Saturday, October 11, 2008

Socialized Housing

I was talking yesterday to a couple of fellow smokers from my building, both investment bankers, and I asked them, "In what way does the idea of endlessly rising residential home prices differ from a Ponzi scheme?"

They both replied, "It doesn't."

A "free" market in residential housing is a recipe for disaster. The housing market has almost everything you can think of that causes market failure: the "infinite value" of having housing, the long lead times to create new housing, the tiny proportion of housing that's actually on the market at any given time, the very long transaction times to buy or sell a house, and the direct correlation between falling home values and job loss (If you lose your job in a recession, then you'll lose all of your wealth (your down payment) when you have to sell your house... if you're lucky. If you're not lucky, you'll lose your credit rating and be unable to even rent, much less buy again.)

Even rising home prices due to migration (such as to the San Francisco Bay Area, where prices remain high), which is not a totally bullshit Ponzi scheme, still does not do what "free" market theory says it will do. If it did, we'd have ten times as much housing in San Francisco, and rents and housing prices would go down. We don't have more housing, and prices haven't gone down, because individual property owners realize that only enforced scarcity keeps their "wealth" secure. Because of all the structural impediments to a "free" housing market, they have the ability to do so even in the face of tremendous macroeconomic pressure.

There simply isn't any choice but to socialize all residential housing.

But how would that work? Here are my thoughts.

Day 1, the government assumes ownership of all the residential housing. But not just any government, local government — borough, city or town — assumes ownership; your locally elected representatives become responsible for all local housing. Local governments usually have shorter terms: If you don't like how the city council is managing your housing, vote the fuckers out.

All mortgages and rents to anyone but the local government will become null and void, except for loans to actual builders, which the government will assume. If you were counting on the increasing value of rental housing, well, you're fucked. You were participating in a Ponzi scheme, which is immoral and usually illegal.

All residents have the secure right of tenancy: no one can be forced to move except for non-payment of rent or malicious or negligent gross mistreatment of the property. Residents may buy and sell the right of tenancy, but only when tenancy is directly and voluntarily transferred; the right of tenancy cannot act to secure any financial obligation. If the city exercises eminent domain, then they have an obligation to move the residents to similar housing and pay all moving expenses.

The basis for all rental will be the local replacement cost of housing of similar quality and size. The rent, therefore, should first cover the replacement of the property amortized over the total life of the house. Since houses typically last about 50-100 years, the replacement portion of the rent should be about 1-2% of the basis.

Since new housing sometimes needs to be built (because of expanding population), elected representatives can add the cost of building new housing uniformly to rents. So if housing is expected to grow by 3% per year, an additional 3% of the basis would be added to the rent.

(Since the local government would have massive cash flow, it can pay for new and replacement construction without borrowing money, saving enormous amounts on interest.)

Projected property maintenance, established by objective criteria and managed by the government (economy of scale), must also be added to the rent, as well as taxes to pay for residency-based services. Insurance can also be added to provide some cushion for people who lose their jobs, especially in a recession.

Given all the above, unless you own your home free and clear (and some expedient consideration could be made for those few), your cost of residency should be about 10-20% of existing rents and mortgages, with no impact whatsoever on home construction.

The only people who would be seriously fucked would be the bankers, and I doubt that anyone is feeling particularly concerned about their well-being right about now.

Update: Of course such a plan cannot happen under our current system, regardless of the overall benefits. We would be required to "compensate" the current absentee property owners, and such a massive transfer of wealth from the taxpayers to the owners of housing would make the government act as the bankers to capitalists. Even if we could somehow construct a legal theory that didn't consider absentee ownership to be Constitutionally protected property, there's no way the fascist motherfuckers on the Supreme Court would ever buy it.

Update 2: I've answered some of the objections raised in the comments.


  1. A Ponzi scheme! Exactly what I called it! Reminds me of the hillbillies who kept selling the same mule back and forth to each other for progressively higher prices, thinking they had a good scheme going, both making good money off the same mule, until the mule died.

  2. Surely it's unlike a Ponzi scheme in that it lacks a Ponzi figure? The Wikipedia article you link to differentiates, correctly in my view, between a Ponzi scheme and a bubble. I think that the housing market in both our countries has exhibited the latter behaviour.

