The Right Way to Fund Homeownership

How a network of community wealth funds dedicated to homeownership can help reverse racial and generational wealth gaps and make the American Dream accessible for generations to come.

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Citing the widespread crisis of home affordability, last month Vice President Harris proposed a $25,000 refundable tax credit for purchasers of new homes to help bridge the gap between an affordable mortgage payment and the necessary down payment to purchase a home. She cited the many benefits of home ownership on middle class wealth creation and housing security, and that for young people in the United States, homeownership has become an impossible dream.

Over the past five years, U.S. home prices have risen significantly, with the median home price increasing from approximately $240,000 in 2018 to over $400,000 in 2023. Meanwhile, mortgage rates have more than doubled, with the average 30-year fixed mortgage rate rising from about 3% in 2021 to over 7% in 2023. This has essentially tripled the minimum income needed to qualify for a standard 30-yar fixed rate mortgage for a “starter” home. Similarly, rents have increased by 25-30% in many U.S. markets over the last five years, further burdening those unable to save for a down payment due to rising rental costs. For people whose personal assets or family cannot contribute a large amount to the purchase price, homeownership has become impossible.

The problem for most families is larger than $25,000. For a median-priced home of $400,000, it would require an income of over $100,000 to qualify for a mortgage at today's rates. This is assuming a 5-10% down payment, an amount most young people are not able to save while also paying their landlord’s mortgage. The amount required to buy a home that grows every month as home prices continue to rise. A $25,000 one-time tax credit would help alleviate some of the closing costs that go into purchasing a home, particularly in states with high title insurance costs and other fees. However, it doesn't address the root issue: the affordability of a home is ultimately determined by the monthly payment the homeowner must make on their first mortgage. The Harris proposal would help some families now, but it would leave many others behind, a one-time fix for a problem that is likely to persist for years, regardless of whether interest rates go up or down.

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Racial and Generational Wealth Gaps

The United States has a strong and sustainable model for financing homes: the fixed-rate, 30-year government-backed mortgage. This tool has helped generations of families become homeowners with a predictable monthly payment that they can afford, while also building equity in their homes over time. Home equity represents the largest single asset class in the country, is consistently the largest asset most people have, and serves as a source of financial and housing security as people age and retire.

Access to home equity and the compounding growth of home prices has historically been the key difference-maker between groups that today possess household wealth in any amount, and those that hold negative household wealth. This wealth divide unfortunately falls along racial and ethnic lines, a result of redlining, historical discrimination in credit markets, and racial bias among loan underwriters and property appraisers. And housing wealth alone will not solve the problem of housing insecurity. In fact, there is some tension between homeowners, renters, and the supply of housing. No down payment assistance program or affordable mortgage initiative will create new housing units or reverse the trend of rent growth, which continues to burden so many working-class families.

But if you ask any family whether they would prefer to pay a third of their monthly income toward a home they own rather than one they rent—building their own net worth instead of their landlord's—the vast majority would choose homeownership.

Homeownership rates vary significantly across both racial and generational lines. As of 2023:

• White households have a homeownership rate of around 75%, while Black and Hispanic households lag behind at 44% and 48% respectively.

• Millennials (ages 27-42) have a homeownership rate of approximately 51%, compared to Baby Boomers (ages 58-76), whose homeownership rate exceeds 80%.

This disparity reflects persistent inequalities affecting racial minorities, who are frequently and unfairly denied the wealth-building advantages of owning a home. And as this divide becomes a generational one as well, America is in danger of sabotaging the housing security and net worth of even more of its citizens, an inequity which will compound over time and only get worse.

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Recapturing Community Wealth for Affordable Home Ownership

The concept of a community wealth fund is not new. United Way, one of the United States' largest charities and philanthropic networks, was originally founded as the Community Chest in Cleveland in 1913, designed to pool community resources for charitable purposes, to support local social services and address urban poverty. United Way continues to focus on creating community-driven approaches to spur economic development and create social equity.

