resale models-shared equity Template

Resale Formula Comparison For Shared Equity Homeownership Programs Overview: All shared equity homeownership programs attempt to balance two competing goals: providing homeowners with an opportunity for meaningful wealth creation and preserving the value of public subsidies so that they can serve additional families into the future. Different shared equity models balance these goals in different ways, however. This spreadsheet provides a side-by-side comparison of three different shared equity programs, allowing users to evaluate each program's likely performance in meeting both of these goals under a wide range of potential economic circumstances. Initial Subsidy Based on the information provided by the user, this spreadsheet assumes that at the time of the initial subsidy, a 3 bedroom house in the user's market would sell for $300,000. At this price the home would be affordable to a family earning 119% of the Area Median Income. (A house is considered affordable when the homeowner spends no more than 35% of their income on housing costs.) In order to make this home affordable to families earning 80% of the Area Median Income (the target income level that the user has specified), the program sponsor will need to provide $120,000 in subsidy. In some shared equity programs this subsidy would be provided as a second loan to the homeowner, while in other programs the subsidy would be used to reduce the initial cost of the unit to an affordable level so that no second loan is necessary. Shared Equity Models Using the inputs specified by the user, this spreadsheet compares three different program models and a market rate transaction. The program models are: Shared Appreciation Loan This approach involves making a second mortgage directly to the homebuyer with no payments due until the home is sold. Upon sale the homeowner repays the full amount of the initial loan plus a share of any appreciation in the value of the home. Under the particular shared appreciation loan formula examined here, the share of appreciation owed to the program sponsor is based on the percentage of the initial purchase price that comes from the second loan. For example, if the program provides a second mortgage equal to 20 percent of the cost of a home, the family must pay the program 20 percent of the home price appreciation upon selling the home. Area Median Income Resale Price Restriction Rather than using subsidies to make a second loan, this approach lowers the initial price to an affordable level and then ties the sale price to changes in the Area Median Income. When the homeowner sells, he or she receives the amount initially paid for the home plus that initial price times the change in the Area Median Income. Affordable Housing Cost Resale Price Restriction This approach requires homeowners to sell at whatever price is "affordable" to buyers in the future earning the target income level (in this case, 80% of median income) given whatever the interest rates and other likely costs are in the future. This model works backwards from the costs to identify the affordable price. Template developed by: Rick Jacobus www.rjacobus.com For the Center for Housing Policy © 2006 Rick Jacobus www.nhc.org Resale Formula Comparison Cover Page 1 of 10 Reading the Results This spreadsheet compares these three shared equity approaches (and a market rate transaction) in terms of how much equity the homeowners receive and how well each approach maintains affordability. The approaches are compared under several alternative economic scenarios. The COMPARISON worksheet provides a high-level overview of what happens after the initially assisted family decides to sell its home. For each model, the worksheet shows: (a) the loss or gain of affordability as expressed in the income level to which the home will be affordable upon resale; (b) the amount of additional subsidy, if any, that will be required to make the home affordable to the next buyer at the original target income level; (c) how much equity the family has gained at the time of sale; and (d) the annual rate of return on the family’s initial cash investment; The