My hypothesis is that people without significant real assets are all worse off since the money supply has been debased. Peter Thiel's book talks about "secrets" that are not really hidden but overlooked .. if he were to interview me and ask what I thought was an apparent secret, I'd say it was this. I'm not even sure what one can do if one accepts this .. borrow money and hoard real assets? If you don't have money to begin with, how do you get the loans? So yeah .. defn worse off.
I'm curious about what you're saying, but I'm a little confused by your terminology. Are you using "debased" here to refer to inflation? And could you elaborate on Thiel's definition of "secrets" and what exactly the "secret" here is?
> My hypothesis is that people without significant real assets are all worse off since the money supply has been debased.
"Debased" in this context doesn't make any sense; it really only makes sense in commodity or representational currencies, not fiat money.
If you mean "devalued", then you really should say that.
But I'm not sure how the logic works, anyway, unless you assume that those without "real" assets also tend to have a constant and positive wealth of fiat currency, such that decline in fiat currency value has the same effect on their net wealth.
I really think there is, at most, a coincidence or possibly common cause here rather than the causal link you suggeset, which I don't see any clear rationale or evidence for.
The Federal Reserve would agree with part of your thesis, as zero interest rates and quantitative easing has caused significant asset inflation and those who are not asset holders have not benefited at all. Instead, many are now priced out of real estate, and have to pay high P/E valuations for stocks. Much higher risk to participate now.
So what are the viable options for those of us without significant assets? This is a real issue for me at this stage as even though I am a relatively high income earner I have been completely priced out of the real estate market. Rent takes up most of my salary making saving up for a decent deposit really dificult (I live in Australia).
The argument I have often heard is that access to credit can be an equalizer. Obviously using credit is high risk at these asset price levels though, but a mortgage is how most average people get to participate in asset inflation.
Also, the size of new homes has risen from 1600 in 1973 to 2600 today. It's not like all factors remain the same. You can drive through old neighborhoods near me with 1000 sq ft houses that sell for $40k because nobody wants a house that small. I'll bet a lot of the homes being built in Palo Alto right now are not small.
Elizabeth Warren addresses this trend in a paper showing most homes' square footage went up to add a second bathroom in comparison to the middle of the century. The cost of labor to add a bathroom and the raw cost of the materials in relation to that low cost house is probably also not worth it either because if we're talking $40k houses I would heavily bet that the property is in an area with no non-minimum wage jobs within reasonable commute distance nor retirees that need income.
> You can drive through old neighborhoods near me with 1000 sq ft houses that sell for $40k because nobody wants a house that small.
How closely have you looked at those $40K houses? I've seen a handful of sub-$100K smaller houses listed in my region, but they're wrecks; they'd need a massive amount of work to get anywhere near the comfort and safety level of a modern, well-maintained house. They're basically the house equivalent of buying a $500 car.
> You can drive through old neighborhoods near me with 1000 sq ft houses that sell for $40k because nobody wants a house that small.
Sure, but a $40k house will need anywhere from $90k to $160k worth of additional repairs to be safe to inhabit.
And since that cost isn't in the equity, most people in most areas can't qualify to finance that. (A $200k mortgage is not identical to a $40k mortgage and $160k reno loan).
Assuming the lots are the same size, which they generally are in many areas (lots are resold), a 60% increase in house should be ~60% increase in price, not 4x or 10x.
> 1000 sq ft houses that sell for $40k
> because nobody wants a house that small
a 1000sqft house in Palo Alto would sell for >$400K just for the land.
It would be a "teardowns", and a $40 house+lot would be converted to a $300k 2600 sqft houses -- quite reasonable, so the explanation lies elsewhere (access to employment, entertainment, educations?)
I realize that this idea is dead in the water because it would require landlords to "give up" a stream of income. However, if we ignore that for a second and entertain a bit of wistful "what if" ...
What if we lived in world where real estate was not an illiquid investment, with extremely high barriers to entry?
What if the monies taken in rent actually accrued equity by some schedule?
What if you could move at any point without losing your equity?
Crazy ideas, I know ... but via example:
1. developer builds a house, has 100% equity.
2. new tenant moves in and starts paying "rent", building up equity.
3. Costs for repairs and maintenance have to be paid per your equity percentage (so if I've accrued 20% equity, I have to pay 20% of the plumber's bill while I'm living there).
4. When the tenant inevitably moves, they take their 20% equity, and are paid 20% of the next tenant's rent payments, while still paying 20% of maintenance costs ... this % of course decreases as the new tenant makes more payments.
This gives you the mobility to move from city to city to follow jobs, while avoiding the money drain that is renting (ie. paying someone else's mortgage). If a tenant stays in that property long enough, they will eventually reach 100% ownership of the property, they will have purchased your "shares" in the house. So it remains an investment that you can get returns from, but those returns do not last forever.
I know, it's a crazy idea; in fact, this is the first time I've ever told anyone else about it ... but I think if it can be structured right, it could change society forever since real estate is one of the areas that is increasingly unavailable to the "have nots", thus contributing to ever-greater inequality.
There are many rent to own plans out there, even had a friend do that with all his rentals. He had one in all the time I knew him renting his "terms" I thought were just fine.
However you also have to be very careful around this with regards to banking laws and even some local regulations will discourage it. The problem with taking your equity is that it likely is taxable an taxable on enough levels to make it not worth anyone's while.
Now taking you idea further, you have a developer/startup/etc that owns units across the country with a form of interchangeable ownership. I think the logistics might sink it and if the company managing it all ever went bankrupt you would come out on the losing end. I guess it would end up being a more equitable time share?
Tracking equity and liability on this sounds like an absolute nightmare. Once you've added an entity to abstract/simply the equity/liability situation, you end up with something that looks a heckuva lot like a bank and a mortgage on a condo/coop.
Islamic mortgages are exactly this. You have an incorporated entity (shares distributed between yourself and the bank) that owns the house and your "mortgage/rent" buys more equity from the bank. It's still just a mortgage structured to hide what it is. If you set this up with a "landlord" instead of the bank, it's the same thing and the landlord is still going to charge you a premium (aka interest) for assuming this risk, and assess your creditworthiness before entering into this kind of contact with you.
Or 3 month Euribor is now -0.281%, so with say 1.2% margin for bank the current interest would be 0.92%. Obviously with no guarantee for it staying that low.