In our time, a community wealth fund can be thought of as a charity or foundation established to capture and reinvest the value created by a community for the benefit of that community. So often, neighborhoods will grow, and that growth is captured mostly in the value of the land and real estate where they work and live, rather than in wages, savings, or public goods that they can access. Public authorities attempt to capture this value through property taxes. However, they often fail to reinvest these funds back into their communities and lack the precision and efficiency to do so effectively. In contrast, businesses are not only faster but more efficient in capitalizing on flourishing communities.

This movement of capital dictates the availability of credit to the businesses and individuals who live in these neighborhoods. When an area attracts a great deal of investment because of the perception of growth that is disconnected from and at the expense of the existing residents of that area, we call that gentrification. For the companies and individuals who move into a neighborhood under gentrification, they see the benefit of the growth and are able to capture a portion of it for themselves. For those who already live in those communities, they must compete with well-heeled newcomers for housing and commercial space. These residents often do not have access to the same credit or cash that would allow them to participate in the growth of their own neighborhoods.

This causes displacement of existing residents, a hollowing out of historic neighborhoods and ways of life, and serious housing and health issues, especially for seniors and children in areas where wages cannot keep up with rents, and the extrinsic costs driven by rapid growth. Without community wealth directed toward a mechanism for individuals and families to benefit, people are left behind.

Homeownership community wealth funds are established to do two things:

1. To capture the growth of land and commercial value in particular communities and then reinvest those funds into public goods and financial assistance to residents of those areas to give them a leg up in benefiting from that growth.

2. To ease the payment burden of housing and home ownership for residents to benefit alongside the community when it grows.

These funds can take many forms and focus on different programs and priorities. What we propose here is the establishment of community wealth funds for the purpose of making shared appreciation down payment assistance loans to first-time homebuyers. This would capture the appreciation of home prices in these communities while easing the financial burden of home ownership for young families.

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How Shared Appreciation Down-Payment Assistance Works

Generally, loan-based assistance programs, which involve real estate purchases, loan servicing, and other regulated activities, are difficult for small charities and even larger foundations to handle on their own. Existing down-payment programs tend to be administered by larger financial institutions, such as the Federal Home Loan Bank, or by larger, specialized philanthropic organizations.  Often, these programs provide funds to buy down the interest rate or cover the down payment of new home buyers. The money invested in these down-payment programs tends to be a one-time gift to a homeowner and tied to financial education and support, as well as potential restrictions on their ability to resell, improve, or refinance their home. The availability of these programs is relatively small and do not currently match the widespread need. This is unfortunate, because loan mechanisms exist which could help. The GSEs, Freddie Mac and Fannie Mae and the VA all have programs allowing non-profits to make soft-second mortgage loans to solve this problem (called Community Seconds or Affordable Seconds). California's HFA recently deployed $300 million in shared appreciation loans in a matter of days, a down payment assistance program called California Dream for All, which used a similar strategy to what we propose.

Advances in financial technology, including underwriting software, loan documentation, and settlement tools, can unlock efficiencies that allow communities to create their own community wealth funds to take advantage of these program guidelines. These funds can offer shared appreciation down-payment assistance at a very low cost with a high degree of transparency and accountability.

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So, what do I mean by shared appreciation down-payment assistance? It’s very simple, and I will explain by way of an example:

Imagine a young family from Washington, D.C. looking to purchase their first home. They are employed and have some savings, but not enough for a 20% down payment on a starter home at around $400,000. They also have income, around 80% of the area median income (AMI): not enough to afford a 7% rate on a $380,000 mortgage. However, they are ready for home ownership and would benefit greatly from assistance to bridge the gap between what they can afford and what is available on the market.  

They become aware of a local community wealth fund that offers a shared appreciation loan as part of a down payment assistance program for which they qualify. They apply for pre-approval, just like they would with any standard private lender. The amount they can borrow is determined based on their income, and assuming they qualify for the program, they are approved for a second mortgage that is subordinate to their standard conforming first mortgage.

The amount they need to cover is about $100,000 or ¼ the sale price of the home. This would give them an affordable 1st mortgage payment of around $1,850/month, which would, with their income, qualify them for a conforming government mortgage at a 74% LTV.

This second mortgage comes with no interest and no monthly payments throughout the life of the loan. Instead, the second mortgage is paid off when they sell the home or refinance the first mortgage, in an amount equal to the original principal of the second mortgage plus a share of the home’s appreciation in value.

