Cooperative Ownership: Closing The Homeownership Divide

September 5, 2023 Steinbridge

Cooperative Ownership: Closing The Homeownership Divide

ForbesRoger Valdez, Director of the Center for Housing Economics speaks with Tawan Davis, Founder and CEO of The Steinbridge Group.
It was just about a year ago that I asked the question, “Is home ownership a good idea?” The hook for the post was a film produced by the Economist that pointed out the cost of the big subsidies that support the single-family housing market, a problem laid bare by the collapse of the market in 2008. Then there are the long-term costs to families that find themselves immobilized by the commitment to pay down a mortgage, and one I pointed out, that housing value and generational wealth are dependent on inflation in the housing market. When prices are high, people paying mortgages win with higher property values but at the expense of others who have to rent. What about alternatives like cooperative ownership?

First, cooperative ownership is not necessarily a radical communitarian concept. Real Estate Investment Trusts (REITs) essentially turn the ownership of land and improvements into a cooperative venture. A trust buys land, divides that land into shares that can be bought and sold, then runs a business like a storage facility, for example on the land, and shareholders reap proportionate gains both from funds from the operations of the business and the appreciation of the land. The advantage of this form of land ownership is that the shares are liquid; that is, if I own $10,000 worth of the property, I can get my value out when I sell those shares without having to putt the land up for sale.

Over a decade ago, I imagined a similar venture for neighborhoods that were upset that a beloved café or neighborhood spot was being bought for development.

“What if all of us pooled our resources to buy real estate and develop it ourselves? Imagine 1200 people in Seattle each contributing $1200 (about the same as buying 1 espresso drink a day for a year) to a Neighborhood Real Estate Investment Trust. That would generate more than a million dollars ($1,440,000) that could be applied to the purchase of that great building with the coffee shop. And if the property is managed well, the funds from operation and increases in equity over time would mean than initial $1000 investment would gradually produce a return, money that could be put back into buying more iconic properties.”

A couple of years ago, in an analysis of various kinds of community-based ownership models, Brookings used the term Neighborhood REIT to describe what I was proposing.

But what about homeownership. I asked Tawan Davis, Founder and CEO of The Steinbridge Group, about cooperative ownership and whether it could be part of what he calls a “second New Deal.” Davis has focused his business on rehabilitating older homes and putting them back into service and trying to close the gap in homeownership between Black and White households. Part of his effort is to “catalyze the land,” allowing families to put land to work for them.

Davis points out that co-ops, a model that allows families to buy into share-based ownership of an apartment building, “created New York City’s homeownership class, and have passed tremendous wealth between generations.” Those co-ops can stay more affordable because shareholders are capped at what they can sell for. While the value of the property goes up, a “cash out” is limited by design. That means the seller walks away with some of the benefits of appreciation, but succeeding families get the benefit of a lower buy in. One group, NASCO, has a useful rundown of various forms of housing co-ops.

Davis sees expanding the cooperative model as complicated and “addressing these complexities through legislation, taxation, and balance sheet support without necessarily requiring direct taxpayer dollars.”

One proposal is on the table, HR 7697, Affordable CO-OP (Collective Opportunities for Owning Property) Act, sponsored by Representative Jamaal Bowman, a Democrat from New York. That bill would direct, Housing and Urban Development (HUD) to “establish a program to provide zero interest loans to nonprofit and public sector entities for the pre-development, acquisition, development, rehabilitation, or conversion of buildings into limited equity cooperatives.”

I think this is a great idea. Have I a become a communitarian or maybe even a communist of some kind? Not really. When I wrote about the opening a debate about whether homeownership is still a good idea, I pointed to the disparity between Black and White households in ownership of their own homes, saying then that

“Engaging on a sustained conversation about homeownership would require addressing the ways in which regulation, subsidies, and the deliberate combination have possibly made life more difficult for many even while others have prospered.”

Families of color are disproportionately poor which results in an ongoing struggle to pay bills which often get paid late which hurts credit scores. When risk is assessed by how much money a family has, the new red line is poverty as opposed to geography. The National Association of Realtors found that “U.S. homeownership rate increased to 65.5% in 2021, the rate among Black Americans lags significantly (44%), has only increased 0.4% in the last 10 years and is nearly 29 percentage points less than White Americans (72.7%).”

Cooperative ownership could provide families who are working and earning money apply that toward ownership in a way that spares them from having to struggle to get and pay for a mortgage. As I have researched cooperative ownership, I have found resistance to it anecdotally; what does a shareholder in a cooperative really own? Where’s the collateral? How can loans be made for this model when the bank can’t take anything back?

Well, that’s why HR 7697 is a worthwhile experiment. A person with a mortgage doesn’t, in any sense, own their own home. A family with a mortgage can only recover their equity if the balance left on their loan is exceeded by the what the market will bear. With cooperative ownership, this isn’t a problem since after operations and costs, each person paying into a cooperative gets to keep a portion of that equity, a value that isn’t entirely dependent on the market.

In the end, capital projects are expensive and have to be paid over time. Housing is expensive and risky to build, and mortgages have been backed to pay for them with low interest loans for almost a century. It is time to give cooperative ownership models the same kind of privilege.

Read the full article at Forbes.