By David Lillington Homeownership in the Context of Durham’s Southside Revitalization
The American dream has been something of a national fixation rooted deep in our country’s mindset ever since the signing of the Declaration of Independence. The idea that one may go out and settle on his or her very own piece of land has fueled the fantasies of Americans and immigrants alike. The Wild West was built on this mantra, and America thrives today based on this expansionist history. Owning a home is still a dream in the hearts of many Americans. It is seen as a sort of gold medal in the course of one’s life; a lifetime achievement that proves they have “made it”.
One project, here in Durham, is attempting to provide some of its citizens with the opportunity to realize such a dream. The revitalization of the Southside neighborhood, a previously run-down community, plans to offer select Durhamites the chance to own their very own home in a brand- new development. Through various special mortgage packages, low- and moderate-income buyers will have the opportunity to purchase a home with some much-needed assistance. But is owning a home affordable for this demographic of residents? This paper will explore the benefits of homeownership and its affordability for qualified homebuyers within the context of Durham’s new Southside neighborhood.
The hallmark of homeownership is “creating the expectation of owning one’s home” (Shlay, 2006). This status sets owners apart from renters as the owner is obligated to “own” their home; that is, maintain and take responsibility for their property. Therefore the owner is taking on risk; but with risk can come reward. Such rewards might include various tax deductions and home appreciation. Anthropologist Constance Perin, cited in Shlay (2006), claims that homeownership is similar to citizenship. Just as a citizen pays taxes to live in his or her city, state, and country, the majority of homeowners will make payments to a bank through a mortgage. There is a sense of pride associated with such an accomplishment.
So how many people actually own a home in the United States? According to the 2013 U.S. Census Bureau News report (Callis and Kresin, 2014) the rate can be calculated as such,
The document, published on January 31, 2014, reports that fourth quarter 2013 homeownership rates rest at 65.2%, down 0.2% from last year. Table 1, which is taken from this report, displays quarterly homeownership rates from Q1 1995 to Q4 2013. National homeownership rates appear to have reached a peak of 69.2% in Q2 and Q4 of 2004 and have been on a steady decline since then. According to Zillow.com’s local homes data (taken from the 2000 U.S. census), Durham has a much lower ownership rate at 49.0% (2014a). This is perhaps due to the younger population that lives in Durham. 65.3% of Durham’s population is aged 39 or younger (Zillow.com, 2014a; taken from 2000 U.S. Census), and only 36.8% of people in the U.S. under 35 own their home (Callis and Kresin,
Despite the fact that Durham’s homeownership rates are lower than the national average, it would behoove Durhamites to consider purchasing property. Shlay (2006) notes that there are a number of economic, social, political, and neighborhood benefits associated with owning a home. In the economic realm, homeownership leads to asset building, serves as an alternative form of investment, forces savings, and imposes what Shlay calls “created fixed housing costs” (2006). Asset building helps owners build equity in their homes; each time a mortgage payment is made, they own more and owe less. As an alternative form of investment, owners can expect a risk premium returned to them when selling their home, just as a 401K would pay interest rewarded in retirement. Forced savings is important in the sense that a portion of the owner’s income is automatically devoted to investment in a home. It ensures that money is not wasted. Finally, “created fixed housing costs” (in a fixed mortgage situation) allows owners some security in that their housing costs are predictable. Payments will not rise like rents may. Most owners are, however, responsible for their own repair costs (though HOAs may cover exterior repair and maintenance costs in some situations, such as if the repair is “communal”).
Shlay (2006) argues that homeownership brings about many social benefits as well. She cites studies by Rohe et al. (2002) and Rohe and Stegman (1994), both of which explain that “homeownership is believed to give people more control over their housing and, therefore, their lives”. In addition, other social advantages to owning a home include greater social stability, greater self-satisfaction, and greater voluntary civic participation (Shlay 2006). She also notes that if the household contains children, they will be less likely to experience juvenile delinquency and will feel physically and mentally healthier. Community involvement due to homeownership is a very important aspect in the Southside revitalization. This positive externality will help in creating a tight-knit community in a space that was otherwise dangerous and civically unengaged.
