Economics of Buying a Home

To better understand the issues effecting attainability, consider that financing is as important, or even more, as cost cutting.  When interest rates were at historic lows, it was much easier to qualify for that first home.  With rates hovering just under 7% (for the most qualified buyer), monthly payments have exploded, excluding an even larger segment of the population than before. 

When applying for a mortgage, lenders will determine your eligibility based on many factors, but the primary ones are credit score and front-end and back-end ratios.  These ratios determine how much mortgage a buyer can qualify for.  Front-end ratios are calculated on a percentage of gross income, generally 28-32%, less housing costs. Back-end ratios factor in all other debt, including car loans, student loans, consumer debt, credit card debt, etc. Back-end ratios are often the reason many buyers can't qualify for a mortgage, as they have too much other debt. Since these factors are unique to each buyer, it is difficult to calculate generic back-end ratios, so we will focus on the front-end ratios only.

The analysis below shows the effect of interest rates on the buying power of families making 80% of the Area Median Income (AMI) and for families making 100% of the AMI.  Even those at 100% of AMI are priced out of today's starter home market.  We are truly in need of homes to address what is known as the 'missing middle', or gap in housing options. 

Homes will not be sold to investors, and short-term rentals are prohibited. Sales are restricted to individuals earning no more than 120% of the Area Median Income (AMI). Preference will be given to those making less. Additional discussions will take place to establish policies ensuring long-term affordability. The Board of Directors will determine the eligibility criteria for homebuyers and consider measures to prevent the transfer of properties to investors or the use of straw buyers.

Operations

 This business model is unique for a CDC, as each home will be sold at a price that typically requires little to no subsidy. Consequently, the same capital can be reinvested in a new project after the prior one is fully sold. However, in some instances, only 80-90% of the costs may be recouped. The strategy is to finance these developments with private loans instead of bank loans.  

The private lender has the option to forgive the loan or portions of the loan over multiple years, thereby managing the timing of their charitable contributions.  It allows the CDC the use of these funds prior to when the donor will need the tax deduction. Or there may be no loan forgiveness, depending on the individual lender's requirements.

As the concept becomes more widely accepted and demand increases, larger projects will be undertaken, contingent upon funding. The initial phase will consist of small clusters of 5-8 homes, which will also reduce the required capital. With increased funding, the projects will grow in scale through the addition of more clusters.

In addition to advancing its own initiatives, the CDC will partner with other community development corporations who want to construct these homes and communities. Working together with other CDCs is vital for the success of our endeavors.