That wasn't a comparison to the 30 year fixed mortgage, just brought up an alternative.
And this is not theoretical, the usual way to get a mortgage around here is Euribor with a margin for the bank added, practically no-one gets decades-long fixed mortgages.
The proposed alternative doesn't get rid of that. It just hides it in the rent cost. No one's going to hand someone a house and say "pay me back over 30 years without any interest" unless they're running a charity.
Making a transaction more complex doesn't change the fundamentals. You either save and buy, or take a loan out and buy, or you don't buy. Anything else involves some form of charity.
Mortgage rates are close to zero already. What scenario do you imagine would drive them even closer to zero? And in such a scenario, why would anyone bother making loans?
Market dynamics are not magic. If it's not profitable to lend money, no one will.
The only way I could see rates hitting zero would be if the government started charging interest on money sitting in banks. Such an event would not be a sign of good housing opportunities so much as a sign of significant economic struggles.
https://en.wikipedia.org/wiki/Islamic_banking_and_finance
"Sharia prohibits acceptance of specific interest or fees for loans of money (known as riba, or usury), whether the payment is fixed or floating . . . As of 2014, sharia compliant financial institutions represented approximately 1% of total world assets. By 2009, there were over 300 banks and 250 mutual funds around the world complying with Islamic principles and as of 2014 total assets of around $2 trillion were sharia-compliant. According to Ernst & Young, although Islamic Banking still makes up only a fraction of the banking assets of Muslims, it has been growing faster than banking assets as a whole, growing at an annual rate of 17.6% between 2009 and 2013, and is projected to grow by an average of 19.7% a year to 2018."
Islamic banks do not provide interest free money. They just use a variety of different legal structures so that there isn't anything explicitly called interest in the agreements. Usually involving the bank buying the asset and selling back to the borrower at an inflated price.
If you had $300,000 in the bank, would you loan it out to some Joe for a measly 3.25% interest? I sure wouldn't, even if God himself[1] appeared in a fire next to me and guaranteed this loan. There's better ways to spend your money.
The only reason the banks accept such a piddling sum is because they immediately sell the loan to a government-run corporation(or maybe skim the interest for a year or two).
In the 1800s before the government stepped in, you had to put 50% down, your interest rates were more like 11%, and while the loan was amortized over 30 years it ended after 5 years, so you'd have a 25-years balloon payment at the end. That's about what it would take for me to consider that loan worth it. The modern term for a loan that isn't sold to the government is a 'portfolio loan', and some smaller banks or hard money lenders will give it to you. Expect 1800s-style loan terms for an 1800s-style loan.
The only time I'd loan money out at 3.25% if I were expecting you to default, and wanted to get your 20% down payment for free when I foreclosed as the noteholder.
[1] Okay, I might actually take it in that case. But not because it's a good deal on paper.
"The only reason the banks accept such a piddling sum is because they immediately sell the loan to a government-run corporation(or maybe skim the interest for a year or two)."
Being ignorant of the situation, I went to fact check this statement and was blown away by how true it is. I'm flabbergasted at the amount of involvement the US government has in the mortage market. More reading if anyone is interested:
"Imagine if someone else would pay 100% of the up-front costs of building a house, eat most of the cost of maintaining it, assume all the risk associated with ownership and renting, and then charge me normal rent rates while also giving me equity for free! That sounds like a great deal!"
It's a cool idea but it won't work in areas where housing supply is scarce (basically everywhere). Renters are already perfectly willing to pay thousands of dollars a month for zero equity. Landlords have little incentive to offer equity in the underlying real estate to get people to move in, so they don't!
In places where housing is plentiful and there is competition you do every once in a while see "rent to own" terms where part of your rent payments can be credited towards a purchase, and typically the renter will need to buy an option to purchase up front.
Unfortunately, housing supply would have to skyrocket in order for landlords to be desperate enough to have to use your idea to lure tenants.
I think this could change the national dynamics. Try it in a place that people are not too keen to live in yet, like Detroit and lots of people would move to get equity. This would take pressure off of in-demand places, and perhaps force them to adopt this to keep up eventually.
Every lower tier location would have to adopt this to compete, if that happens, middle tier locations will start to adopt it, and if that happens . . .
It also incentivizes people being better renters. Why would you want to damage your own house, in fact, you'd want to invest in it.
If you want to buy real estate in small liquid increments, you can do that with REITs (essentially real estate trusts that trade like stocks).
I live in an apartment owned by one of the big publicly traded trusts, and have amused myself in the past by calculating how many shares I'd have to buy for the dividends to cover my rent. On balance there are other ways I'd rather invest my money though.
Part of being a free market is people can set up a business any way they like. For example, there are neither legal nor regulatory barriers to setting up a commune (communes were popular in the US around 1900). People can set up workers' cooperatives. And your idea can be done if you can organize a bunch of like-minded individuals to try it. You don't need to change society to do it. Just do it.
What would be the (say 3) biggest hurdles you see to kicking off that type of venture (and maybe give us hints as to how a freer market minimizes those)?
One would be the non-standard equity breakdown which might make getting a mortgage loan from a bank more difficult.
Another would be keeping people 'in the system' long-term, otherwise it doesn't really work (if the original landlord tires of it, what stops them from 'just reverting' to the old system?)
It's an interesting idea, but it'd be hard to test out.
There are multitudes of banks with different policies. There are multitudes of other ways to get capital. In the D community, we used Kickstarter to fund the first D conference, for example.
> what stops them
That's what contracts are for. Contracts are a central feature of a free market.
> Contracts are a central feature of a free market.
So, you don't think that it's a hurdle that your rent has to be split 20% to the previous tenant, 10% to the tenant before that, 15% to the tenant before that, 8% to the tenant before that, 33% to the tenant before that, and 20% to the tenant before that? Who is doing the legwork in tracking these tenants down? What happens when the combined 'equity' goes over 100%? When does the landlord bug out? Who wants to keep tabs on their 8% equity of a rental home that they occupied for a year five years ago, along with paying 8% of the upkeep for any repairs or administrative work? Who wants to chase up all the previous tenants and get them to cough up the money? How much time does that person waste if even one previous tenant won't pay (or can't)? If the original owner wants to sell the property, what happens to the tenants with equity? What if they have more equity than the original owner, can they force the owner not to sell? Can they force the owner to a reserve price? Does a new tenant have to make a contract with the owner and all previous tenants? Is there a new kind of corporate body to handle this new form of renting? Are the contracts around this new way of renting going to be easy enough for the general public to understand, or are they going to provide plenty of loopholes for sharks to operate?
