Although the United States has developed highly sophisticated markets for funding corporate investment projects, markets for financing home ownership are comparatively rudimentary. When a corporation wishes to fund a project, it can choose any mix of debt and equity financing. In contrast, to buy a home, a household must take on debt in the form of a mortgage. The authors of this book propose the development of new markets, called Partnership Markets, that would allow households to use equity finance to buy their homes. With these new markets, a household would be able to finance housing not only with a mortgage, but also with an institutional investor who would provide part of the equity capital for the house in exchange for a share of the ultimate selling price.
The new markets would offer many benefits to both homeowners and the broader financial community. In the current market, many Americans are forced to rent housing because they cannot afford to buy. Those who do buy are burdened with high debt payments. They also have the vast majority of their wealth tied up in their home and are exposed to the high risk levels of such an undiversified portfolio. With Partnership Markets, households would be able to buy homes with much smaller mortgages, thereby greatly reducing their expenses. They would also be able to diversify their assets and create less risky portfolios. For the broader financial community, Partnership Markets would provide an opportunity to diversify into the residential real estate market.
To give the reader a rounded view of their proposal, the authors explain the economic theory of the housing market and the housing finance market, as well as key aspects of the institutional structure and performance records of the current market. They discuss the wider ramifications of their proposal, including changes in the form and structure of the secondary market, the government's role in the housing market, the composition of assets held by institutions, and the general level of risk for individuals.
About the Author
Joseph Tracy is Director of Research at the Federal Reserve Bank of New York.
“I am very enthusiastic about this book. It makes an extremely important proposal that ought to become a part of our mortgage lending institutions, and be offered to millions of homeowners. The book not only outlines the idea, it is also very thorough in presenting the concrete problems, and creative in suggesting contractual forms that will deal with them. This book could change the world.”
—Robert J. Shiller, Stanley B. Resor Professor of Economics,Yale University
“Housing Partnerships is a serious discussion of financial reform in housing by some of economics' most distinguished scholars,and a significant contribution to the policy reforms suggested forhousing market problems.”
—Ed Glaeser, Paul Sack Associate Professor of Political Economy, Harvard University