The share of appreciation is based on the loan-to-value ratio of the second mortgage at the time of origination. For example, if the family borrows 25% of the home’s value to make the purchase and reduce the amount they need to borrow on the first mortgage, they would repay 25% of the home’s price appreciation when they sell or refinance. If ten years later, they sell their home for $500,000, they would repay $120,000 or 25% of the homes value, a cost of $20,000 or 2% per year.

This one-to-one relationship ensures that the family is never out-of-pocket to repay the second mortgage, while also allowing the community wealth fund to earn appreciation on its investment in the home. The profits earned by the community wealth fund can then go on to support another family through an equally impactful loan, having captured the growth in the community’s value in the form of home price appreciation.

This creates a self-sustaining cycle of down payment assistance that benefits multiple generations, growing with the economy and the wider real estate market. By preserving donor capital and impacting hundreds of families, this model allows communities to share in their own economic growth, enabling homeownership with favorable loan terms and no repayment burden for new homeowners.

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The Role of Sponsors in Community Wealth Funds

With the shared appreciation loan as a tool, sponsors of community wealth funds—which would include donors, foundations, governments, larger employers, labor unions, and other community groups—can contribute funds to support down payment assistance through a program with terms they can decide. This ensures that assistance reaches those who need it most and where the impact will be greatest and easiest to sustain.

For instance, with just a $10 million contribution from sponsors, a community wealth fund could issue 100 down payment assistance loans of $100,000 each. This would allow homeowners with incomes below 80% of AMI to purchase starter homes in most U.S. markets, with smaller or larger loan sizes needed based on local housing markets. Each $100,000 loan would earn no interest and require no payments throughout its term but would secure, in the case of a $400,000 home, one-quarter of the home’s price appreciation when the home is sold or refinanced.

Our loan origination and instant securitization platform can bundle these loans into a single investment, allowing the community wealth fund to gain exposure to a diversified pool of homes. Program sponsors could potentially pool homes from multiple communities, diversifying risk and significantly lowering the cost required to service and manage these loans.

Homeowners would essentially receive a silent investor in their home—a community fund that enables them to become homeowners but remains on the same terms as the family, earning a return on the capital invested without imposing any influence on how the family manages or improves their home. This aligns the interests of the homeowner and the community wealth fund, as both share in the success of the home’s appreciation.

By utilizing these shared appreciation loans, community wealth funds would have a direct connection to the residents they aim to support, gaining real-time insights into the impact of their program. This system provides a highly transparent and efficient method for managing community assets, ensuring that they serve the interests of the people, helping families build wealth through homeownership.

A sponsoring group could raise as little as $1 million and make an instantaneous impact on the lives of 10-20 families. The long-term effects of this investment ripple outward in the form of improved educational outcomes, health outcomes, economic mobility, and housing security. For example, an employer in a mid-sized town in Missouri could contribute a couple of million dollars and create homeownership opportunities for 50 of their employees. Similarly, a successful entrepreneur aiming to uplift families in their home neighborhood in Detroit could turn 100 families into homeowners in just a few months. A major foundation could finance a rotating community wealth fund in the tens or hundreds of millions, transforming the housing situation for thousands of families.

Connecting these community wealth funds to other financial assistance and education programs ensures that homeowners fully understand the terms of the program and have all the tools needed to be successful. By embedding these programs into the communities they serve, community wealth funds can ensure that loans are directed to those who most need and deserve them. They also guarantee that every loan helps to reverse the racial wealth gap and strengthen communities of color. Programs aiming to relieve affordability of assumable VA mortgages could bridge that gap for service members, and unlock home equity for veterans looking to move. The possibilities are endless.

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A Better Way to Finance Affordable Homeownership

As the end of this election cycle nears, and programs like the Harris proposal for down payment assistance, or the Trump proposal to slash building and safety codes to lower costs for builders, will take shape and some may become policy. At Homium we submit our plan for your consideration instead.

If you think that a community wealth fund making down payment assistance available through shared appreciation lending would help people in your community access homeownership and all the benefits that come with it, please reach out. Homium is the ideal lending and technology partner that can make this program a reality for millions of American families.

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