I think that's enough to classify as 'a hurdle', and people need to be in the system long-term and at scale to figure out how it's going to work well. Hand-waving that problem away with "meh, contracts" doesn't solve the long-term issues.
None of those are barriers that the free market or the government throws in your path. For an unusual business plan, expect to have to put in the work to figure out the details.
The original question was "what are some hurdles to doing this?", with a secondary "how does the free market help solve them?". It wasn't "how does the free market (or government) stop you from doing this?".
I down voted you and here's why. https://en.m.wikipedia.org/wiki/Mondragon_Corporation
This is a strong coop in Spain. It is one of the most diverse. It is one of the largest corps in Spain. It is also Christian in origin. Given the general Christian background of the Western world, it's one of the most natural.
We are talking about the United States, not a free market. In the United States, the stated policy of the central bank (hint: free markets have no central banks that control interest rates and pick winners and losers) for the last 8 years is to inflate housing prices. The FED and the big banks still have trillions of dollars of worthless derivatives on their books that they have not "marked to market" because they are derived from mortgages on homes that are underwater. The FED has taken over 5 trillion dollars onto its balance sheet in the last 8 years in order to artificially inflate housing prices (not including off-balance sheet loans, guarantees, and other tangible efforts taken to prop up banks and home prices).
This is the opposite in a free market. In a free market, housing prices would plummet with demand and credit availability, and would reach an equilibrium with income. This is impossible in our centrally controlled economy that runs on debt service in which even a small bump in interest rates or a small drop in assets prices will cause the whole scheme to fall apart.
Edit: The Downvotes without replies are somewhat amusing. I can't decide if its out of ignorance of the financial system on the part of those who read the hacker news, or cognitive dissonance. I suspect a mix of both. I welcome anyone who thinks any of the above is inaccurate to chime in.
That is quite a good way of putting things in perspective about Fed and free money building up the asset bubble, which is only made worse by stricter zoning laws and NIMBY.
As far as downvotes go, HN leans left, that is not news, any conservative or libertarian views will collect the usual down votes. Strangely it happens in bunches too.
It isn't a left or right issue, its a reality issue. We in the USA do not have a free market, where prices are determined by market forces. Whether or not this is a good or bad thing is a completely different debate. The FED does not hide the fact that it buys MBS (mortgage backed securities) to prop up the housing market. This is the opposite of a free market (and only one of many ways the market is controlled). This isn't up for debate among members of the reality-based community.
>The Federal Open Market Committee (FOMC) directed the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York to purchase additional MBS and longer-term Treasury securities (see http://www.federalreserve.gov/monetarypolicy/fomccalendars.h... for the most recent FOMC statement). The FOMC also directed the Desk to maintain its existing policies of reinvesting principal payments from the Federal Reserve’s holdings of agency debt and agency MBS in agency MBS and of rolling over maturing Treasury securities at auction. The FOMC noted that these actions should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
I believe the standard "party line" on housing costs would be something akin to Sweden. Purchasing a property for the explicit purpose of renting it is de-facto barred. Its not illegal but must be approved by your local tenant/owner association (like a condo board or home owner's association). This has the net effect of raising rents, making it extremely difficult to rent in the first place, while keeping home ownership within reach for nearly everyone due to depressing any kind of housing bubble or gentrification through property acquisition and flipping.
The free market bit was irrelevant. You are being downvoted for arguing an irrelevant point. Weather free or not, communes are possible in the us, which is what you wanted.
There is no canonical free market. Free markets require enforcement of property rights (otherwise people can run around taking each others property). Once you have enforcement of property rights - there is some form of government. Once you start talking about all the various cases for property rights enforcement - you end up with various rules to try to manage fuzzy cases and protect property.
You could claim that it's not a free market with the set of freedoms or policies that you'd like to have implemented, but to claim that the US is not a free market just because the Fed has taken some action seems like a fallacy to me. (BTW I agree with you in questioning the wisdom of that particular set of Fed actions..)
How about being able to build taller buildings in order to support higher population densities in major cities?
Most cities in the US have all kinds of zoning regulations that prevent cities from reaching higher population densities: https://news.ycombinator.com/item?id=11918230. For example, there are quite a few livable cities in the world supporting > 15,000 per sq km, most cities in the US hardly reach half that amount.
This is definitely not a free market phenomenon; I am pretty sure that in a free market (or even a market with rationally determined, not NIMBY based regulations), there would be increases in population density of major cities in the US.
Just set up a corporation that issues shares according to these rules. You'll need to personally guarantee the loan for the bank, but otherwise they won't have a problem with it. You could also remove the bank, and say the builder has 100% equity at the start if you can get them to agree to it.
It seems like it'd be a better idea to continue paying rent and just buy some shares in an REIT with the difference in cost with rent and rent+shares. And let's be clear: You would pay higher rent in your scheme, so said difference is nonzero.
This is the right answer. As far as I can tell, the only reason to buy a home is to lock in a particular home for your family over time at a stable price, which this equity structure does not address. Otherwise, you can just invest in real estate in financial markets.
(Tax incentives skew these incentives towards ownership.)
>Otherwise, you can just invest in real estate in financial markets.
Most of the gains from active REI don't come from RE appreciation (which generally tracks the inflation rate nationally). The growth from REI comes from using a TON of leverage to purchase the assets (ie a mortgage) then getting someone else to build your equity for you (the renter).
Additionally real estate investors pursue extremely favorable deals, generally where the seller is motivated to use their built up equity to sell at a significant discount to what the remaining cost of their mortgage is. These distressed sellers are usually going through a divorce or potential bankruptcy (where getting a small amount of their equity value back is preferable to losing everything and destroying their credit via bankruptcy).
As you alluded to, this of course relates to real estate as a business. Not to standard home ownership (where you buy a property because you want it as a home, not because it is a good business investment).
Leverage is important, but leveraged bets can be made with financial assets too. Our laws make leveraged bets on owner-occupied housing attractive, but I don't think there's an inherent financial advantage to other kinds of investments.
This will probably get buried deep in the thread, but...
