What happens to shared equity homes when market housing prices fall?

There are several common approaches to setting resale prices in shared equity homeownership programs and they differ in important ways, but most provide owners with significant protection against falling home prices.  For example,  San Francisco imposes price restrictions tied to the change in the Area Median Income in its Below Market Rate (BMR) homeownership program.  BMR buyers purchase their homes for far less than their market value.  Declines in the market value of units have no direct impact on the maximum resale price.  As long as the market price remains well above the restricted price, BMR owners are likely to be able to realize limited appreciation even in a falling market.  However, the program does not guarantee that sellers won’t lose money.  Recent dramatic drops in condo prices in San Francisco have resulted in market prices that are only slightly higher than the affordable prices in some buildings which makes it difficult to sell BMR units for their maximum formula price.  In this situation, owners may choose to wait for prices to recover or they may sell for less than their maximum price.

Similarly, for homeowners whose prices are limited to some percentage of the market appreciation, the public investment is generally at risk before the homeowner’s equity.  For example, Salina, CA uses a shared appreciation loan to protect affordability of homes created through its inclusionary housing ordinance.  In a rising market, sellers must repay the initial subsidy that they received plus 3% interest, as well as a share of the increase in market value of the home.  But when prices decline the city forgives all or a portion of its subsidy to allow owners to recover their full investment in the home whenever possible.  In this way, while shared equity owners are not guaranteed to get their investment back, they are significantly less likely to face a loss than most owners.

Not every shared equity program is structured this way and it is therefore important to closely study the details of each resale restriction.