What if most people owned their homes free and clear, in other words, debt free? If we were renting, what if the rent were less than 1/2 of what it currently is because we only paid for upkeep and taxes, and not debt payments of the owner? With most of us paying 30-60% of our income in rent or mortgage, this would be a huge subsidy. Better than that, it would give us a sense of security. If we owned our homes, if bad times hit and we lost our jobs then we could settle back into our house, reduce our expenses and pull through. Maybe we could call it Home/Land Security 🙂
People are happier when they are not scared of losing something they can not afford to lose. Losing one’s house to foreclosure means your credit is a wreck, usually one is out of money, and you have to leave your house– a bad combination. Having to move apartments to a less expensive part of town possibly means changing jobs or schools or neighborhood friends that could support you. Starting over another notch down can hurt a great deal. This essay attempts to show a way to really own our homes.
The key to home security is to pay a small part of our income for our housing. That way when we have a dip in our income we do not have to leave our home.
At this point, the reader might be saying: “well that would be nice, but that is just not my reality.” And unfortunately, that is correct, that is not most people’s realities. So we need a new reality. We need to fix a system, or we need a new system, in which our housing is not a dominant cost in our lives. How do we do this? Lets find the cause.
The cause is perpetual debt financing of housing. Let me explain. The rent or mortgage we are paying is mostly interest payments on debt. This is because most mortgages are for 30 years, and most Americans move before 7 years. When they move, they get a new mortgage that resets the 30 year clock, and they start paying interest again. The United States government encourages us to just pay interest and never own by giving a generous tax deduction called the Mortgage Interest Deduction. If we are renting, then most of our rent is going towards the owners mortgage, so again this is just debt financing of housing.
It is perpetual debt payments because people do not do what our ancestors did: build a house as we could afford it, and then pass it on to the children. We now move and the only way we could afford to buy a house is to take out a mortgage. A mortgage we are very unlikely to ever pay off.
Even we were the statistically odd ones that does pay off their mortgage, once the house is sold, it will likely be sold to someone that can not afford to pay cash for it and it will again be a debt burden to someone. Requiring that people not move for 30 years and pass on their house to their children does not seem like a good solution. Lets try another.
What if any particular house is paid off once and then stays paid off? What if we fixed the system such that a mortgage, if one exists, is passed on to the next owner on the same terms until it is paid off, and then a new mortgage can not be placed on the house? Then owner of brand new house would slowly pay off the cost of building of the house, and once that is done, then all subsequent owners would just pay for the upkeep. The advantage is that the cost of ownership would be much less and stay low forever after. The disadvantage is that the owner does not then put extra money into a speculative investment that then might pay off (or might not depending). Fortunately there are many other ways to speculate with the money that would be saved from paying mortgage interest.
This would mean that those of us living in 50 year old houses would not pay for the interest and principle of the house. This would mean that a house would not be an investment for the owner, but rather it would be a place for the owner to live in security.
The original builder of the house would pay the construction costs through a 30 year mortgage as they do today, presumably because the banks would make sure the government does not take away this bonanza system for them. But those that come later do not have to refinance the house as if it were brand new when it is indeed a 30 year old house.
How do we get there?
Given that almost everyone is up to their necks in debt, how do we change this system? If we could get cooperation from the government, it would be must easier: first take away the mortgage interest deduction tax credit system, but even this is unlikely because so many people profit from it. So if we assume we will get no help from the government, can we still get it to work?
Maybe there is an incentive to those that purchase or already own apartment buildings and homes to commit to passing on the mortgage and not putting on new debt. The mechanics of how one prevents any future owners from putting new debt on the building is doable I am told by lawyers, so lets assume that it is possible.
In fact there are those that take the debt off of houses and keep them off– such as universities sometimes for their faculty and churches for their pastors. These are organizations that think long term. Is it possible to find incentives for individuals to also think long term where the benefits will come to those that come after them? I believe there are.
One incentive can be a lower cost to purchase the house in the first place. An informal poll by Jordan Modell, who is exploring setting up a credit union for the Internet Archive found that if one were offered a 20% discount on a house then people would give up the possible future upside on selling the house. This 20% might come from a community foundation could see it as in grant for the future, or even structure it as a long term debt that gets paid back as an extension of the mortgage.
Another incentive could be to a foundation that wants to endow an organization or a set of organizations with inexpensive housing for their workers such as teachers or workers in public benefit non-profits. This way a foundation could do a cash calculation to find that this form of investment is an enduring way to benefit a cause that could rival putting an endowment in the hands of investors.
There could even be some people that just decide that it is the right thing to do, and put this “no new debt” restriction on their property voluntarily. Maybe the house or apartment building could be named after them forever as they are giving a gift to all future residents. This, I believe, can be tax deductable if the entity that will watch over the “no-lien” restriction is a non-profit and therefore could be seen as a donation to that non-profit.
The government could help by taking away some of the bank benefits like the mortgage interest deduction which helps prop up house prices, or even offer a tax benefit for those that donate any future upside on their home investment. But we do not have to wait for the government to start getting rid of debt on our houses once and for all.
The point is– there are ways that people can own their own homes, really own them, and have the security that comes with that.