LUCHA’s Homebuyer Seminar

Recently, PartnerOwn had the pleasure of taking part in a six-hour housing counseling seminar on a Saturday with twenty future home buyers.  The program was provided by LUCHA.  LUCHA is a nonprofit neighborhood housing agency serving the Humboldt Park, West Town and Logan Square neighborhoods in Chicago.  PartnerOwn wanted a glimpse at programs like these that have improved a borrower’s ability to stay current on her mortgage and are a great service to the local communities they support.

LUCHA home buyer seminar

LUCHA home buyer seminar

LUCHA’s seminar covered a wide array of homeownership: from financing the home purchase to monitoring energy usage.  We learned a great deal, and we also saw the need for better financing opportunities for borrowers since participants talked through issues of credit scores and down payment needs . We recognize that any new financing arrangement should be flexible enough to provide options for borrowers with different down payment thresholds or credit scores that do not reflect their financial situation.

The day began by enumerating the positive and negative aspects of homeownership.  The participants listed many “consumption” based benefits of homeownership, and the instructor suggested that purchasing the home is also an investment towards the end of the brainstorming session.

To acquire financing for their home purchase, all participants were interested in obtaining a mortgage.  The instructor provided tips for obtaining and maintaining a good credit score.  One participant was surprised that after paying off all of his credit card accounts and closing them, his score could be hurt because it lessened his credit history.  It made PartnerOwn wonder if there are better ways to determine a borrower’s ability to pay a mortgage, outside of using a credit score alone?  Research has demonstrated how the dependence on credit scores led to lax screening in the most recent housing crisis.

A mortgage lender spoke next about financing options that banks provided to borrowers.  It was a great opportunity for participants to learn more.  Many banks currently offer down payment assistance programs.  The banker also stressed that they did not want to “put borrowers in a position to fail” when making a loan given what has happened in these past five years.  Unfortunately, the banker did not discuss the risks that borrowers face, such as house prices decreasing in value or the possibility of being in negative equity.  This is surprising given that Zillow estimates that 30% of Chicago homes are still in negative equity.

Juan Linares, LUCHA’s Executive Director and a commercial real estate lawyer spoke next about legal considerations when going through the home purchase process.  He emphasized asking for more than the standard five day inspection period to make a decision because it can often be difficult to book an inspector and get the results in the contracted timeframe.  His insight was invaluable for all involved.

Juan Linares, Executive Director, LUCHA

Juan Linares, Executive Director, LUCHA

Next on the docket was a real estate agent.  The real estate agent spoke about the commitment one must sign and the small things agents can do to make sure that the purchase goes smoothly.  One anecdote was to specify the models of the appliances that would stay in the house since he once had a client end up with a rusty refrigerator that was switched into the home because the contract only specified a refrigerator.

A real estate appraiser and an electrical provider dug into the details of keeping up a home and ensuring that the home you buy is the right one.  LUCHA’s team then closed with advice for down payment grant opportunities available through state and federal agencies.  Most of the programs took the form of a loan at a higher interest rate than the mortgage itself.  While it is enviable to help borrowers overcome the down payment obstacle, it seems doing by encouraging more debt may not be ideal in the long run.

It was a great day for homeownership.  And we thank LUCHA for the opportunity to participate.  Stay tuned for more updates.  PartnerOwn is busy at work creating our financing solution for residential real estate and acquiring the resources to make it a reality.

The PartnerOwn Team

Missing the Point? Housing Industry vs. Housing Academics

By Dylan Hall, PartnerOwn Team Member

One fun debate to follow is the argument between housing industry and housing academics.  Most recently, the debate has centered on the mortgage interest tax deduction, which enables homeowners to deduct their mortgage interest expense as an itemized deduction on their tax returns.  This deduction typically helps out people with incomes greater than $100K and is not seen as a progressive tax policy generally speaking.

Housing debates tend to follow a common thread though.  Typically, academics encourage more renting and less government involvement.  People in the housing industry on the other hand “nobly” advocate for the person on Main Street who can benefit from tax breaks and subsidies and cite the benefits of ownership for communities.