Political benefits from homeownership include decreased criminal activity, increased political participation, increased commitment to employment, and a larger tax base. Durham will benefit from new homeowners in Southside in this way. Futhermore, Shlay (2006) claims that neighborhood benefits seen as a result of homeownership may lead to higher property values, better care of property, more stability, less abandoned homes, and less signs of decline such as graffiti and litter. These issues were some of the same that plagued the Southside neighborhood noted in the Durham tour paper at the beginning of the semester. Many houses were boarded up, most had bars on their windows, and a broken umbrella was hanging from power lines. The Southside revitalization project will completely transform this area and will see most of these economic, social, political, and neighborhood benefits. With these benefits, however, comes a high cost. Will the new Southside area offer homeownership opportunities to low- and moderate-income Durhamites at an affordable price?
Quigley and Raphael (2004) claim that “public concern over the affordability of housing arises from two factors”. The first is that housing is most likely the most expensive item that an individual or family owns, equating to approximately a quarter of income devoted to annual housing payments. They note that low- and some moderate-income owners may devote half of their incomes to such expenditures. The second concern derives from the considerable increase in housing prices and rents in metropolitan areas. This creates greater barriers to entry for those who do not own a home and makes rent more unaffordable to those who rent.
The National Association of Realtors quantifies the affordability of homes in their Housing Affordability Index (HAI). As of January 2014, the HAI sits at 175.8 (2014a). This means that an individual or family at the median national income has 175.8% of the income needed to qualify for a purchase on a median-priced home. This assumes a 20% down payment. Figure 1 shows the performance of the index over a 10-year period from 2003 to 2013 (Hyman, 2014). There has been an overall increase in affordability of housing as evidenced in the chart. The National Association of
Realtors also provides data of the HAI by metropolitan area. Durham is reported as having a housing affordability score of 180.0 for 2013, a few points above the national index (2014b). It is safe to conclude that, according to the National Association of Realtors, housing is affordable in Durham.
The Southside revitalization project plans to make more housing affordable to the Durham community. Although it appears that housing is already affordable, the City of Durham and the North Carolina Housing Finance Agency (NCHFA) are offering down payment and mortgage assistance to those who may need more assistance (City of Durham, 2014). They state that individuals and families over the age of 18 may qualify if they have an income less than or equal to 80 percent of the area’s median income. For a family size of 1 the maximum household annual income is set at $37,950. A family of 2 may have a household income no more than $43,350; a family of 3 may have a household income no more than $48,750, and so on. A federal requirement dictates that at least 51% of homes sold in the new Southside community must be sold to buyers falling within these thresholds (City of Durham 2013). This will allow those who might otherwise not have the opportunity to own a home to take ownership in a brand new piece of property and enjoy some of the benefits of homeownership as discussed previously.
There exists a wide range of other benefits to owning a home particular to Durham’s Southside community. Builder B. Wallace (2014a) notes that the City of Durham has purchased lots in this area at very low prices. Therefore the lots on which new homes will be built will be sold to buyers at below-market value. In addition, the Southside community is just a couple blocks from downtown Durham and offers convenient access to gourmet dining and shopping experiences. Such amenities are valuable to many, especially younger buyers who might fall into Southside’s target audience. She claims that some similar homes in similar parts of Durham have been selling as much as $25,000 more than the $162,000 to $198,900 Southside prices (City of Durham, 2014). Very similar houses on Redfern Way, a cul-de-sac off Bivins St., built by builder B. Wallace, sold in 2012 for prices ranging from $176,000 to $203,000 (Zillow.com, 2014b). Lots were similar sizes as well. In fact, according to her website, builder B. Wallace is offering the exact same floor plans in the Southside neighborhood as she did in the Redfern Way cul-de-sac in 2012 (B. Wallace, 2012, 2014b). The area of Bivins St., though not as deprived as the Southside area, still had seen some rough times, as evidenced in the Durham tour paper. The area has picked up since then, and we can use Redfern Way and Bivins St. as an example of what to expect in the Southside area after construction has been completed. Figure 2, taken while doing research for the Durham tour paper, provides a visual of the Redfern Way cul-de-sac.