COMPARISON worksheet provides results for each model using the base economic scenario while the SCENARIOS worksheet provides results under a range of different assumptions about the economic future. The SHARED APPRECIATION, AMI, and AHC worksheets provide the details behind the calculations for each of the shared equity approaches examined here. Economic Scenarios The relative performance of these different shared equity approaches depends on several key assumptions about future economic conditions, especially the rate of home price inflation, the rate of increase in the median income and the change in mortgage interest rates. The spreadsheet shows detailed results for each approach under a basic set of economic assumptions (the base scenario) but also shows summary results for up to 5 Alternative Scenarios input by the user. Approaches that perform well under one economic scenario may not perform as well under other circumstances; the SCENARIOS worksheet allows us to evaluate these approaches under a wide range of conditions. Key Terms Holding Period is the time before the first buyer sells the home. Median Home Price Inflation is the expected annual change in the median home price over the time that the first homeowner owns the home. Median Income Inflation is the projected average annual change in the Area Median Income over the same period of time. Initial Mortgage Interest Rate is the interest rate for 30 year fixed loans at the time of the initial purchase. Interest Rate at Resale is the projected rate that the second buyer will pay on a similar mortgage. By varying these assumptions we get a more complete picture of the relative performance of the different shared equity models. Affordability Resale Price: For each model the spreadsheet shows the price at which the home will sell after the holding period. For the market and shared appreciation models, this is the initial price times the change in home prices. For the AMI and AHC formulas this is the price calculated by the appropriate resale formula (see above for an explanation). Affordability at Resale: Given these prices, the spreadsheet calculates the "Affordability at Resale" which is the percentage of the Area Median Income a new buyer would need to earn in order to purchase the unit and pay the appropriate percentage of his or her income for housing costs. Second Loan at Resale: Under the Shared Appreciation model there is also a Second Loan at Resale, which is the total amount which the seller must repay to the program upon resale. This is equal to the initial subsidy plus the share of appreciation. The Affordability at Resale for this model assumes that this money is re-lent to the second buyer to reduce the second buyer's costs. (As you will observe, this may or may not be enough to maintain the initial level of affordability.) Resale Formula Comparison Cover Page 2 of 10 Additional Subsidy Needed: When there is a loss of affordability, the program sponsor might need to invest additional subsidy to make the home affordable to a subsequent buyer at the target income level. The spreadsheet calculates the amount of subsidy that would be necessary to maintain affordability to the target income group. When this number is negative, the sponsor could withdraw funds at resale without reducing affordability. Asset Building Initial Investment: A homeowner's initial investment is the sum of his or her downpayment and closing costs. To facilitate comparison, Shared Appreciation owners are assumed to provide the same downpayment as the AMI and AHC owners. (Based on the user-specified inputs, the comparision currently assumes the downpayment to be 3% of purchase price and closing costs 2%.) Homeowner's Net Return: At sale, the net return to the homeowner is calculated as the resale price minus the principal owed on any mortgages, minus broker and other sales costs. (Based on the user-specified inputs, the comparision currently assumes sales costs to be 7% of the sales price for below market units.) Approximate Rate of Return: This is the annual rate at which the homeowner would have had to invest the money he or she contributed toward downpayment and