We at PartnerOwn find these debates interesting, albeit sometimes confusing.  The academic viewpoint is one of telling consumers that homeownership does not make sense and to ultimately consider renting.  This ignores peoples’ stated desire to own though.  When PartnerOwn went to Chinatown in Chicago, we learned that people generally wanted to be homeowners.  They took out 15 year mortgages and paid them down as quickly as possible.  Housing was true wealth in their eyes.  They did not want to deal with the stock market, sure they owned their own businesses, but housing was something that was tangible and real, not a statement they receive in the mail every six months from Fidelity.  It is also in this neighborhood where PartnerOwn found the best community center that took care of people from children to senior citizens and was even awarding a cop for her commitment to the area for more than a decade.  Shouldn’t academics be advocating for better ways to finance ownership if they are worried about the financial risks associated with ownership, not just pushing people to forget about owning?

This is not meant to ridicule housing academics.  They are advocating a change of mind, taking on large businesses and the housing industry in favor of a better economic system that is less dependent on taxpayer involvement.   Most mortgages last 30 years and can be used for 97% of financing.  This contrasts with the Great Depression when mortgages were generally 50% of home value and lasted 3 to 5 years.  We have effectively stretched the limits of credit over the past eighty years.  Unfortunately, houses become more expensive when more people can get more credit to pay for and ultimately to compete for home purchases.  Housing industry advocates likely benefit from an increase in the money being made available.  Think of the nature of transactions and commissions at play for various stakeholders in the housing industry.  Less credit means lower prices.  Fewer deductions mean ownership becomes less lucrative.  Why wouldn’t any good business in the housing industry express a desire for federal money to be given to homeowners?

Now, as spectators of this dialogue, PartnerOwn’s conclusion from these debates is simply that we should be skeptical of the housing industry and its blind commitment to federal taxpayer support in the name of helping out the “little man,” but that we should not ignore consumer demand to own and the community benefits that come with it.  Finding a new way to finance ownership that is not dependent on deductions and debt may be just the ticket.

Need to Bridge Between Owning and Renting

By Dylan Hall, PartnerOwn Team Member

The Housing Partnership Network released a white paper in March about opportunities for reform in the housing market.  In the report, they cite the need for new models for “Homebuyer Readiness and Sustainable Ownership.”  They cite the damage to credit scores and the tightening of lending standards in response to the most recent economic downturn as reasons why.

One need they address are “Hybrid Tenure Products to Bridge Between Owning and Renting.”

“Policy efforts should focus on the challenge of creating new pathways to homeownership for young families and low-income households in this new market environment.  One particularly important consideration is the embrace of hybrid housing tenure models that help families move between renting and owning their homes.  Hybrid tenure products include lease purchase, shared equity, shared appreciation, community land trusts and earned homeownership approaches.  Many communities and providers around the country have experimented successfully with these models but we have so far failed to make these interventions widely available.”

Purchasing a Home: Prospective homeowner considerations

By Dylan Hall, PartnerOwn Team Member

These past two weeks, PartnerOwn has continued researching how homeowners pay for housing and the issues that they come across.   Needing to speak to a lot of homeowners, we decided to speak with people who speak with a lot of homeowners.   The United States Department of Housing and Urban Development  has certified counselors who provide free counseling services to prospective and current homeowners.  We met with counselors throughout the city of Chicago.

Our takeaways from the interviews are that there are populations who could benefit from a “high touch” partnership in owning a home that deals with both financial and maintenance concerns.  Also, providing financing alternatives for people who meet income thresholds but have low credit scores from a lack of credit history or use can be valuable as well.  Finally, creating a network of homeowners can be a valuable way to address issues that are common to all, such as property tax changes.

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All housing counselors offer workshops in purchasing a home.  They described the problems their clients face in the following order:

1) Education – understanding what it means to own a home, setting realistic affordability expectations, establishing a budget

2) Credit scores – need to build up a better credit history or cover past due bills.

