Diffuse Stimulus to Potential Address some Inequality
I post this idea for consideration and admit that it isn’t fully baked, but it is a “big idea”. Please poke holes or help mature the idea.
To quickly get to the point, here is a concept to be considered. Further justification or basis for the concept is provided in the subsequent paragraphs.
What if every Renter could purchase their current rented dwelling in a 30 year fixed rate government backed loan with 0% down? The landlord gets exited from a “shaky” business and gets a significant capital infusion for reallocation into the broader economy. The renter gets secure housing, an investment vehicle in which to build equity, and access to all federal housing crisis programs such as mortgage forbearance, etc. The community (and country) gets renewed vitalization in the form of an “ownership” culture.
The interest rate would be set at 3% and the equity the landlord/owner would receive from the sale could be defined using a number of methods (property tax assessed value, income / capitalization rate method, appraised value, etc.) Whatever the valuation method, it needs to be able to be transparently defined, based in data and broadly / quickly applied. It would not be acceptable, efficient or quick enough to have each valuation “negotiated”. The “sweetener” for the landlord… no capital gains tax on the entire value regardless of previous depreciation.
An interesting set of numbers would be:
# of Rental Dwellings in USA = 43,280,000 * Source: Statista – https://www.statista.com/topics/1618/residential-housing-in-the-us/
Median Home Price in USA = $174,600 *Source: Wolfram Alpha – https://www.wolframalpha.com/input/?i=average+home+price+in+usa
Assuming 78% of rent goes to landlord debt service (8% to Insurance, 6% to Property Taxes, 6% to Maintenance, and 2% to Profit), and using the Media Home Price as the “purchase price” of the rented home, the monthly mortgage cost would be $736 (30 year fixed @3%). Given the debt service is $736 per month, this assumes the rent would be $736/78% = $944.
Landlord’s sale price = $944 * 360(months) = $265,000
New Owner’s (previous renters) Mortgage Balance = $174,600
The Federal government / Treasury would need to fund the difference as a “liquidity grant” to the Landlords. The good news is that if the new owners pay off the entire mortgage over the 30 years, then the cost to the Federal government is $0. (roughly, without taking into account a lot of net present value, inflation, etc., just dollar for dollar).
So what is the aggregate immediate cost to the Federal government?
43,280,000 rental dwellings * $265,000 Average cost per dwelling (new mortgage $174,600 + $90,400 landlord “liquidity grant”) = $11,5 Trillion USD ($7.5T in 30 year notes repayable by new homeowners, and $4T in liquidity grants).
Maybe another $500B to administer the program over 30 years (if $17B per year couldn’t do it, I don’t know what could).
30 Year Cost to the Federal Government… $0 (or the $500B administrative fee)
Some Positive effects:
- Ownership culture takes over (everyone builds equity in their home and community)
- Landlords are exited from the landlord business with much liquid capital for reallocation
- Mortgage forbearance programs would now cover renters
- Helps alleviate a historical injustice perpetrated by Federal Housing Authority against people of color (“The Color of Law” by Richard Rothstein – https://www.youtube.com/watch?v=r9UqnQC7jY4
Some Negative effects:
1. Residential rental real estate investment is no longer an investable asset class
2. Potential to depress real estate market (what are terms restricting sale of houses financed this way? None? Pre-payment penalty?)
3. Complexity associated with townhouses, condos, apartment buildings (how to convert from between various ownership structures?)
4. What new bubble does all that liquidity now in the hands of Landlords, their banks, and other real estate investors create?
5. What about people in short term rentals in places they really don’t want to be long term?
6. What about cases where there are unrelated tenants, like roommates
Well… I thought Peak Prosperity would be a good place to put this idea out there. I hope it is novel enough to warrant an interesting discussion.
I have the Excel workbook that works out all of the financial models if anyone is interested.
Full Disclosure: I own my own home and 2 rental properties. I would take this deal and valuation model if offered to me. I think it would be good for my tenants as well.
Interesting ideas @slowandsteady and welcome aboard! I have some thoughts. First, how do you define “rental dwellings?” If you are talking single family homes, Bloomberg writes “most Americans own their own homes.” Does this mean most renters are in apartment complexes?
