From an NYT blog post,
With the right financial vehicle, Mr. Rampell said, such a fund could invest to co-own houses in, say, pricey Palo Alto, Calif., making it easier for prospective home buyers to make down payments and reduce their mortgage burden. “They could own 10 percent or 15 percent of your house, so you don’t have to borrow as much,” Mr. Rampell said. “I think there’s a lot of room for more of those kind of new asset classes.”
Pointer from Tyler Cowen.
1. This is not the first time someone has proposed such an idea. In the early 1980s, with sky-high interest rates, somebody came up with the Shared Appreciation Mortgage, where you would get a lower interest rate from the lender in exchange for which the lender would get a percentage of the appreciation in 10 years or when you sold your home, whichever came first.
2. So what is the asset, exactly? I think of it as a second mortgage, with a variable interest rate that depends on the rate of appreciation of the property and on the size of what I would call the “discount,” because the third-party owner is going to pay less than $10,000 for a 10 percent share of a $100,000 house. Why? Because the third party does not get to live in the house and enjoy the implicit rental income. In the extreme case where a third party has 100 percent of the equity but for some reason pays the full $100,000 price. In that case, in exchange for giving up all the equity, the “buyer” would be living in the house rent-free!
3. There are no magic tricks in mortgage finance that make housing affordable to people who cannot save enough for a reasonable down payment. The only way to make housing affordable is for the price of homes to come down to where people can afford them. That’s true even in California, although folks there go through periodic episodes where they refuse to believe it.
“There are no magic tricks in mortgage finance that make housing affordable…”
Not least because if this actually worked exactly as described, the pool of buyers would expand at the margin and the amount of dollars available for purchasing Palo Alto real-estate would grow. And given that development in Palo Alto isn’t going to get any easier, house prices in Palo Alto would simply rise to match the increased demand. Leaving prospective buyers no better off than before.
Think of a stock share that pays a regular dividend. The prospective owner finds the share too expensive. The bank offers to buy part of the share, x%, but the individual will receive all dividends. Then the bank should pay x% of the ex-dividend price. What is the ex-dividend price for a house? It’s not trivial to figure it out. Will homeowners balk at the offer, not understanding the mechanics?
I still think that a simpler solution to the problem of occasional housing market crashes would be to require homeowners to purchase the equivalent of a put option with a strike equal to, say, 80% of the current house price. The strike price could be a function of the home buyer’s other wealth (i.e. ability to absorb such a negative shock). Why isn’t such insurance discussed? Not being in this field, I may be oblivious to a glaring problem.
The basic problem with this is that prices describe reality. Namely:
* Palo Alto has 3 jobs for every house
* IIRC, 16% of Palo Alto residents work in Palo Alto.
* The local infrastructure is completely inadequate.
* The only 1 of those numbers that might change in the medium-term future is the 3 turning into a 4.
* So 2/3rds of y’all need to trudge up 101 every morning. Oh, and outbid Google employees for the right to live in Mountain View and Sunnyvale while you’re at it unless you like a 90 minute trudge or have a boss who lets you come in at lunchtime.
Adding more money to the system will NOT lead to a supply expansion to pick up the low-hanging money fruit, it will just lead to even higher prices as ever more money chases after all the artificially limited supply of housing.
Which won’t actually solve the problem, and will lead to another 2008-type scenario.