Lease to buy is a thing, more or less as you describe. However, it removes liquidity for both the buyer and seller (buyer cannot exit easily, seller cannot exit easily). As a result, mortgages are more popular and more-or-less functional identical.
Except the way lease-to-buy is usually structured is in favor of the landlord where the landlord usually still gets to keep the payments when the tenant moves out instead of opting for the purchase option. The vast majority of the time, the tenant will usually move out due to life circumstances anyway.
From what I've researched about Lease-to-buy, it is a strategy of charging higher rent.
There are rent to own schemes, although less flexible than what you are describing. The amount of money renters would have to spend to get a relevant portion of the equity would be substantial. Landlords aren't just going to start giving away capital for free.
The current Price-to-Rent ratio in SF is 45.88. So lets say your willing to pay an extra 50% of your rent to gain equity you would end up gaining about 1.1% of the units equity per year at market rates. This is somewhat unfair because SF has one of the highest price/rent ratios but 50% increase in rent is also very large.
With an average tenancy around 2 years most people are going to own extremely little equity while the property accrues all sorts of minority owners which would be nontrivial to manage.
The only real benefit I can think of is it provides some insulation against cost of housing increases but at the downside of exposing you to housing price decreases and trading cash for an extremely illiquid asset. Who is going to want to buy 2% of a house/apartment?
That's a good idea. It's called "Musharaka al-Mutanaqisa" and is a form of Islamic banking and finance.
"An innovative approach applied by some banks for home loans, called Musharaka al-Mutanaqisa, allows for a floating rate in the form of rental. The bank and borrower form a partnership entity, both providing capital at an agreed percentage to purchase the property. The partnership entity then rents out the property to the borrower and charges rent. The bank and the borrower will then share the proceeds from this rent based on the current equity share of the partnership."
So....you've basically described how the property market works today for the most part.
> What if we lived in world where real estate was not an illiquid investment, with extremely high barriers to entry?
It's not, about 70% of all people (in the U.S. at least) "own" or are scheduled to own their home. There's not an enormous barrier to buying property, you can even finance 100% of the property value in various ways so very little money is even required up front.
> What if the monies taken in rent actually accrued equity by some schedule?
This is basically how mortgages work. In general, some of the money you pay goes to the title holder to pay interest on the loan...this is effectively like rent except better, since you get some tax benefits for it. The difference goes towards buying the loan principle, which is effectively buying you equity in the property. Once the principle is paid off, you own all of the equity in the property.
> What if you could move at any point without losing your equity?
You can, you sell the property -- this is exactly how it works. The new owners effectively pay off your loan in one lump sum, you get pretty much the portion of the principle you paid off as equity, the organization providing your loan gets paid the difference. When you buy a new home, you can use the equity towards buying the new house so you have to finance less. In effect you move around your equity as you move around your house ownership. If you manage things well (it's up to you) at some point, you will own 100% of the equity in the property, in which case you will become the title holder.
Selling/buying a home is a bit more complicated than waiting for a lease to end and moving to a new rental property, but not by much -- it mostly just takes a bit of patience.
Let's look at your idea:
> Crazy ideas, I know ... but via example:
>1. developer builds a house, has 100% equity.
This is exactly what happens
>2. new tenant moves in and starts paying "rent", building up equity.
This is sorta what happens. When a person goes to "buy" a house, they typically engage a bank or some other finance organization who buys the home from the developer and then you pay your "rent" to the financial institution instead of the developer.
This enables the developer to turn over inventory quickly and continue building more houses rather than having inventory locked up for decades.
> 3. Costs for repairs and maintenance have to be paid per your equity percentage (so if I've accrued 20% equity, I have to pay 20% of the plumber's bill while I'm living there).
That's an interesting idea. Not how it really works of course, but an idea of shared ownership. To riff on this, if you default on your loan and the bank reclaims the property, they assume 100% of the maintenance costs. You'd need to control for people who want Cadillac everything throughout their house: Spanish tiles on the roof, gold plated pipes, top of the line appliances, etc.
> 4. When the tenant inevitably moves, they take their 20% equity, and are paid 20% of the next tenant's rent payments, while still paying 20% of maintenance costs ... this % of course decreases as the new tenant makes more payments.
I'm not sure I follow, if they take their 20% equity (to put into the next property) they wouldn't be entitled to receive any rent from the next tenant.
But if if a previous tenant leaves their equity with the property it sounds like then a person might end up with percentage ownership of tons of properties if they move around a lot.
Effectively your scheme describes that every property operates like a business with shareholders. Except the current executive of the property is whoever happens to move in. So you might end up holding equity in a property that somebody else burns down to the ground or uses it as a meth lab. But you would have no rights or controls over how the new tenant uses the property.
oh yeah ... the concept definitely has lots of unanswered questions :P
> I'm not sure I follow, if they take their 20% equity (to put into the next property) they wouldn't be entitled to receive any rent from the next tenant.
I think maybe I wasn't as clear as I could have been ... what I mean is 20% ownership here. So when they "leave", they're not removing that value from that property. They maintain ownership of that "20%", and reap the rewards until their share is ultimately bought out and dwindles to zero.
The corollary to that, is that they wouldn't have to take the value in order to finance their next tenancy ... if they could find another place to enter into the same kind of agreement, they simply move in and start paying there.
Here's a crazy idea that actually exists. In a handful of countries tenants pay something colloquial called "key money". It's usually a lump sum, say $150k on up, to a landlord. The landlord invests the money and makes what they can off of it and the tenant lives rent free. When the lease is up the tenant gets back their key money to take elsewhere.
that's really interesting, thanks for posting about it I'll look up more info :)
However, unfortunately in a scheme like this, the tenant would have to have 150k in the first place. I'm looking to find ways to lower barriers to entry so that one doesn't have to be rich.
Sorry for the slow answer, yes, they'd have to have the money up front. It works better and is more common in multi-generational households where they can pool their resources and savings across generations. There's a version where the deposit is much smaller (say 10k) and rent is still payed.
No one is going to "give up" anything - in a free transaction between two parties the terms are agreed by both sides.
Rents are up because tenants can afford to pay the rate to live there - ask any landlord if they want to charge more, or ask any tenant if they want to pay less. Both parties end up settling in equilibrium.
The price of rent is what the market can currently bear.
