeownership

Despite its challenges, affordable deed-restricted homeownership does offer the opportunity for a homeowner to build some equity in their home and enjoy the psychological benefits of having a permanent place to live and the pride of ownership. Moreover, this model can be better suited than affordable rental housing for achieving various community goals, including:

• Revitalization: Encourages residents in low- and moderate-income neighborhoods to invest in and maintain their properties.
• Displacement Prevention: Helps long-time renters remain in areas with high gentrification pressure and a high likelihood of increased rents.
• Civic Engagement: Homeowners tend to be more engaged in their communities. In high-cost areas with aging populations, affordable homeownership can attract young adults and families to support community organizations.
• Economic Mobility: Affordable homeownership provides a mechanism for building equity among households that might otherwise only afford to rent.
• Family Stability: Stable housing positively impacts children’s education and health.
• Social Equity: Affordable homeownership can help reduce racial and economic disparities in homeownership rates.

Any deed-restricted affordable homeownership program should be carefully crafted to balance the objectives of wealth-building and long-term affordability for individual households while simultaneously furthering neighborhood and community-wide goals.

Such programs can be a strong fit for a variety of different community types, including:

• High-cost metro areas
• Rapidly growing suburban areas with worsening socioeconomic segregation
• Destination rural communities with high visitation and many seasonal residences
• Communities with high levels of economic distress and housing insecurity

While deed-restricted affordable homeownership offers both benefits and drawbacks, it can be thoughtfully integrated with other housing policies to form a comprehensive and balanced approach to addressing the complex issue of housing affordability.

Understanding the role that affordable homeownership can play in a given community can be further explored through a community-wide housing assessment.

To learn more about whether deed-restricted affordable homeownership could be a housing solution in your community, please contact Senior Housing Specialist Robert O’Brien.

Learn more about our Real Estate Development and Housing services

Additional Resources:

• “Mechanisms for Preserving Affordability” (Inclusionaryhousing.org)
• “Deed Restrictions and Affordable Home Ownership” (Harvard Law School)
• “Balancing Affordability and Opportunity: An Evaluation of Affordable Homeownership Programs with Long-Term Affordability Controls” (The Urban Institute)
• “Deed-Restricted Homeownership” (Local Housing Solutions)