3) Down payment/Earnest money – having saved enough money to purchase

4) Employment history – need to establish longer employment history even though they have sufficient income

Most of these agencies tend to work with low middle-income and immigrant populations.  Yet, there is variation within these communities.  For example, in Chinatown, foreclosures are fairly rare and most work is done around translation and understanding the home purchase process.  People use a strong family support network to help in meeting their obligations, prefer to take out 15 year mortgages due to lower interest payments and prepay as soon as possible.  They view housing as an investment, one that is the most trustworthy.  As soon as they pay off their first house, they look for their second to begin renting out.

Other immigrant populations and lower middle-income have a different perception.  The consumption aspects of housing play a bigger role and the 30 year mortgages are more common.  Month to month affordability is a bigger concern, and the American Dream of homeownership, of being in control and creating their own living space, and passing down something to their children motivates the purchase.

Lower middle-income populations may need budget counseling and to acquire a better understanding of the costs associated with homeownership.  Most counselors cite a need of consistency, of not just getting someone into the home but working with them on their budget and the other aspects of homeownership once they move into their house.  As a result, a more “high touch” service that provides financial and maintenance consultation could be valuable instead of letting people go on their own once they receive their mortgage.

Immigrant populations are also subject to realities of a lack of history in the United States.  While monthly income may be high, their shorter employment and credit history create difficulty in accessing mortgage financing.  Counselors can usually recommend processes to build up their credit score.  Employment history is more difficult to establish, and can be a problem even if someone has a good paying, stable job currently.  Thus, providing financing options for people who find themselves in this situation is important.

Downpayment assistance programs are fairly common and require the completion of HUD counseling.  This can reduce the downpayment burdens for some.  These may not be permanent though going forward, as many were created from the government settlements against mortgage providers or make use of taxpayer funding.

Property taxes can be a hidden aspect of homeownership for many in the Chicagoland area.  Recently, property taxes  increased, and most homeowners were caught off guard by their increase in monthly payments, especially since these taxes are built in as payments.  Particularly in Chinatown, people sought out advice on getting their home reappraised.

A homeownership partnership should be able to provide information on all costs related to homeownership and act as an adviser for homeowners.  Also, homeowners frequently find themselves subject to considerations like these, and as independent homeowners, may not be able to tap into any sort of collective voice if their local housing counseling agency is not as strong as those that we were able to meet with.  There could be value in creating a network of homeowners due to the complexity of homeownership in America.

Homeowner Need for Alternative Financing

By Dylan Hall, PartnerOwn Team Member

PartnerOwn’s mission to provide alternative home financing should be motivated by an understanding of the problems, preferences and needs of homeowners and investors.  After a review of market research related to the homeownership decision, we believe that we need to create a financial and legal relationship that provides people with the benefits associated with homeownership but limits their dependency on large, long term debt commitments.

Below is a summary narrative about the homeownership decision followed by a collection of motivating statistics that have been drawn from a number of nationwide surveys and research articles.

The Housing Decision: A Narrative

Most Americans prefer to own a home as opposed to renting.  Homeownership is perceived to be superior to renting for considerations such as privacy, community engagement, safety, school selection and control of their living space.

Homeownership is also seen as a good investment, even though it is secondary in importance for most owners compared to the housing attributes described above.  In spite of the volatility of house prices over the past ten years, people believe housing is a great way to build wealth and is a safer investment than stocks, bonds, mutual funds or IRA/401K.  A majority also believe it has the most potential for return compared to stocks, bonds, mutual funds or IRA/401K.  Thus, homeownership has a dual, likely contradictory, perception of being a safe investment and having the most potential for return.