In your plan there are always those that will settle for less yield, or will take on a larger risk, but it has to be out of free will, not mandated by law
That can go OK, but the wishes of you and the developer may not align perfectly (the developer may want to spend $20,000 on improvements, to be split 50-50 between him and you, but at the movement you have only $5,000)
That gets worse once you move out. You effectively become a landlord, and your goals may no longer align with both those of the developer and the new renter.
If you want to use hire purchase for the second, third, etc. renters, too, things would get complicated fast. Say, there's a maintenance job of $10,000 to do. The second tenant doesn't have the money, the third one died a week ago, the fifth one married and divorced, the seventh one wants to spend money on other improvements, etc. Now try to get all owners to give permission to spend any money.
If you want to own something, I think it is easier to just buy one property or to invest in a developer that builds properties.
If renters wanted to pay more, they could probably have this deal with any number of landlords. It's not common because renters aren't looking to own a part of that house/apartment, they're just looking to get by until they can actually own one themselves.
How is it better for them to be forced to put money into that residence rather than in a savings account that'll go toward the residence they actually want to buy?
That's an interesting idea, but what you're describing basically sounds like a:
A) 0% down-payment mortgage
B) where you can stop making payments at any time, and get to keep your equity in the house anyway
The above obviously sounds like a sweet deal for the buyer, but put yourself in the shoes of a developer/home-owner/bank: Why would you agree to a deal like that? Why not just sell the house to someone who is willing to commit to a traditional mortgage and buy it outright? You will only agree to the above terms if the buyer is offering you significantly more money. But as a buyer, are you willing to pay significantly more money than you would have to pay under a traditional mortgage?
It sounds like what you really want is:
A) The flexibility and mobility that comes with renting
B) The ability to invest in real-estate in an incremental and liquid manner
There is already a solution that accomplishes both of the above! Just continue renting your house, and invest the rest of your money into REITs. This way, you get all the flexibility and mobility of renting, together with the incremental and liquid nature of REIT investments.
If the reason you're averse to the above, is that you don't want to "throw your money away in rent," that's a false misconception. When you buy a house and make mortgage payments, the fact that you get to "live in the house for free" is already baked into the price of the house. This is why mortgage payments (after amortizing the down-payment) is virtually always higher than renting the same house. Regardless of whether you choose to rent or buy, you're still "throwing away" the same amount of money regardless.
Is what you suggested capable of "working"? Sure. Any arrangement can be made to work, with the appropriate numbers needed to attract a counter-party. But is it going to generate anything of value beyond what we currently have? I doubt it. If you want flexible living arrangements, rent a house. If you want to own real estate, buy REITs. If your complaint with this suggestion is that rent is too high and REITs are too expensive, there's no alternative business arrangement which will solve that problem.
The beauty of owning tangible property is that banks will give you a loan for it, which makes the investment even better in an average economy. You get the dividends of a much higher investment, while only paying a fraction up front. I did some calculations here:
I've had similar thoughts, and they usually conclude with me thinking that a perpetual license from the government to own land and pay taxes is a bad idea, because it encourages this predatory rental behavior where no equity is accrued on behalf of the renter. They're literally paying something (usually a very large something) on a recurring basis for something that the owner paid for on a one-time basis, except for the taxes (which are typically passed on to renters anyway).
The endless payments for no equity to lease a thing which was paid for on a one-time basis is my biggest issue with private property ownership. There's no way in my mind to make it a fair system without some aspect of slowly gaining even partial ownership.
This is just a small part of a wider shift in the structure of our society. We are moving toward a future where a small minority of highly educated, highly skilled people will live in complete luxury and have their every need fulfilled at the push of a button on their smart phone, while the vast majority of less specialized average people will serve them through various menial services until even those jobs are automated.
Are we? As a highly educated, highly skilled person I live in destitution, while some baby boomer jackass collects free money for buying an apartment decades ago.
Rent - or, rather, the inflation of real estate value in cities - is entirely about transferring money out of the productive part of society. If you make your living with "education" or "skills", you're on the losing end of it.
House affordability seems to me one of the major issues in the US. (Along with high costs of college and Health)
It hurts families. But it also makes the economy less competitive. For example. It is hard to bring any manufacturing when you have to pay higher salaries that are barely high enough to pay rent.
Not only that. Because housing costs are high, people have less available income. They spend less money in other services like entertainment, dining out, etc.
So, it is a loose-loose. I don't even know if anyone wins. May be when you sell your house at the end of your life you win. /s
It depends on what area of the US you are in. In Western PA and the midwest, housing can still be found in decent neighborhoods at a reasonable cost. HSH did a study showing 27 metro areas and the cost to buy a house. http://www.hsh.com/finance/mortgage/salary-home-buying-25-ci...
For Pittsburgh, a $29k takehome is roughly $40-45k a year. That is in the $20/hr range. I know at one point, my salary was $51k/year and I was brining home $36-37k annually. I was working a standard office job that was not particularly exciting, but all I needed was to have a bachelors degree. If you have one adult working full time and another part time for an extra ~15k a year, you can live relatively comfortably in Pittsburgh, and I am assuming other medium sized cities in the Midwest.
The big costal cities (SF, NYC, LA, DC) do make it difficult to own housing, but almost every country has cities where it is more expensive to live.
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[ 3.1 ms ] story [ 181 ms ] thread"Debased" in this context doesn't make any sense; it really only makes sense in commodity or representational currencies, not fiat money.
If you mean "devalued", then you really should say that.
But I'm not sure how the logic works, anyway, unless you assume that those without "real" assets also tend to have a constant and positive wealth of fiat currency, such that decline in fiat currency value has the same effect on their net wealth.
I really think there is, at most, a coincidence or possibly common cause here rather than the causal link you suggeset, which I don't see any clear rationale or evidence for.
How closely have you looked at those $40K houses? I've seen a handful of sub-$100K smaller houses listed in my region, but they're wrecks; they'd need a massive amount of work to get anywhere near the comfort and safety level of a modern, well-maintained house. They're basically the house equivalent of buying a $500 car.
Sure, but a $40k house will need anywhere from $90k to $160k worth of additional repairs to be safe to inhabit.
And since that cost isn't in the equity, most people in most areas can't qualify to finance that. (A $200k mortgage is not identical to a $40k mortgage and $160k reno loan).