closing costs to make as much money as he or she earns on the sale of the home. Resale Formula Comparison Cover Page 3 of 10 Inputs The models are compared using the assumptions provided on this page. You can only change the numbers that appear in blue. Affordability Total Development Cost or Market Price Affordability Target (% of Median Income) Initial Median Income Mortgage is "affordable" at % of income Sales and Closing Costs Downpayment (% of price) Closing costs (% of price) Below market unit selling costs (% of price) Market unit selling costs (% of price) $ 300,000 80% 64,225 35.0% Housing costs - other than mortgage Property Taxes Insurance Home Owners Association Dues Ground Lease Fee Other Total other housing costs Available for mortgage payment Interest rate (Base scenario) Maximum loan amount Downpayment Affordable Purchase Price Initial Subsidy Required $ $ $ $ $ $ 2,160 900 1,680 0 0 4,740 $ $ $ $ $ $ $ 180 75 140 0 0 395 Initial Subsidy Requirement Annual Monthly $ 51,380 $ 4,282 $ 17,983 $ 1,499 $ Target Income Available for housing costs 3.0% 2.0% 7.0% 7.0% Housing Costs Property Taxes Based on Affordable Price? Tax Basis Property Tax Rate (% of price per year) Home Owners Insurance (% of price per year) Home Owners Association Dues ($ per month) Ground Lease Fee ($ per month) Other Housing Costs ($ per month) $ 180,000 1.20% 0.50% 140 0 0 1,104 6.5% $ 174,600 $ 5,400 $ 180,000 $ 120,000 $ $ $ Economic Scenarios Alternatives Base Scenario Holding period (years) Median home price inflation Median income inflation Initial mortgage interest rate Interest rate at resale 10 6.0% 4.0% 6.5% 6.5% Static 10 3.0% 3.0% 6.5% 6.5% Price Spike 10 8.0% 4.0% 6.5% 6.5% Housing Rate Price Bust Spike 10 -4.4% 3.0% 6.5% 6.5% 10 6.0% 4.0% 6.5% 8.0% Rate Spike - 5 yrs 5 6.0% 4.0% 6.5% 10.0% Resale Formula Comparison Inputs Page 4 of 10 Resale Formula Comparision Compares the performance of different approaches to equity sharing Base Economic Scenario Holding period (years) Median home price inflation Median income inflation Initial mortgage interest rate Interest rate at resale Adjust 10 6.0% 4.0% 6.5% 6.5% Affordability Initial Price First Mortgage Second Mortgage Initial Affordability Resale Price New Second Mortgage Affordability at Resale Additional Subsidy Needed Asset Building Initial Investment Homeowner's Net Return Approx Rate of Return Market Shared Appreciation $ 300,000 $ 300,000 $ 291,000 $ 174,600 $ 120,000 119% 80% $ 537,254 $ 537,254 $ 214,902 140% 93% n/a $ 55,909 AMI Index AHC Formula $ 180,000 $ 180,000 $ 174,600 $ 174,600 80% 266,444 $ 80% 0 $ 80% 266,444 80% 0 $ $ $ $ 15,000 $ 252,948 $ 33% 11,400 $ 136,726 $ 28% 9,000 $ 99,774 $ 27% 9,000 99,774 27% Resale Formula Comparision Comparision Page 5 of 10 Comparision Under Alternative Scenarios Compares the performance of the models under a range of different economic conditions Housing Price Bust 10 -4.4% 3.0% 6.5% 6.5% Rate Spike - 5 yrs 5 6.0% 4.0% 6.5% 10.0% Holding period (years) Median home price inflation Median income inflation Initial mortgage interest rate Interest rate at resale Resale Price Market Shared Appreciation Loan Area Median Income Index Affordable Housing Cost Affordability at Resale Market Shared Appreciation Loan Area Median Income Index Affordable Housing Cost Base Scenario 10 6.0% 4.0% 6.5% 6.5% Static 10 3.0% 3.0% 6.5% 6.5% Price Spike 10 8.0% 4.0% 6.5% 6.5% Rate Spike 10 6.0% 4.0% 6.5% 8.0% $ $ $ $ 537,254 537,254 266,444 266,444 $ $ $ $ 403,175 403,175 241,905 241,905 $ $ $ $ 647,677 647,677 266,444 266,444 $ $ $ $ 191,293 191,293 241,905 241,905 $ $ $ $ 537,254 537,254 266,444 229,516 $ $ $ $ 401,468 401,468 218,998 157,732 140% 93% 80% 80% 119% 80% 80% 80% 164% 108% 80% 80% 68% 48% 80% 80% 159% 104% 89% 80% 171% 111% 103% 80% Additional Subsidy to Maintain Target Affordability Market n/a Shared Appreciation Loan $ Area Median Income Index $ Affordable Housing Cost $ Homeowner's Net Proceeds Market Shared Appreciation Loan Area Median Income Index Affordable Housing Cost Approximate Rate of Return Market Shared Appreciation Loan Area Median Income Index Affordable Housing Cost Resale Formula Comparison 55,909 0 0 n/a $ $ $ n/a (736) $ 0 $ 0 $ 122,163 0 0 n/a n/a $ (127,865) $ $ 0 $ $ 0 $ 91,729 35,820 0 n/a $ $ $ 79,887 59,427 0 $ $ $ $ 252,948 136,726 99,774 99,774 $ $ $ $ 128,254 65,664 76,952 76,952 $ $ $ $ 355,642 195,250 99,774 99,774 $ $ $ $ (68,796) (46,634) 76,952 76,952 $ $ $ $ 252,948 136,726 99,774 65,431 $ $ $ $ 100,957 49,333 40,223 (16,754) 33% 28% 27% 27% 24% 19% 24% 24% Scenarios 37% 33% 27% 27% n/a n/a 24% 24% 33% 28% 27% 22% 46% 34% 35% n/a Page 6 of 10 Market Rate Sale This model shows what would happen if the unit were sold at its market value with no subsidy Initial Costs Initial purchase price Downpayment Closing costs Initial Financing First mortgage Initial Affordability Monthly mortgage payment Other Housing Costs Total Housing Cost Affordable to % of Area Median Income Resale Resale price Total appreciation Transaction costs of sale First mortgage payoff Homeowner's net proceeds from sale Continuing Affordability Second buyer's downpayment Second buyer's first mortgage Monthly payment Other Housing Costs Total Housing Costs Affordable to % median income Gain/(loss) of affordability Base Economic Scenario Holding period (years) Median home price inflation Median income inflation Initial mortgage interest rate Interest rate at resale Adjust $ $ $ 300,000 9,000 6,000 10 6.0% 4.0% 6.5% 6.5% $ 291,000 $ $ $ 1,839 395 2,234 119% $ $ $ $ $ 537,254 237,254 37,608 246,699 252,948 $ $ $ $ $ 16,118 521,137 3,294 585 3,879 140% -21% Alternative Scenarios Base Scenario 10 6.0% 4.0% 6.5% 6.5% $ 537,254 $ 252,948 140% n/a Static Price Spike Housing Price Bust Rate Spike Rate Spike - 5 yrs 5 6.0% 4.0% 6.5% 10.0% $ 401,468 $ 100,957 171% n/a Holding period (years) Median home price inflation Median income inflation Initial mortgage interest rate Interest rate at resale Sale Price Homeowner's net proceeds Affordability Additional subsidy required 10 10 10 10 3.0% 8.0% -4.4% 6.0% 3.0% 4.0% 3.0% 4.0% 6.5% 6.5% 6.5% 6.5% 6.5% 6.5% 6.5% 8.0% $ 403,175 $ 647,677 $ 191,293 $ 537,254 $ 128,254 $ 355,642 $ (68,796) $ 252,948 119% 164% 68% 159% n/a n/a n/a n/a Resale Formula Comparison Market Page 7 of 10 Shared Appreciation Loan This formula allows the homeowner to receive a percentage of the appreciation in the market value Initial Costs Total development cost LESS Subsidy Initial purchase price Downpayment Closing costs Initial Financing First mortgage Second Mortgage Initial Affordability Monthly mortgage payment Other Housing Costs Total Housing Cost Affordable to % of Area Median Income Resale Initial appraised value land + building Appraised value at time of sale Total appreciation Appreciation sharing percentage City Share of Appreciation Sale Price - Purchase Option Price Transaction costs of sale Second Loan Payoff First mortgage payoff Homeowner's Net Proceeds From Sale Continuing Affordability Second buyer's downpayment Second buyers second mortgage Second buyer's first mortgage Monthly payment Other Housing Costs Total Housing Costs Affordable to % median income Gain/(loss) of affordability Additional Subsidy Affordability target (80%) Supportable mortgage at time of resale Subsidy required to maintain affordability Alternative Scenarios Base Scenario 10 6.0% 4.0% 6.5% 6.5% $ 537,254 $ 136,726 93% $ 55,909 Static 10 3.0% 3.0% 6.5% 6.5% $ 403,175 $ 65,664 80% $ (736) Price Spike 10 8.0% 4.0% 6.5% 6.5% $ 647,677 $ 195,250 108% $ 122,163 Housing Price Bust 10 -4.4% 3.0% 6.5% 6.5% $ 191,293 $ (46,634) 48% $ (127,865) Rate Spike 10 6.0% 4.0% 6.5% 8.0% $ 537,254 $ 136,726 104% $ 91,729 Rate Spike 5 yrs 5 6.0% 4.0% 6.5% 10.0% $ 401,468 $ 49,333 111% $ 79,887 $ $ $ $ $ 300,000 0 300,000 5,400 6,000 Base Economic Scenario Holding period (years) Median home price inflation Median income inflation Initial mortgage interest rate Interest rate at resale Adjust 10 6.0% 4.0% 6.5% 6.5% $ $ 174,600 120,000 $ $ $ 1,104 395 1,499 80% $ $ $ $ $ $ $ $ $ 300,000 537,254 237,254 40% 94,902 537,254 37,608 214,902 148,019 136,726 $ $ $ $ $ $ 7,993 214,902 314,359 1,987 585 2,572 93% -13% $ $ $ 76,055 258,451 55,909 Holding period (years) Median home price inflation Median income inflation Initial mortgage interest rate Interest rate