    If anyone was counting on the increasing value of rental housing, they're fucked anyway, without any help from you, but I fail to see what they were doing that was illegal or immoral. Would it have been more moral if they'd been counting on the rental income instead of the capital appreciation?

    Haven't you just invented council housing? Or do you not have that in the US? I think the big problem is that councils and their builders have no incentive to build houses that people want to live in. It's true they have democratic accountability, but most voters have no such incentive either, since most of them all ready have houses.

  3. Such a public ownership scheme may sound good in theory, but in practice will always fall prey to corruption and mismanagement.

    People will find a way to trade on the "value" of their residence whether you call it a "title" to the property or "right to occupy." There are all sorts of stories from the East-bloc about people paying massive bribes to secure coveted housing slots. Effectively a black-market causes the same type of real-estate speculation. You still have artificial scarcity in that all public housing would not be created equal. Even if every housing unit were identical (yuck), there would still be some locations more desirable, and people would find a way to pay money for the better spots.

    Likewise, your San Francisco example doesn't really apply. Sure the free market should cause more housing to be built, but it can't create more land in desirable areas. Hence the stubbornly high prices. There's less density in the outlying areas, but that's not where people who like the city and can afford it want to live.

    Think private-sector malfeasance is bad? Just look at the dismal track record of nationalized housing in the countries where it's been tried. You end up with a bunch of decaying homes and concrete-block tenements.

    Putting local councils in charge still allows for the tyranny of the majority, just on a smaller scale. If you had a minority concern, it would simply be quashed. This is unacceptable for something so fundamental as housing. I don't want other people to be able to vote on what I can do with my property. It's bad enough with existing covenants and what you have to go through to get a permit to even remodel. You want to expand that to cover all construction and ownership? What a nightmare.

    You also fail to take into account the people who are currently holding the paper on existing homes. Those are everyone from individual investors to institutions. You can't just legislate that away.

    Houses do NOT last 50-100 years without extensive maintenance. It might add up to the cost of having to completely rebuild the house every 30-40 years.

    And there are other problems. Any scheme that promises to deliver a valuable service at 1/5 to 1/10 the existing cost should be highly questioned. If something seems too good to be true...

    Any solution to market failure must take into account the ever present motivations of greed and self-interest. If you want a system that works, it must anticipate and harness the so-called negative aspects of human nature, rather than pretending they don't exist.

  4. Black Sun: Think private-sector malfeasance is bad? Just look at the dismal track record of nationalized housing in the countries where it's been tried. You end up with a bunch of decaying homes and concrete-block tenements.

    This is simply a lie. I do not permit liars to comment on my blog.

    This comment will stand, but further comments by you will be summarily deleted.

  5. Ever see any of the Housing projects in The USA.

    The classic example was Cabrini - Green in Chicago.

  6. Just because an idea has been implemented poorly does not mean it cannot be implemented well.

  7. We have council housing in my country too, and despite some problems it largely works well.

    -a European reader

  8. Interesting proposition. One thing I'm confused on, though... you mention buying the right to tenancy, and you mentioning owning your home outright. So this seems like people could *own* their home instead of rent it, correct? In this case doesn't this defeat the purpose of the government owning the housing? If the government owns the housing isn't everyone a renter, not an owner?

  9. Owning the right of tenancy is different from owning the home itself. Unlike owning the home itself, one cannot maintain ownership of tenancy without actual tenancy.

    The mention of people who own their homes outright is relevant to how people would be affected by the transition, not to any ongoing, operational feature of socialized housing. Those people with pre-existing rents or mortgages would see their payments drastically reduced; those people who do not have mortgages would see their payments increased (as they're not paying interest).

  10. Aha, that makes sense. Thanks for the clarification.

  11. Home ownership is the American Dream. Why would you ever think it's a good idea to let the government take ownership of anything. Have you seen government housing? I live in it (military) so I know first hand what happens when the government takes control of anything. And what about the people that already own homes? I really don't understand how anyone can see this as a viable solution. SCARY

  12. Damn, son. Were you born that stupid, or did you have to study?

    Yes. It's scary that people have ideas outside the bounds of your narrow prejudices.


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