> 1000 sq ft houses that sell for $40k > because nobody wants a house that small
a 1000sqft house in Palo Alto would sell for >$400K just for the land. It would be a "teardowns", and a $40 house+lot would be converted to a $300k 2600 sqft houses -- quite reasonable, so the explanation lies elsewhere (access to employment, entertainment, educations?)
What if we lived in world where real estate was not an illiquid investment, with extremely high barriers to entry?
What if the monies taken in rent actually accrued equity by some schedule?
What if you could move at any point without losing your equity?
Crazy ideas, I know ... but via example:
1. developer builds a house, has 100% equity.
2. new tenant moves in and starts paying "rent", building up equity.
3. Costs for repairs and maintenance have to be paid per your equity percentage (so if I've accrued 20% equity, I have to pay 20% of the plumber's bill while I'm living there).
4. When the tenant inevitably moves, they take their 20% equity, and are paid 20% of the next tenant's rent payments, while still paying 20% of maintenance costs ... this % of course decreases as the new tenant makes more payments.
This gives you the mobility to move from city to city to follow jobs, while avoiding the money drain that is renting (ie. paying someone else's mortgage). If a tenant stays in that property long enough, they will eventually reach 100% ownership of the property, they will have purchased your "shares" in the house. So it remains an investment that you can get returns from, but those returns do not last forever.
I know, it's a crazy idea; in fact, this is the first time I've ever told anyone else about it ... but I think if it can be structured right, it could change society forever since real estate is one of the areas that is increasingly unavailable to the "have nots", thus contributing to ever-greater inequality.
However you also have to be very careful around this with regards to banking laws and even some local regulations will discourage it. The problem with taking your equity is that it likely is taxable an taxable on enough levels to make it not worth anyone's while.
Now taking you idea further, you have a developer/startup/etc that owns units across the country with a form of interchangeable ownership. I think the logistics might sink it and if the company managing it all ever went bankrupt you would come out on the losing end. I guess it would end up being a more equitable time share?
http://finance.yahoo.com/news/30-fixed-mortgage-rates-fall-1...
http://www.euribor-rates.eu
And this is not theoretical, the usual way to get a mortgage around here is Euribor with a margin for the bank added, practically no-one gets decades-long fixed mortgages.
Making a transaction more complex doesn't change the fundamentals. You either save and buy, or take a loan out and buy, or you don't buy. Anything else involves some form of charity.
Market dynamics are not magic. If it's not profitable to lend money, no one will.
The only way I could see rates hitting zero would be if the government started charging interest on money sitting in banks. Such an event would not be a sign of good housing opportunities so much as a sign of significant economic struggles.
Just one example.
Islamic banks still profit from loans.
Islamic banks do not provide interest free money. They just use a variety of different legal structures so that there isn't anything explicitly called interest in the agreements. Usually involving the bank buying the asset and selling back to the borrower at an inflated price.
The only reason the banks accept such a piddling sum is because they immediately sell the loan to a government-run corporation(or maybe skim the interest for a year or two).
In the 1800s before the government stepped in, you had to put 50% down, your interest rates were more like 11%, and while the loan was amortized over 30 years it ended after 5 years, so you'd have a 25-years balloon payment at the end. That's about what it would take for me to consider that loan worth it. The modern term for a loan that isn't sold to the government is a 'portfolio loan', and some smaller banks or hard money lenders will give it to you. Expect 1800s-style loan terms for an 1800s-style loan.
The only time I'd loan money out at 3.25% if I were expecting you to default, and wanted to get your 20% down payment for free when I foreclosed as the noteholder.
[1] Okay, I might actually take it in that case. But not because it's a good deal on paper.
Being ignorant of the situation, I went to fact check this statement and was blown away by how true it is. I'm flabbergasted at the amount of involvement the US government has in the mortage market. More reading if anyone is interested:
1. https://www.frbatlanta.org/banking/publications/financial-up... (Somewhat outdated but mostly good info)
2. http://blogs.reuters.com/bethany-mclean/2013/08/20/getting-g...
3. http://www.npr.org/2015/03/24/395119065/as-economy-rebounds-...
4. http://www.npr.org/sections/money/2015/04/21/401259676/who-o...
In places where housing is plentiful and there is competition you do every once in a while see "rent to own" terms where part of your rent payments can be credited towards a purchase, and typically the renter will need to buy an option to purchase up front.
Unfortunately, housing supply would have to skyrocket in order for landlords to be desperate enough to have to use your idea to lure tenants.
In demand places are in demand for a reason. San Francisco has palatable weather year round. Detroit gets pretty damn cold for about half the year.
Would you get some people moving to lower tier places for this? Probably. Would it be enough to actually have an effect on things? Probably not.
I live in an apartment owned by one of the big publicly traded trusts, and have amused myself in the past by calculating how many shares I'd have to buy for the dividends to cover my rent. On balance there are other ways I'd rather invest my money though.
"Apply HN: reinvent ownership" https://news.ycombinator.com/item?id=11454138
I'm more than willing to work on it.
Another would be keeping people 'in the system' long-term, otherwise it doesn't really work (if the original landlord tires of it, what stops them from 'just reverting' to the old system?)
It's an interesting idea, but it'd be hard to test out.
There are multitudes of banks with different policies. There are multitudes of other ways to get capital. In the D community, we used Kickstarter to fund the first D conference, for example.
> what stops them
That's what contracts are for. Contracts are a central feature of a free market.
So, you don't think that it's a hurdle that your rent has to be split 20% to the previous tenant, 10% to the tenant before that, 15% to the tenant before that, 8% to the tenant before that, 33% to the tenant before that, and 20% to the tenant before that? Who is doing the legwork in tracking these tenants down? What happens when the combined 'equity' goes over 100%? When does the landlord bug out? Who wants to keep tabs on their 8% equity of a rental home that they occupied for a year five years ago, along with paying 8% of the upkeep for any repairs or administrative work? Who wants to chase up all the previous tenants and get them to cough up the money? How much time does that person waste if even one previous tenant won't pay (or can't)? If the original owner wants to sell the property, what happens to the tenants with equity? What if they have more equity than the original owner, can they force the owner not to sell? Can they force the owner to a reserve price? Does a new tenant have to make a contract with the owner and all previous tenants? Is there a new kind of corporate body to handle this new form of renting? Are the contracts around this new way of renting going to be easy enough for the general public to understand, or are they going to provide plenty of loopholes for sharks to operate?