at resale Sale Price Homeowner's net proceeds Affordability Additional subsidy required Resale Formula Comparison Shared Appreciation Page 8 of 10 Area Median Income Resale Price Restriction This index formula allows the purchase price to rise along with changes in the Area Median Income (AMI). Initial Costs Total development cost LESS: Subsidy Initial purchase price Downpayment Closing costs Initial Financing First mortgage Initial Affordability Monthly mortgage payment Other Housing Costs Total Housing Cost Affordable to % of Area Median Income Resale Change in index Total appreciation Sale Price Transaction costs of sale First mortgage payoff Homeowner's Net Proceeds From Sale Continuing Affordability Second buyer's downpayment Second buyer's first mortgage Monthly payment Other Housing Costs Total Housing Costs Affordable to % median income Gain/(loss) of affordability Additional Subsidy Affordability target (80%) Supportable mortgage at time of resale Subsidy required to maintain affordability Alternative Scenarios Price Spike Housing Price Bust 10 -4.4% 3.0% 6.5% 6.5% $ 241,905 $ 76,952 80% $ 0 Rate Spike - 5 yrs 5 6.0% 4.0% 6.5% 10.0% $ 218,998 $ 40,223 103% $ 59,427 Base Economic Scenario Holding period (years) Median home price inflation Median income inflation Initial mortgage interest rate Interest rate at resale Adjust $ $ $ $ $ 300,000 120,000 180,000 5,400 3,600 10 6.0% 4.0% 6.5% 6.5% $ 174,600 $ $ $ 1,104 395 1,499 80% $ $ $ $ $ 48% 86,444 266,444 18,651 148,019 99,774 $ $ $ $ $ 7,993 258,451 1,634 585 2,218 80% 0% $ $ $ 76,055 258,451 0 Holding period (years) Median home price inflation Median income inflation Initial mortgage interest rate Interest rate at resale Sale Price Homeowner's net proceeds Affordability Additional subsidy required Base Scenario 10 6.0% 4.0% 6.5% 6.5% $ 266,444 $ 99,774 80% $ 0 Static 10 10 3.0% 8.0% 3.0% 4.0% 6.5% 6.5% 6.5% 6.5% $ 241,905 $ 266,444 $ 76,952 $ 99,774 80% 80% $ 0 $ 0 Rate Spike 10 6.0% 4.0% 6.5% 8.0% $ 266,444 $ 99,774 89% $ 35,820 Resale Formula Comparison AMI Page 9 of 10 Affordable Housing Cost Resale Price Restriction This formula sets the price at a level that will insure that it is affordable regardless of changes in interest rates. Initial Costs Total development cost LESS Subsidy Initial purchase price Downpayment Closing costs Initial Financing First mortgage Initial Affordability Monthly mortgage payment Other Housing Costs Total Housing Cost Affordable to % of Area Median Income Resale Median income at time of resale Target income Max monthly Housing Cost Other Housing Costs Available for Loan Payment Supportable Mortgage Downpayment Sale Price - Purchase Option Price Transaction costs of sale First mortgage payoff Homeowner's Net Proceeds From Sale Continuing Affordability Second buyer's downpayment Second buyer's first mortgage Monthly payment Other Housing Costs Total Housing Costs Affordable to % median income Gain/(loss) of affordability Additional Subsidy Affordability target (80%) Supportable mortgage at time of resale Subsidy required to maintain affordability Alternative Scenarios Price Spike Housing Price Bust 10 -4.4% 3.0% 6.5% 6.5% $ 241,905 $ 76,952 80% $ 0 Rate Spike - 5 yrs 5 6.0% 4.0% 6.5% 10.0% $ 157,732 $ (16,754) 80% $ 0 Base Economic Scenario $ $ $ $ $ 300,000 120,000 180,000 5,400 3,600 Holding period (years) Median home price inflation Median income inflation Initial mortgage interest rate Interest rate at resale Adjust 10 6.0% 4.0% 6.5% 6.5% $ 174,600 $ $ $ 1,104 395 1,499 80% $ $ $ $ $ $ $ $ $ $ $ 95,069 76,055 2,218 585 1,634 258,451 7,993 266,444 18,651 148,019 99,774 $ $ $ $ $ 7,993 258,451 1,634 585 2,218 80% 0.0% $ $ $ 92,014 258,451 0 Holding period (years) Median home price inflation Median income inflation Initial mortgage interest rate Interest rate at resale Sale Price Homeowner's net proceeds Affordability Additional subsidy required Base Scenario 10 6.0% 4.0% 6.5% 6.5% $ 266,444 $ 99,774 80% $ 0 Static 10 10 3.0% 8.0% 3.0% 4.0% 6.5% 6.5% 6.5% 6.5% $ 241,905 $ 266,444 $ 76,952 $ 99,774 80% 80% $ 0 $ 0 Rate Spike 10 6.0% 4.0% 6.5% 8.0% $ 229,516 $ 65,431 80% $ 0 Resale Formula Comparison AHC Page 10 of 10