The Plight of First-time Homebuyers

Bloomberg Magazine covers the plight of first-time home buyers in its August 12th article, “First-Time Buyers Shut Out of Expanding U.S. Home Supply”.

“I definitely sacrificed in terms of location,” said Nielsen-Dembe, a 33 year old mother of two who lives with her husband and bought a house in west Denver last April for $184,500. “I had to cross streets that were not ideal in order to get a house.”

With the abundance of all-cash buyers (42% nationwide in November 2013), strong investor appetite for affordable buy-to-rent properties, and the reluctance of underwater homeowners to sell (19% of all homeowners are in negative equity, with those of inexpensive homes three times more likely), the inventory for first-time homebuyers is crunched.

The inventory of U.S. homes for sale in the bottom third of the market (those below $198,000 and most sought after by first-time homeowners) fell 17 percent in June compared with a year earlier, according to a Redfin analysis of 31 large U.S. metropolitan areas. In Denver, this number was closer to 51% and in Austin, 34%.

Depressed inventory means that first-time homebuyers, already faced with tighter lending conditions, slow wage growth and lower credit scores, are increasingly shifting their home search to less attractive but more affordable neighborhoods often with higher crime rates, more incidents of violence, less desirable school districts, higher rates of foreclosure and fewer available jobs.

Since a neighborhood’s quality directly affects a home’s value, by sacrificing neighborhood for affordability, these first-time homeowners are also at a higher risk of losing value from the purchase of their home.

At PartnerOwn, we believe that homeowners should not be punished for where or when they decide to buy a home due to macroeconomic circumstances beyond their control. That’s why the Shared Responsibility Mortgage (SRM) automatically decreases homeowners’ monthly payments when their local home values drop. This price relief is built-in to the mortgage and does not require additional paperwork, phone calls or visits to the lender. In return for this benefit, the homeowner will share a small portion of the home’s appreciation (10%) upon sale with her lender. If the home does not appreciate in value, the lender receives no compensation.

By removing the uncertainty of paying more when local home prices decrease, PartnerOwn gives homeowners the freedom and peace of mind to purchase a home in a location and at a time that works best with their personal situation. Finding the right home is stressful, but we want to make sure that paying for it isn’t.

Shared Responsibility Mortgage

Shared Responsibility MortgagePartnerOwn’s work to improve mortgage finance is based on the research of economists Amir Sufi and Atif Mian, who propose the Shared Responsibility Mortgage (SRM) in their new book, House of Debt.  Their research into the Great Recession has made them the experts on its underlying causes, and their down-to-earth approach makes their book (and blog) a great read.  With this post, we want to introduce a few key concepts that draw on their work and explain the basic need for their proposal, the SRM.

Buying a home is more than buying rooms, a roof, a garage and a backyard.  It is buying into a neighborhood, a school district, and a commute to work.  A homeowner may control the house but not the neighborhood, the local businesses, or the school district.  Things change.  And these changes can hurt or help the value of the home.  If a nearby employer leaves the neighborhood for example, the home and its neighborhood may be less desirable since there are fewer jobs.

In addition to neighborhood risk, homeowners face market risk.  To buy homes, people use a lot of debt (90% of the value of the home for the typical buyer).  This is dependent on someone or some institution being able to make those loans.  So, starting in 2007, when the housing market began to go through a major correction and banks needed to be bailed out by the government, lending became less common which hurt home values.  People who were using the value of their home to get by started to consume less because they lost wealth.  This in turn hurt businesses and caused layoffs.  More people defaulted on their debt.  And overall, nationwide home values dropped over 30% in the course of a single year.

Because most homeowners use debt to purchase their homes, they are not protected if the neighborhood or the housing market changes.  The debt is constant.  These risks would make any investor cringe, especially since most mortgages are thirty years in length, ample time for the risk to be realized.  However, as mortgages have grown in length and require lower down payments, our government and banks still encourage borrowers to take on this greater risk and hope things work out.

This is why PartnerOwn is working to implement Sufi and Mian’s SRM.  Its most fundamental innovation is to tie the homeowner’s debt to the local housing market.  If home prices go down because of the neighborhood and market risk, the homeowner’s monthly payment will go down as well.  So, if the neighborhood decreases by 10% in value, a homeowner’s monthly payments will also decrease by 10%.  Effectively, the risk is shared with the lender, who can better handle the risk through modern diversification strategies.  This will protect the homeowner who has a significant portion of her wealth tied up in her home and provide relief in case the local neighborhood or housing market experiences a downturn.  Additionally, the homeowner never has to make up those decreased payments. It is simply part of the original agreement between the homeowner and the lender.

To pay for this protection, the homeowner would pay a small portion of the increase in the home’s value at sale.  So, if a homeowner bought a home for $100,000 and sold it for $110,000, the homeowner would pay 5% of the $10,000 made, which is $500.  The homeowner essentially borrows from the future increase in the home’s value to receive protection.  If the home does not increase in value, no payment is made.  Sufi and Mian argue that this simple innovation would have helped limit the severity of the most recent crisis.

PartnerOwn is currently working to implement a version of Sufi and Mian’s SRM.  We have identified a first investor, a local housing agency in Chicago, to help us originate SRMs for its clients.  They believe the SRM to be a more responsible form of lending for their clients and a way to invest in their local neighborhood.  We look forward to keeping you updated about our progress.  And if you have any questions about the SRM, please do not hesitate to contact us along the way.

Team PartnerOwn
team@partnerown.com

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