Furthermore, builder B. Wallace (2014a) provides information on the different loan packages offered for the new Southside community. Four opportunities are being offered to assist with down payment and mortgage costs. The first is from the City of Durham through a forgivable mortgage program. A $20,000 loan is given to qualifying buyers and is “forgiven” at a rate of 3.33% per annum. This means that the loan is essentially a grant; however the amount of principal owed decreases at this yearly rate. No interest is charged, but the remaining balance must be paid if the owner decides to sell before the loan has been completely forgiven. The second option is provided by the NCHFA and gives up to $18,000 in the form of a deferred mortgage loan (City of Durham, 2013). This money is loaned at 0% interest without any repayment until the house is sold. The third option offers a second mortgage program from the City of Durham (B. Wallace, 2014a). In this loan, the buyer takes out a second amortizing loan of up to $20,000 (different from the private bank loan to pay for the majority of the house). This loan charges a 2.00% interest rate and must be paid in 30 years. Finally, Duke University is offering $10,000 through the form of a forgivable loan to 10 of its employees.
How affordable will new Southside homes be to qualifying buyers after these incentives? Using information provided by B. Wallace (2014a) and the City of Durham (2013, 2014), this paper presents various mortgage scenarios created in Microsoft Excel to calculate how much monthly mortgage payments would be for a basic new home in the Southside community. We use the most affordable housing option at $162,000 and subtract from it the City of Durham forgivable loan of $20,000 and the deferred NCHFA loan of $18,000. This leaves $124,000 to be borrowed. The City of Durham also offers a loan of up to $20,000 in the form of a 2% fixed 30-year loan which is at more than half the current interest rate. Separating this loan from the remaining balance, we are left with $104,000 to be borrowed at the federal interest rate of 4.50% for 30 years (Bankrate.com, 2014). We leave out the subsidy provided by Duke since it does not apply to all buyers. In Excel we set up the spreadsheet to include the principal of $104,000 to be loaned to the buyer at a rate of 4.50% over a period of 30 years or 360 monthly payments. Using the Excel formula,
=PPMT(rate, per, nper, pv),
we are able to calculate the monthly principal payment for this particular loan where rate stands for interest rate divided over a period of 12 months, per stands for the particular period (in this case month 1), nper is the total number of periods of the loan (360), and pv is the present value of the loan ($104,000). We arrive at a principal payment in month 1 of $136.95. A similar calculation is done to
calculate monthly interest payment. Using the formula,
=IPMT(rate, per, nper, pv),
Excel calculates month 1’s interest payment to be $390.00. This adds up to a total payment of $526.95 per month. The same method is used to calculate the City of Durham’s 2% amortized 30- year loan of $20,000. The monthly payment for this particular loan is calculated to be $73.92. Adding these together, we get a total monthly payment of $600.88. This, however, does not include association fees of $20.00 per month as well as taxes and insurance estimated to be $250.00 per month (B. Wallace, 2014a). With these estimates, total monthly homeownership costs sum to be $870.88 per month.
To see the positive effects of these subsidies, payment schedules were calculated without any sort of incentives to act as a comparison to the first scenario. One schedule was calculated assuming a standard 20% down payment on the house, or $32,400. The other schedule, though unrealistic, presents a scenario in which there is no down payment; all of the money is borrowed from a lender. The subsidized scenario is much like this, as the NCHFA and City of Durham are helping the buyer with the down payment. With 20% down, homeowners would pay a monthly payment of $656.66 a month; a difference of only $55.78 more per month. This may seem to be small, however when purchasing the house, a down payment of $32,400 had to be made. This amount of money may equate or come close to equating the yearly salary of a qualified buyer for the Southside project. It is unlikely that one would have this sort of money disposable if they qualified for subsidies. If one were to eliminate the down payment completely, monthly payments would rise to $820.83 per month, not even including HOA fees, taxes, and insurance payments. This is a difference of $219.95. This translates into savings made through the subsidies offered by the NCHFA and the City of Durham. The only cost not included in the subsidized scenario is the repayment of the $18,000 NCHFA deferred loan upon the sale of the house. When adding this back in to the total amount paid by the owner plus a required contribution of $500, we get a total loan cost of $234,815.58. Compared to the other scenarios at $268,799.10 and $295.498.87 respectively, the subsidies offer qualified buyers the opportunity to take advantage of owning a home at a much more affordable price.