I think that's enough to classify as 'a hurdle', and people need to be in the system long-term and at scale to figure out how it's going to work well. Hand-waving that problem away with "meh, contracts" doesn't solve the long-term issues.
We are talking about the United States, not a free market. In the United States, the stated policy of the central bank (hint: free markets have no central banks that control interest rates and pick winners and losers) for the last 8 years is to inflate housing prices. The FED and the big banks still have trillions of dollars of worthless derivatives on their books that they have not "marked to market" because they are derived from mortgages on homes that are underwater. The FED has taken over 5 trillion dollars onto its balance sheet in the last 8 years in order to artificially inflate housing prices (not including off-balance sheet loans, guarantees, and other tangible efforts taken to prop up banks and home prices).
This is the opposite in a free market. In a free market, housing prices would plummet with demand and credit availability, and would reach an equilibrium with income. This is impossible in our centrally controlled economy that runs on debt service in which even a small bump in interest rates or a small drop in assets prices will cause the whole scheme to fall apart.
Edit: The Downvotes without replies are somewhat amusing. I can't decide if its out of ignorance of the financial system on the part of those who read the hacker news, or cognitive dissonance. I suspect a mix of both. I welcome anyone who thinks any of the above is inaccurate to chime in.
As far as downvotes go, HN leans left, that is not news, any conservative or libertarian views will collect the usual down votes. Strangely it happens in bunches too.
https://www.newyorkfed.org/markets/ambs/ambs_faq.html
>The Federal Open Market Committee (FOMC) directed the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York to purchase additional MBS and longer-term Treasury securities (see http://www.federalreserve.gov/monetarypolicy/fomccalendars.h... for the most recent FOMC statement). The FOMC also directed the Desk to maintain its existing policies of reinvesting principal payments from the Federal Reserve’s holdings of agency debt and agency MBS in agency MBS and of rolling over maturing Treasury securities at auction. The FOMC noted that these actions should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
https://www.justlanded.com/english/Sweden/Sweden-Guide/Prope...
You could claim that it's not a free market with the set of freedoms or policies that you'd like to have implemented, but to claim that the US is not a free market just because the Fed has taken some action seems like a fallacy to me. (BTW I agree with you in questioning the wisdom of that particular set of Fed actions..)
Most cities in the US have all kinds of zoning regulations that prevent cities from reaching higher population densities: https://news.ycombinator.com/item?id=11918230. For example, there are quite a few livable cities in the world supporting > 15,000 per sq km, most cities in the US hardly reach half that amount.
This is definitely not a free market phenomenon; I am pretty sure that in a free market (or even a market with rationally determined, not NIMBY based regulations), there would be increases in population density of major cities in the US.
It seems like it'd be a better idea to continue paying rent and just buy some shares in an REIT with the difference in cost with rent and rent+shares. And let's be clear: You would pay higher rent in your scheme, so said difference is nonzero.
(Tax incentives skew these incentives towards ownership.)
Most of the gains from active REI don't come from RE appreciation (which generally tracks the inflation rate nationally). The growth from REI comes from using a TON of leverage to purchase the assets (ie a mortgage) then getting someone else to build your equity for you (the renter).
Additionally real estate investors pursue extremely favorable deals, generally where the seller is motivated to use their built up equity to sell at a significant discount to what the remaining cost of their mortgage is. These distressed sellers are usually going through a divorce or potential bankruptcy (where getting a small amount of their equity value back is preferable to losing everything and destroying their credit via bankruptcy).
As you alluded to, this of course relates to real estate as a business. Not to standard home ownership (where you buy a property because you want it as a home, not because it is a good business investment).
Lease to buy is a thing, more or less as you describe. However, it removes liquidity for both the buyer and seller (buyer cannot exit easily, seller cannot exit easily). As a result, mortgages are more popular and more-or-less functional identical.
From what I've researched about Lease-to-buy, it is a strategy of charging higher rent.
The current Price-to-Rent ratio in SF is 45.88. So lets say your willing to pay an extra 50% of your rent to gain equity you would end up gaining about 1.1% of the units equity per year at market rates. This is somewhat unfair because SF has one of the highest price/rent ratios but 50% increase in rent is also very large.
With an average tenancy around 2 years most people are going to own extremely little equity while the property accrues all sorts of minority owners which would be nontrivial to manage.
The only real benefit I can think of is it provides some insulation against cost of housing increases but at the downside of exposing you to housing price decreases and trading cash for an extremely illiquid asset. Who is going to want to buy 2% of a house/apartment?
"An innovative approach applied by some banks for home loans, called Musharaka al-Mutanaqisa, allows for a floating rate in the form of rental. The bank and borrower form a partnership entity, both providing capital at an agreed percentage to purchase the property. The partnership entity then rents out the property to the borrower and charges rent. The bank and the borrower will then share the proceeds from this rent based on the current equity share of the partnership."
https://en.wikipedia.org/wiki/Islamic_banking_and_finance
> What if we lived in world where real estate was not an illiquid investment, with extremely high barriers to entry?
It's not, about 70% of all people (in the U.S. at least) "own" or are scheduled to own their home. There's not an enormous barrier to buying property, you can even finance 100% of the property value in various ways so very little money is even required up front.
> What if the monies taken in rent actually accrued equity by some schedule?
This is basically how mortgages work. In general, some of the money you pay goes to the title holder to pay interest on the loan...this is effectively like rent except better, since you get some tax benefits for it. The difference goes towards buying the loan principle, which is effectively buying you equity in the property. Once the principle is paid off, you own all of the equity in the property.
> What if you could move at any point without losing your equity?
You can, you sell the property -- this is exactly how it works. The new owners effectively pay off your loan in one lump sum, you get pretty much the portion of the principle you paid off as equity, the organization providing your loan gets paid the difference. When you buy a new home, you can use the equity towards buying the new house so you have to finance less. In effect you move around your equity as you move around your house ownership. If you manage things well (it's up to you) at some point, you will own 100% of the equity in the property, in which case you will become the title holder.
Selling/buying a home is a bit more complicated than waiting for a lease to end and moving to a new rental property, but not by much -- it mostly just takes a bit of patience.
Let's look at your idea:
> Crazy ideas, I know ... but via example:
>1. developer builds a house, has 100% equity.
This is exactly what happens
>2. new tenant moves in and starts paying "rent", building up equity.
