Wealth-building potential of LIHTC tenant ownership: Evidence from Detroit

• In Event: Home Equity and Wealth Building

Abstract

Although it is more commonly associated with multiunit developments, the Low Income Housing Tax Credit (LIHTC) can be and has been used to finance the construction of single-family homes, particularly in Detroit. There are presently more than 1,200 single-family homes in Detroit financed in part through LIHTC, what are known as scattered site developments. Many of these homes have reached the end of their fifteen-year affordability compliance period. When this occurs managing partners can provide existing renters an option to purchase their units, a process referred to as tenant ownership in LIHTC proposal documentation. 

There are numerous benefits to homeownership, including the potential to build wealth. However, in Detroit, wealth is not always positively associated with homeownership. Often, the single-family homes built through LIHTC are the newest homes in the neighborhood. Over a fifteen-year time horizon, therefore, homes in Detroit may depreciate. In this study, I explore the wealth-building potential of homes built through LIHTC to better understand if tenant ownership should be a more common feature of developments that reach the end of their compliance period. To do this, I used data on 405,033 residential property sales involving a warranty deed from the Office of the Assessor for the City of Detroit from 2011 to 2024 within a half-mile radius of each scattered site development in Detroit. Although there was considerable variation across sites in the volume of property sales activity and the growth in property values over time, I find that had residents been given the opportunity to purchase homes when the developments expired they would, on average, have positive wealth accumulation by 2024. The amount of wealth accumulation was nearly in line with property appreciation across the entire city of Detroit. 

However, additional complications challenge the ability of tenant owners to make use of their home equity. For example, by law tenants are able to purchase these units below market, but once in their possession they cannot simply turn around and sell their new home. Deed restrictions may exist if the development also used HUD HOME funds during its construction. Similarly, in areas of the city with higher property values these tenant ownership conversions often involve down payment assistance in the form of forgivable loans. These limit the owner’s ability to the sell the home within five years without paying the balance of the forgivable loan. 

Even with such restrictions, tenant ownership provides an accessible pathway to homeownership in cities like Detroit, where the supply of affordable move-in ready homes is limited. The economics of tenant ownership may not be feasible in housing markets with higher property values and limited affordable rental units. For Detroit, though, tenant ownership can be part of a comprehensive neighborhood revitalization strategy that redistributes wealth to its poorest residents should property values continue to increase over the long term.

Author

• Patrick Meehan, University of Michigan
  Presenting Author