Innovating CLTs in Houston

Houston is among the fastest-growing metro areas in the country, and despite its reputation for affordability, it’s also one of the places where Black residents are hardest pressed by gentrification, and at highest risk for displacement, even from communities founded and built by Black residents.
May 20, 2022
Stuart Yasgur
Stuart Yasgur
Economic Architecture
Andre Perry
Andre Perry
Senior Fellow
Brookings Metro

Last year, the net population of the Houston metro area grew by 250 people[ii] every day, as people flocked to the area seeking job opportunity and affordable neighborhoods. But from March 2020 to March 2021, home prices grew 16%[iii], pricing many Houstonians of limited income out of the market.

“Everybody has this idea of Houston being super affordable,” says Ashley Allen, CEO of Houston Community Land Trust (HCLT), one of the fastest growing CLTs in the country. “People think if you move to Texas, you automatically get a huge house with a huge yard as soon as you get here. The reality is that those houses in once affordable communities are no longer affordable. People are going to be displaced.”

Community leaders in Houston’s Black neighborhoods such as the Third Ward and Independence Heights had known for decades that because of their central location they would eventually become targets for gentrification. In fact, at various times they had proposed community land trusts as a way to counter anticipated displacement pressures.

But by the time the current mayoral administration took office in 2017, gentrification of Houston’s Black neighborhoods wasn’t just feared, it was well underway, and those communities were increasingly losing Black residents. In 2018, the City established the Houston Community Land Trust (HCLT), which partners with the Houston Land Bank to build quality, affordable single-family homes on City- owned lots. Newly built three-bedroom homes in the program start at just $75,000.

The homes are purchased with 30-year fixed mortgages. HCLT works with community partners that provide homebuyer education programs, and can help prospective buyers who need to raise their credit score to 620 or better to qualify for a loan. But as Allen is quick to point out, the widely held notion that lack of education or financial literacy is what prevents Black people from owning homes is a fallacy that serves to justify and perpetuate low rates of Black homeownership.

“In a lot of programs, the buyers would do the work, go to the homebuyer education classes, and get their credit together,” Allen says. “They get super excited, save up their down payment, then they go to a bank and they’re only approved for $100,000 when there are no homes in that price range. So they get discouraged. They think, ‘Why did I take this class? Why did I save this money? I did the right thing, I go to work every day. But I still can’t buy a home.’”

The mismatch between available loans and available homes is an obstacle to homeownership which is baked into mortgage and housing markets. While homebuyer education programs are important, they do nothing to address this structural problem, which can’t be blamed on buyers’ lack of financial literacy.

That’s why HCLT also conducts lender education, working with banks to help them understand how underwriting CLT mortgages is in their interest. In fact, they are lower-risk than traditional fee-simple mortgages. CLT purchase prices and monthly payments are below market, so loan principals and default risks are lower. HCLT also builds in foreclosure prevention measures, such as a right of first refusal for the trust to step in and assume the loan in the unlikely event of a default.

The approach has proven effective at mitigating the disconnect between available loans and available affordable homes. Working with both banks and buyers, today HCLT has helped 62 applicants obtain mortgages and purchase a home, scoring a much higher success rate for qualifying than most other affordable housing programs. This is one example of a data point indicating CLTs are addressing a structural problem, in this case the obstacles to Black homebuyers qualifying for loans, and beginning to move the needle away from the status quo toward solutions.

Another structural problem is the limited reach of many CLT programs, since they can only build so many units, often concentrated in a specific area. Typically, it’s the units themselves which attract prospective buyers to CLT programs. For example, under its New Home Development Program, HCLT acquires lots owned by the Houston Land Bank in gentrifying neighborhoods like the Third and Fifth Ward, Sunnyside, and Independence Heights, and builds affordable units on them, which then brings homebuyers to the Trust to inquire about buying them. But an alternative HCLT program called Homebuyer Choice flips that equation. It lets homebuyers with limited income find a home they like in any neighborhood, initiate the purchase, then bring the Trust in to complete the transaction. Such “buyer-initiated purchases” are a further evolution in the CLT model that could help overcome its limitations.

Buyers in the program can choose any home anywhere in the Houston metro area, and as long as it meets certain criteria, HCLT will subsidize the purchase with up to $150,000. Once the owner buys it, the home becomes a permanent part of the Trust, whose mission is to keep it secure and affordable. That way, the Trust’s holdings aren’t limited to City-owned land in certain neighborhoods; they can expand throughout the metro area, and HCLT’s affordable housing portfolio can grow rapidly. Typically, it takes three years from incorporation for a CLT to achieve its first home sale. Now entering its third year, HCLT has 62 homeowners as of the end of 2021, and is on track to grow its portfolio to 150 homes by mid 2022.