This is sorta what happens. When a person goes to "buy" a house, they typically engage a bank or some other finance organization who buys the home from the developer and then you pay your "rent" to the financial institution instead of the developer.
This enables the developer to turn over inventory quickly and continue building more houses rather than having inventory locked up for decades.
> 3. Costs for repairs and maintenance have to be paid per your equity percentage (so if I've accrued 20% equity, I have to pay 20% of the plumber's bill while I'm living there).
That's an interesting idea. Not how it really works of course, but an idea of shared ownership. To riff on this, if you default on your loan and the bank reclaims the property, they assume 100% of the maintenance costs. You'd need to control for people who want Cadillac everything throughout their house: Spanish tiles on the roof, gold plated pipes, top of the line appliances, etc.
> 4. When the tenant inevitably moves, they take their 20% equity, and are paid 20% of the next tenant's rent payments, while still paying 20% of maintenance costs ... this % of course decreases as the new tenant makes more payments.
I'm not sure I follow, if they take their 20% equity (to put into the next property) they wouldn't be entitled to receive any rent from the next tenant.
But if if a previous tenant leaves their equity with the property it sounds like then a person might end up with percentage ownership of tons of properties if they move around a lot.
Effectively your scheme describes that every property operates like a business with shareholders. Except the current executive of the property is whoever happens to move in. So you might end up holding equity in a property that somebody else burns down to the ground or uses it as a meth lab. But you would have no rights or controls over how the new tenant uses the property.
Further...
> I'm not sure I follow, if they take their 20% equity (to put into the next property) they wouldn't be entitled to receive any rent from the next tenant.
I think maybe I wasn't as clear as I could have been ... what I mean is 20% ownership here. So when they "leave", they're not removing that value from that property. They maintain ownership of that "20%", and reap the rewards until their share is ultimately bought out and dwindles to zero.
The corollary to that, is that they wouldn't have to take the value in order to finance their next tenancy ... if they could find another place to enter into the same kind of agreement, they simply move in and start paying there.
However, unfortunately in a scheme like this, the tenant would have to have 150k in the first place. I'm looking to find ways to lower barriers to entry so that one doesn't have to be rich.
The example I know the most about is:
https://en.wikipedia.org/wiki/Jeonse
Rents are up because tenants can afford to pay the rate to live there - ask any landlord if they want to charge more, or ask any tenant if they want to pay less. Both parties end up settling in equilibrium.
The price of rent is what the market can currently bear.
In your plan there are always those that will settle for less yield, or will take on a larger risk, but it has to be out of free will, not mandated by law
That can go OK, but the wishes of you and the developer may not align perfectly (the developer may want to spend $20,000 on improvements, to be split 50-50 between him and you, but at the movement you have only $5,000)
That gets worse once you move out. You effectively become a landlord, and your goals may no longer align with both those of the developer and the new renter.
If you want to use hire purchase for the second, third, etc. renters, too, things would get complicated fast. Say, there's a maintenance job of $10,000 to do. The second tenant doesn't have the money, the third one died a week ago, the fifth one married and divorced, the seventh one wants to spend money on other improvements, etc. Now try to get all owners to give permission to spend any money.
If you want to own something, I think it is easier to just buy one property or to invest in a developer that builds properties.
How is it better for them to be forced to put money into that residence rather than in a savings account that'll go toward the residence they actually want to buy?
A) 0% down-payment mortgage
B) where you can stop making payments at any time, and get to keep your equity in the house anyway
The above obviously sounds like a sweet deal for the buyer, but put yourself in the shoes of a developer/home-owner/bank: Why would you agree to a deal like that? Why not just sell the house to someone who is willing to commit to a traditional mortgage and buy it outright? You will only agree to the above terms if the buyer is offering you significantly more money. But as a buyer, are you willing to pay significantly more money than you would have to pay under a traditional mortgage?
It sounds like what you really want is:
A) The flexibility and mobility that comes with renting
B) The ability to invest in real-estate in an incremental and liquid manner
There is already a solution that accomplishes both of the above! Just continue renting your house, and invest the rest of your money into REITs. This way, you get all the flexibility and mobility of renting, together with the incremental and liquid nature of REIT investments.
If the reason you're averse to the above, is that you don't want to "throw your money away in rent," that's a false misconception. When you buy a house and make mortgage payments, the fact that you get to "live in the house for free" is already baked into the price of the house. This is why mortgage payments (after amortizing the down-payment) is virtually always higher than renting the same house. Regardless of whether you choose to rent or buy, you're still "throwing away" the same amount of money regardless.
Is what you suggested capable of "working"? Sure. Any arrangement can be made to work, with the appropriate numbers needed to attract a counter-party. But is it going to generate anything of value beyond what we currently have? I doubt it. If you want flexible living arrangements, rent a house. If you want to own real estate, buy REITs. If your complaint with this suggestion is that rent is too high and REITs are too expensive, there's no alternative business arrangement which will solve that problem.
https://medium.com/@sanchitgupta/investing-in-real-estate-7d...
The endless payments for no equity to lease a thing which was paid for on a one-time basis is my biggest issue with private property ownership. There's no way in my mind to make it a fair system without some aspect of slowly gaining even partial ownership.
Support your local YITBY group.
Median house sqft has increased - how do the numbers look if we compare not just median rent, but median rent per sqft?
Rent - or, rather, the inflation of real estate value in cities - is entirely about transferring money out of the productive part of society. If you make your living with "education" or "skills", you're on the losing end of it.
It hurts families. But it also makes the economy less competitive. For example. It is hard to bring any manufacturing when you have to pay higher salaries that are barely high enough to pay rent.
Not only that. Because housing costs are high, people have less available income. They spend less money in other services like entertainment, dining out, etc.
So, it is a loose-loose. I don't even know if anyone wins. May be when you sell your house at the end of your life you win. /s
For Pittsburgh, a $29k takehome is roughly $40-45k a year. That is in the $20/hr range. I know at one point, my salary was $51k/year and I was brining home $36-37k annually. I was working a standard office job that was not particularly exciting, but all I needed was to have a bachelors degree. If you have one adult working full time and another part time for an extra ~15k a year, you can live relatively comfortably in Pittsburgh, and I am assuming other medium sized cities in the Midwest.
The big costal cities (SF, NYC, LA, DC) do make it difficult to own housing, but almost every country has cities where it is more expensive to live.