Debt Free Housing

Debt free housing would cost a fraction, and probably a small fraction, of what most of us pay now, whether we own or rent.   As I argued before, most of the monthly cost we pay for our housing goes to finance fees rather than maintaining our houses.   Even if our houses or apartments are over 30 years old, and therefore should be paid off, they come back to be be refinanced, resold, second-mortgaged, or just profitable for the owner because they the prevailing rent assumes a debt burden.

How do we get to debt free housing in this current circumstance?   We now have houses that have artificially high prices because of the debt system , and we have people not paying off their mortgages because of 30 years is longer than they stay in their houses.   And furthermore, owners want to cash out because it is probably their largest vessel of their wealth.

So we have a puzzle– the tax and pricing system is built to support chronic and risky debt burdens that are perpetuated from generation to generation.     I will propose a system that breaks this cycle, one house or one apartment building at a time, that can permanently remove housing units from a debt burden and hopefully spread.    But it take some investment and patience, but mostly it requires wanting to give a gift to the future.

The fundamental idea is to pay off a house or apartment block once, and then keep it from being burdened with debt ever again.    This requires building long term entities that have at their mandate to have this long term view, then find low cost way to build these entities, and finally find people that would find this desirable to do.   This is not a new idea, and there are variations, but I will outline one way through this thicket that has some advantages.

Lets take an existing apartment block in a city that already has tenants, but is for sale.   Lets create an non-profit entity that has a specific charter to be a “public benefit organization” with certain covenants in it that ensure that it will stay on track.   This entity then buys and mortgages the property with a fixed rate 30 year loan with a 10% down payment.   I will get to who would be motivated to extend this money in another post, but lets examine the financial case for those that might want to.    Since prevailing market apartment rents are generally set to pay for such expenses, the rents can approximately pay for the mortgage.   If there is inflation, then the prevailing rents would rise relative to the fixed mortgage payment and then there is latitude to either lower the rents in our apartment block, or use the money for something else.    If there is deflation and rents fall, then there is a possibility of defaulting on the mortgage and losing the 10% down payment.  This a risk of default assumes we do not have an external source of money and lets assume in this case we do not, so this is a risk.    Since deflation is linked with all other housing there is great interest on the part of the government to not have this happen, as we are seeing in the housing crisis of 2007-2011– and they take efforts to prop up housing prices at taxpayer expense.   Without a major round of deflation, in 30 years, the mortgage would paid off and then there is an ongoing revenue stream that can be used in some way.   It is interesting to note, that this revenue stream would then be available forever after.

So after 30 years, and probably much sooner, the Public Benefit Organization that owns this apartment block can either charge under-market rent or spin off money for some purpose.    With a covenant to never get into debt again, and to never sell, this revenue stream or under-market rental properties can be available forever.

Who would be interested in investing in this way?   Who would benefit from creating debt free housing?    I suggest that there are groups of people, those doing the public good, those that have long term interests, that have these motivations.    Key to understand in this system, is that it does not cost much up front (maybe 10% of a housing unit), does not cost anything as we wait out the mortgage or for inflation to diminish the mortgage cost, and then the benefit is perpetual.

I will show examples of this system in action already, and how we can create a movement to do much more of this in future posts.