Most surveyed do not believe that they have enough personal savings built up.  Surprisingly, given their lack of savings and the fallout from the most recent recession, a majority of respondents are not very stressed about their ability to make payment on their debts, and are not very concerned about losing their job in the next 12 months.  Most feel comfortable about their ability to pay for their current monthly expenses.  This is notable as housing expenses have become a bigger portion of total expenses recently.  Housing represents the majority of wealth for most low-to-moderate income households

When it comes to purchasing a home, the median perception is that a 10% down payment should be sufficient to obtain a mortgage.  A significant majority of survey respondents believe that someone should continue paying their mortgage even if the mortgage is more expensive than the house or the person paying the mortgage is in financial distress.  Currently, a quarter of homes are worth less than their outstanding mortgage (in negative equity / underwater).  In some major metropolitan areas like Chicago, this number is closer to half.

Since 2007, renting has become more common.  As a result, rental prices have grown and the availability of rental units has decreased in many metropolitan areas.  Of those renters not renting to save money for homeownership, they cite affordability, flexibility and less stress in guiding their decisions to rent.

Generation Y (representing people born between the 1980s and 2000s) is often portrayed as being less interested on homeownership because they are less likely to own homes or have a mortgage.  However, when asked about their preferences, a significant majority want to own a home in the future and cite the same benefits of homeownership described above.  We do know that Generation Ys are  more worried and feel more constrained by their current debt levels.  As a result, they may not desire to incur additional debt to finance a home.  Meanwhile, baby boomers, confident in their ability to cover expenses and maintain employment, do not believe that they have enough savings.  This may stem from looking ahead to retirement.

Our conclusion from this initial market research is that people prefer ownership for a greater sense of control.  From an economic perspective, it is disconcerting that those surveyed may not have not realistic expectations when it comes to the investment aspects of housing, especially when we consider that a majority of people believe it is ok to use credit to finance 90% of the purchase.  In effect, these are risky bets that we encourage homeowners to take on a daily basis, even though they tend to view housing less as an investment and more as a consumption good.

Owning vs. Renting: Statistics

65.1% of households are owner occupied, while 34.9% are renter occupied (US Census, 2010)

65% of households would buy as opposed to rent (31%) if they were going to move (Fannie Mae, 2013)

The most common reason (28%) renters cite for renting is to become financially ready to own (Fannie Mae, 2013)

61% of households believe they are more likely to buy at some point in the future as opposed to rent (31%).  (Fannie Mae, 2013)

71% of households believe the number of homeowners will increase or stay the same (Fannie Mae, 2013)

The Role of Debt: Statistics

The median home buyer uses a mortgage loan to finance $91 of out of every $100 spent to purchase a house (NAR, 2013)

92% of homebuyers have mortgages that are fixed rate, meaning that they pay the same interest rate on the mortgage loan (NAR, 2013).

76% of mortgages have length of 30 years or longer (Fuster and Vickery, 2013).

Median survey respondent believed 10% is sufficient for a downpayment for a home (Fannie Mae, 2013).

86% surveyed believe that it’s not ok for a person to stop paying the mortgage on the home if the mortgage is worth less than what they owe on it. (Fannie Mae, 2013).

77% surveyed believe that if a person is facing financial distress, it is not ok for them to stop paying the mortgage. (Fannie Mae, 2013).

Homeowners Tend to be More Consumption Focused: Statistics

65% would prefer to buy a home because of the broader security and lifestyle benefits of homeownership,such as providing a good and secure place for your family and children, where you have the control to make renovations and updates if you want, and in a place that’s in a community and location that you prefer (Fannie Mae, 2013)

35% would prefer to buy a home because the financial benefits of homeownership,such as its value as an investment (especially compared to paying rent), its value as a way to build up wealth for retirement or to pass on to your family, and the tax benefit (Fannie Mae, 2013)

Housing as an Investment: Statistics

To achieve building up wealth, households believe they are better off owning (82%) as opposed to renting (13%). (Fannie Mae, 2013)

84% of respondents believe owning makes more sense because you’re protected against rent increases and owning is a good investment over the long term.  13% believe renting makes more sense because it protects you against house price declines and is actually a better deal than owning. (Fannie Mae, 2013)

66% surveyed believe buying a home is safe investment compared to investing in bonds (48%), stocks (16%), mutual fund (47%), or IRA/401k (65%).  (Fannie Mae, 2013)