“A lot of CLTs just build their own homes,” Allen says. “We don’t have that luxury here because the market is moving so fast. We also have to use the homes that are already available on the market. What’s helping us get more homes quickly is subsidizing what’s already there.”

Critics may argue that a Homebuyer Choice subsidy of up to $150,000 is an expensive proposition for one home, but Allen says, “it’s not if you know you never have to put more [subsidy] money back into that property again. In other programs, families may get $30,000 or $40,000 in subsidies to buy a home, then in 10 or 20 years they can sell it at market rate, and it’s no longer affordable. At that point, you’ve just lost your $40,000 investment.”

Allen is referring to Houston’s earlier Homebuyer Assistance Program, which predates HCLT. It gives homebuyers a one-time subsidy up to $40,000, but since housing prices are rising so fast, in many cases that $40,000 subsidy won’t bring the cost of a home down enough for limited income buyers to afford it. And since the subsidy doesn’t do anything to change the underlying market structures driving prices up, subsidized properties can be resold at market rates, so whatever degree of affordability the subsidy confers may not last long.

The Homebuyer Choice program on the hand offers more than just a bigger subsidy; it offers a different form of ownership that keeps the home secure and affordable permanently.

That not only helps lower home prices and barriers to homeownership for Black buyers, it also helps fight housing shortages driven by price distortions. HCLT limits appreciation of the home to 1.25% annually, which removes the incentive for speculation. In addition to that modest upside, keeping homes affordable also helps homeowners build wealth in other, positive ways.

“People are able to live comfortably because they’re not paying more than 30% of their income on housing costs,” Allen says. “They are able to put their extra money into other forms of wealth building, put more into 401ks and college funds, and pay off medical bills and student loans. If you’re looking to make money off your home, if you’re using it as your main wealth building tool, this is not the program for you. But if you’re looking for affordability so that you can build your credit and have more space to create wealth, then this is for you.”

HCLT is working on ways to apply the same principles to commercial real estate, green spaces, and eventually, multifamily housing. “We need affordable rentals, since not everybody is ready to buy and not everybody wants the responsibility of homeownership,” Allen says. “We want to make sure that there’s affordability for those people, too, and multifamily may be another way to do that.”

The City of Houston recently floated $52 million in bond funding to help HCLT finance sales of 400 affordable units by 2023 — the biggest public financing of CLTs to date. This year HCLT will kick off a campaign to raise another $88 million to reach 1000 homes in the next six to seven years. That’s an ambitious goal, but it’s still only about 5% of Houston’s estimated need, which is at least 20,000 homes.

Meanwhile, growing recognition of CLTs’ potential in Houston is also prompting policy shifts that have important ramifications in their own right. The Texas State Legislature passed a bill which just took effect, expanding the types of organizations that can establish CLTs in the state, and changing tax assessment rules so that CLT homes are assessed only on the basis of the subsidized purchase price and ground lease, not the market value of the property. That will lower taxes for CLT homeowners and support faster development of community land trusts in the state.

Prior to the change, Texas policy was in a sense aligned with real estate speculation, which drives up property values, property taxes and tax revenues. When higher property values result in higher taxes it pushes residents out of neighborhoods. The rising property values attract more speculative development and gentrification, which undermines affordable housing, housing security and Black homeownership, extracts value from Black neighborhoods, and drives displacement. But by taxing CLTs on a different basis from fee-simple ownership and real estate speculation, the State is shifting its policy and revenues to align with a more just, sustainable alternative. It recognizes that CLT properties don’t appreciate the way other properties do, and the reduced tax burden alleviates one of the most significant displacement pressures. More public investment and legislation supporting CLTs in Houston and Texas are in the works.

Houston Community Land Trust doesn’t operate at the scale of the need for affordable, secure housing, even though it is one of the nation’s largest CLTs. Even with substantial City funding and a major capital campaign, its current goal is to meet just 5% of local affordable housing needs. Other community development NGOs are generally much less well-resourced than HCLT, and scaling up the nonprofit sector as a whole to meet the need is a challenging proposition.

Yet there are other forms of impact besides scale itself. Structural innovations like the ones HCLT has introduced, such as working with banks, buyer-initiated purchases, or changing state policies, are powerful because they help create new market conditions for wider uptake of CLTs, shifting market structures and policies away from speculation and displacement, towards housing security, affordability and equity. They also demonstrate the ability to quickly and effectively put a large and growing amount of capital to work to address displacement. While HCLT and other innovative CLTs continue to face challenges and limitations in terms of reaching scale, they’re also continuing to evolve new ways of addressing them.

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