Shared Equity Mortgages, Housing Affordability, and Homeownership

Abstract

The homeownership rate rose from 65% in 1995 to 69% in 2005, yet this rise appears difficult to sustain. We argue that the development of new shared equity mortgages (SEMs) that blur the lines between debt and equity would propel further advances in homeownership. The rationale for these mortgages is that the broad financial markets values shares in individual housing returns higher than do hard-pressed prospective homeowners. We describe a new class of SEM and provide survey evidence that the majority of households would prefer these SEMs over interest only and other currently popular mortgages. Financial simulations confirm the value of the securitized SEMs to investors. We present "back of the envelope" computations suggesting an increase in the overall U.S. homeownership of rate of between 1% and 1.5% would be the likely result of development of SEM markets.

Keywords: Housing Affordability, Mortgages

JEL Classification: G21