57% surveyed believe buying has a lot of potential compared to investing in bonds (25%), stocks (52%), mutual fund (34%), or IRA/401K (50%).  (Fannie Mae, 2013)

Lower income homeowners have a majority of their wealth tied into home equity

Housing as Consumption: Statistics

87% believe that to to achieve having a good place for your family or to raise your children, you are better off owning as opposed to renting (5%). (Fannie Mae, 2013)

81% believe that to feel engaged in their community, they are better off owning as opposed to renting (9%). (Fannie Mae, 2013)

83% believe that to achieve living in a place where they and their families they are better off owning as opposed to renting (7%). (Fannie Mae, 2013)

93% believe that to achieve having control over their living space, they are better off owning as opposed to renting (5%). (Fannie Mae, 2013)

90% believe that to achieve having a sense of privacy and security, they are better off owning than renting (6%). (Fannie Mae, 2013)

Growth in Rentals: Statistics

Household Fiscal Health: Statistics

68% surveyed said that they are not very stressed about their ability to make payments on their debt. (Fannie Mae, 2013)

55% surveyed said that they do not have sufficient savings. (Fannie Mae, 2013)

73% surveyed said that their current income is sufficient for the expenses that they have. (Fannie Mae, 2013)

77% surveyed said that they are not very concerned about losing their job in the next 12 months. (Fannie Mae, 2013)

35% said that their current household expenses have increased significantly over the past 12 months. (Fannie Mae, 2013)

50% believe to achieve having less stress, they are better off owning as opposed to renting (44%). (Fannie Mae, 2013)

A significant majority (85%) of homeowners said that the mortgage rate offered were at least somewhat important in their decision to own.  A majority (58%) said that mortgage rate offered was very important. (Fannie Mae, 2013)

25% of home are still in negative equity (Zillow, 2013).

Mortgage delinquency rates look to be steadying at rates that are above pre-2007 levels.

Both renters and homeowners have increased the proportion of their income being spent on housing.

Most lower income households have a majority of their wealth concentrated in their homes.

Generational Concerns: Statistics

More than half (54%) of millennials say debt is their “biggest financial concern currently,” according to a survey focused on Gen-Y attitudes toward savings and retirement. 42% say their debt is “overwhelming,” twice the rate of boomers who were also surveyed for comparison.  (Wells Fargo, 2013)

88% of Generation Y respondents said that in the future they are likely to “always own.” (Fannie Mae, 2013)

88% of Generation Y respondents said that they plan to  purchase a home in 3 years or more. (Fannie Mae, 2013)

63% of Baby Boomers believe they do not have sufficient savings (Fannie Mae, 2013)

PartnerOwn Introduction

Homeowner Partnerships

PartnerOwn has begun with a simple question.  Is there a better way to finance homes than standard fixed rate, 30 year mortgages?  Most businesses will not go past a 5 year plan.  And yet, we have homeowners make these long-term commitments on a daily basis.  Does making debt so easy to obtain, standardized and systemic create the right incentives and optimal arrangement?  Why should we encourage people to incur such debt in the name of homeownership?   Should debt be the only means of financing?

PartnerOwn wants to discover if homeowners can be given an alternative form of financing while investors still see returns.  PartnerOwn’s goal is not to become a philanthropic endeavor to promote homeownership, but rather to begin moving the housing market toward more natural arrangements that are less dependent on government guarantees and complex debt derivatives if the sentiment bears this out.

Currently, our search for the answer has led to our participation in Chicago’s Lean Startup Challenge where lean startup methodologies seem most appropriate to determining whether or not we can provide an alternative form of financing that satisfies both homeowners and investors.  This blog will serve as a record of our collection of information including reflections from statistics, interviews and reports.   We look forward to sharing our discoveries, and will be updating regularly, so please keep checking on our progress.

And most importantly, thank you checking us out.  We hope to keep you entertained.

Signed,

The PartnerOwn Team