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Imagine the following hypothetical scenario that plays itself out time and time again across the country and right here in the city of Muncie.
Ten years ago, Nancy bought a house in Muncie with substantial public assistance. The city used funds from the Community Development Block Grant (CDBG) to acquire blighted property and prepare a site for redevelopment.
This land was then sold to a developer at a much reduced cost for the construction of housing that will be sold to low- and moderate-income (LMI) households in the city. Nancy was a beneficiary of such public sector commitment.
In addition, when Nancy applied for a housing mortgage, because she is a low-income single mother, she received $7,000 in down payment assistance from the city. By participating in the city’s home ownership promotion program for LMI households, Nancy was required to remain in her house for at least five years after purchase. Thereafter, she could sell her house without restrictions.
In 2006 and just before the real-estate bubble burst, Nancy fell in love with a man from another state and decided to sell her house and move to join her fiancé. At the time, she had owned her house for seven years. She listed her house at its market price of $100,000, an increase of almost 20 percent over the purchase price of $83,000.
Thus, Nancy pocketed close to $17,000 from the sale of her house that resulted from the equity build up. Since she met all of the requirements of the subsidy program, there was no requirement for her to pay back the down payment assistance that the city provided to her when she bought the house. Thus, the public could not recapture the subsidy for use in supporting other low-income households.
At the same time that Nancy was selling her house, Megan divorced her husband and was looking for a house to buy. As a person with low income, Megan would have benefited from buying Nancy’s house but the listed priced of $100,000 priced her out of the market.
To enable Megan to buy Nancy’s house, the city would have to now subsidize Megan with an amount in excess of what it previously provided to help Nancy to become a homeowner. After all, Nancy is no longer obligated to sell her house to a low-income beneficiary. She has already met all the retention requirements by the city and is now free to sell her house in the open market. Nancy’s house is no longer affordable to low- and moderate-income households at its listed price.