In addition, subsidized payments plus taxes and HOA fees amount to 27.5% of the maximum income allowed for one individual: [(870.88*12)/37950]*100 = 27.5%. This is near the 25% target of portion of income devoted to homeownership expenses as discussed by Quigley and Raphael (2004). Subsidized payments plus HOA fees, taxes, and insurance also amount to nearly three-quarters of the rent required to occupy the same home. According to Zillow.com (2014b), a similar house valued in the neighborhood at $167,000 would rent for $1,200 per month. Therefore, it is safe to conclude that purchasing a house and taking advantage of the subsidies offered in Southside proves to be a financially wise and affordable option.
This paper explores the affordability of new homes in Durham’s revitalizing Southside neighborhood. Through various subsidies offered by the City of Durham and the North Carolina Housing Finance Agency, people who would otherwise struggle to find the capital needed to purchase a home may take advantage of an opportunity to do so. This will leave them with many of the positive benefits associated with being a homeowner, as discussed by Shlay (2006). It will also allow select Durhamites a cheaper, smarter alternative to renting in their beloved city. For $870 per month qualified people might have the chance to start owning a home. Southside will surely see a welcomed, dramatic transformation after construction is completed, and both new owners and the City of Durham will see many positive benefits as a result of these new properties.
B. Wallace, 2014a, “Southside: Why investing in a new home in Southside is a great idea and how to do it”. B.
Wallace. http://bwallacebuilt.com/files/2014/03/SouthsidePresentationV2forPDF.pdf B. Wallace, 2014b, “Southside-Downtown: Property Description” B. Wallace.
B. Wallace, 2012, “Redfern Way: Property Description” B. Wallace. http://bwallacebuilt.com/communities/redfern-way-2/
Bankrate.com, 2014, “Current Mortgage Interest Rates” Bankrate.com. http://www.bankrate.com/finance/mortgages/current-interest-rates.aspx
Callis and Kresin, 2014, “Residential Vacancies and Homeownership in the Fourth Quarter 2013” U.S. Census Bureau News: 1-12.
City of Durham, 2013, “Southside Homebuyer Update, July 3, 2013” Durhamnc.gov, City of Durham Community Development Department. http://durhamnc.gov/ich/cb/cdd/Documents/SSBuyerUpdate.pdf
City of Durham, 2014, “Homeownership” Durhamnc.gov. http://durhamnc.gov/ich/cb/cdd/Pages/FTHB.aspx
Hyman, Michael, 2014, “NAR Affordability Index: Composite, Fixed + ARM” Economists’ Outlook Blog. http://economistsoutlook.blogs.realtor.org/2013/12/18/latest-housing-affordability-data-4/
John Quigley and Stephen Raphael, 2004, “Is housing unaffordable? Why isn’t it more affordable?” Journal of Economic Perspectives 18(1): 129-152.
National Association of Realtors, 2014a, “Housing Affordability Index” Realtor.org. http://www.realtor.org/sites/default/files/reports/2014/embargoes/hai-01-2014/hai-01-2014-housing- affordability-index-03-14-2014.pdf
National Association of Realtors, 2014b, “Affordability Index of Existing Single-Family Homes for Metropolitan Areas” Realtor.org. http://www.realtor.org/sites/default/files/reports/2014/embargoes/metro-affordability-2013-existing- single-family-2014-02-11.pdf
Shlay, Anne B., 2006, “Low-Income Homeownership: American Dream or Delusion?” Urban Studies 43(3): 511-531.
Zillow.com, 2014a, “Durham Local Information” Zillow.com. http://www.zillow.com/local-info/NC- Durham/r_24457/
Zillow.com, 2014b, “1008 Redfern Way, Durham, NC 27707” Zillow.com. http://www.zillow.com/homedetails/1008-Redfern-Way-Durham-NC-27707/114315049_zpid/
Tables and Figures
See attached Excel file Lillington David_Southside+Mortgage+Scenarios