Shared-equity mortgages, housing affordability, and homeownership

Although the homeownership rate rose from 65 percent in 1995 to 69 percent in 2005, 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 would value shares in individual housing returns more highly than hard-pressed prospective homeowners do. We describe a new class of SEMs and provide survey evidence that most households would prefer them to interest-only and other currently popular mortgages. Financial simulations confirm the value of the securitized SEMs to investors. We present computations suggesting that an increase in the overall U.S. homeownership rate of between 1% and 1.5% would likely result from the development of SEM markets.