Home Ownership Alternatives

There have been a few posts at Atlantic Cities considering the "forever renter".  The subprime crisis has caused a major reevaluation of the risks of home ownership.  In a world where housing prices are not guaranteed to go up forever, does it make sense to leverage yourself so heavily on a single investment?  If stable "organization man" careers are replaced by constant change, does it make sense to tie yourself down to one location?

While it would seem the new economic reality is stacked against homeownership, there are still some non-economic downsides to a life of renting.  Emily Badger writes about a few of these concerns, explaining the non-economic indignities that renters suffer.  There is a psychological toll to not being able to paint the walls or hang paintings on nails, and a huge psychological benefit from the feeling of owning the space where you live.

I think it's important to distinguish between the economic and psychological side of home ownership vs renting. Some of the comments explain alternative agreements between landlord and tenant, which is a completely non-economic consideration.  It's interesting to think about how much of the landlord/tenant relationship is culturally determined, and how this can mitigate the feeling of missing out on home ownership.

There are separate economic considerations however.  Home ownership is partially an investment, and since a house by itself is technically a depreciating asset, the investment is in the neighborhood.  Home owners benefit from an improving neighborhood, while renters get priced out.  Home owners care about maintaining their neighborhood and are incentivised to become active citizens, while renters would experience any positive changes as rent increases.

I've considered this situation before, and have always wondered why housing as an investment can't be decoupled from your home.  I've thought of a few plausible alternatives to the standard model of home ownership we have in place today.

Home Ownership as a Completely Flexible Share-based Equity Investment

If I would like to invest in my neighborhood, why is my only option to leverage myself and buy a house?  Amanda Erickson writes about NYU professor Andrew Caplin's idea of housing partnerships, which I believe partially touches on this idea.  In my opinion he still seems to frame his idea as a way to invest in a fraction of YOUR home, along with the help of an institutional investor.

Whenever I've considered this sort of option, I've thought it should be framed as an investment for the occupant as well.  Buying shares in your house is a hedge against rising rent: as rents go up, the value of your investment will go up as well and partially offset the rent increase.  Viewing it in this way is key in my opinion.  With this framing it would make sense to live in one rental building and buy shares in the building across the street.  It gives you full control over how much you want to put into your investment.  The decision on how much you would like to hedge your rent would be based off of so many new variables, such as the amount of time you spend in a particular place, and your future expectations on gentrification within the neighborhood.

This also allows a person to diversify their housing investments.  It's insane that we ever thought it was a good idea to leverage yourself on an investment in ONE house.  Perhaps you'd like to invest in several neighborhoods in your own city to protect yourself against the risk of housing prices in your home neighborhood declining in value.  Or, you can invest in comparable neighborhoods across different cities, to hedge against any city specific variation that might adversely affect housing prices.  The opportunities are endless.

Rent Stabilized Leases as a Commodity

I actually began thinking about this issue as a result of considering the effects of rent stabilization laws, and my first particular solution involved a revamping of this system.  Economists generally view this as they would any other price control.  The artificially low price of rent stabilized apartments makes them extremely hard to come by, the lower supply of market rate apartments cause all non-rent stabilized rents to be higher than they should be, and the fact that rents can't rise discourages investment by landlords into rent stabilized buildings.  Overall, it seems to be bad policy.

However, rent stabilization is a guarantee that your rent won't go up, which is the main risk you'd be hedging against in the housing share situation I described above.  This guarantee creates a sort of permanence that one would normally only get with home ownership.  Rent stabilized tenants have the same incentives as home owners to become active citizens and improve their communities.  In both cases they will reap the benefits of their improving neighborhood.

The economic distortions caused by the current implementation of rent stabilization disappears if these leases can be bought and sold.  Rent stabilized leases would be priced based on expectations of future increases.  Assuming a lease is being sold directly by a landlord in a previously market rate building, the landlord is compensated for his restricted lease.  The benefits of an improving neighborhood get moved from the landlord to the residents, which actually a better incentive system overall and avoids problems of "absentee landlords".

Over time, this will create an amazing variety of housing options.  As rent stabilized leases grow older an more out of touch with current market rates, their values will increase.  At any point, landlords could buy back their leases and create new ones based off of current market rates.  A wide spectrum will develop between pure home ownership and non-regulated market rents.  The first few rungs of the "housing ladder" will be lower, people can begin to buy less expensive regulated leases closer to the market price, and can work their way up to full home ownership over time.

Of course there are hurdles to implementing a system like this.  There is no clear answer to how to transition existing rent stabilized leases (in this case who "owns" the lease?)  Once in place however, it is a great way to keep the positives of rent stabilization such as stability and a renter's stake in a neighborhood, while getting rid of the market distortions rent stabilized leases causes.

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