If most renters are in apartment complexes, how dependent on their landlords are they, for everything? Who will assume the responsibilities of the landlord? Building maintenance, roof, HVAC, Fire and Life Safety? Are the renters, by-and-large, ready and able to assume responsibility for well, everything? Insurance? Would that have to be mandatory? Not knowing how any individual apartment was a being maintained, would that push insurance premiums up?
These new property owners would now have more complicated tax situations? They would be responsible for all of their own maintenance costs. Would they be less likely or more likely to maintain their units?
What I’m really getting at is what if many renters don’t want to be homeowners?
Thanks for taking the time to read my post and comment thoughtfully. Sorry for the delay in my response.
I was defining “rental dwellings” as any “dwelling” (apartment, condo, trailer, attached home, detached home, etc.) for which the occupants do not own the dwelling but remit payment in exchange for the right to occupy it. As for the number of dwelling owners vs. dwelling renters, I used Statista (https://www.statista.com/topics/1618/residential-housing-in-the-us/). They use the term “housing unit”. They list these values:
Number Housing Units in the US: 139.64M
Number of Owner Occupied Housing Units: 80.68M
Number of Housing Units occupied by Renters: 43.28M
Statista does not break out what sort of “housing unit” each renter lives in. I do believe it is safe to assume it is a broad mix of apartments, condos, trailers, houses, etc.
Your point of renters being dependent on their landlords for many services such as buildings maintenance is valid. However, nobody said homeownership would be easy. In my experience when given the chance people “rise to the challenge”. The new owners will have to assume the responsibilities of being owners.
You bring up and excellent point with regards to some renters not wanting to be owners… that is their option, or perhaps this “buy-out” concept applies once to each citizen in the US and they can apply it when they want? It would surely add an interesting dynamic to the landlord-renter relationship if the landlord knew the renter could exercise that buy-out option at anytime (but only once in their lifetime).
Your other questions regarding insurance, maintenance, etc. all fall under the “rise to the challenge” argument. I believe it is safe to assume that most (not all) people take pride in things they own and communities in which they are “invested”. One of my hopes for this sort of program would be to inspire people to really take a civic interest in their immediate local area (apartment building, street, town, county, state, etc..) I really hope the ownership culture would change mindsets dramatically.
The new property owners would have all the same tax complications and maintenance costs and all the other badness of being a homeowner.
To answer your final question… “freedom” is probably the most important characteristic of American government. I do not think people should be forced to own their dwelling… but I also don’t think they should be forced into being a renter their whole life because of systemic issues from yesteryear.
In interesting idea but I would hope the government or another individual couldn’t force me to either buy or sell anything. Especially not a house.
If both parties agreed, perhaps the government back no interest no money down thing but in some respects that is how we got into the 2008 mess. A bunch of people bought a bunch of houses they couldn’t really afford.
We rented for 17 years. No way would I have taken the deal. During that stage of our lives we didn’t want or need to be shackled to home ownership.
Property rights are a complicated topic. But in a nutshell, the government can always take your property. Civil forfeiture, imminent domain, property taxes, municipal liens, etc.
I think a key difference from 2008 is that the transfer price is set… In 2008, pricing went crazy because of lower interest rates and wild property speculation. In the scenario I suggest, pricing is directly tied to the rent / maintenance cost of the property. It specifically and purposely is not allowed to “float” or be negotiated between buyer and seller. I think a systematic pricing systems such as I have suggested would actually act to stabilize pricing. One issue could be that landlords would be incentivized to raise the rent as high as possible in order to maximize their equity value in the property, however I believe this is already the case. Anytime you attempt to intervene in free market pricing the outcome could be bad or have unintended consequences, so this approach has that weakness.
I understand your personal preference for renting, however that preference cost you a lot of net worth. Over 17 years, you could have owned 45.5% of the property you rented… for the same cost of renting it (given the proposed scenario). That is a huge change in net worth when the median American net worth is a very low ~$68,000 (https://www.thebalance.com/american-net-worth-by-state-metropolitan-4135839) .
Part of the goal of this scenario is to help the lower 50% of earners in society build net worth. It may not be easy, and there will be trade-offs such as maintenance responsibility, but the effect of home-ownership on net worth is significant! Beyond net worth, I think an “ownership culture” would positively impact communities and families.