This is the final post in our “homeownership rate” trilogy. The first part reviewed the history of the homeownership rate and its sustainability over time. The second part focused on available mortgage products, and the problems rising from the current interest rates. The third and final part is here to introduce a new era of financial balance.
Part 3: The Future
In our blog posts we sometimes discuss the challenges faced by potential homebuyers. Recently we’ve seen additional challenges when the Fed hiked rates once again, making it almost impossible for first time homebuyers to take on a mortgage and buy a home. We’ve discussed the meaning of mitigating risk and the importance of downside protection in times like these. We also talked about the reasons borrowers and institutional investors would not have been as affected by soaring rates had they taken the RTM™ (a risk-transfer mortgage™ for borrowers) or invested in RT-MBS™ (risk-transfer mortgage-backed securities™ for investors). But now we’d like to revisit the original topic of our discussion in this trilogy - the homeownership rate - and explore the future of homeownership.
Homeownership is the most common way to build generational wealth, and it has been that way for decades. With 65% homeownership in the US, there is no question regarding its dominance. The only question is - how can we significantly raise it further, in a sustainable manner?
First and foremost - inventory plays an important role when it comes to homeownership. However, inventory isn’t a defining obstacle at the moment, at least when it comes to increasing the homeownership rate from 65% to 70%, for example. It’s critical to push for more inventory as the shortage is at an all time high - The U.S. now has a deficit of 3.8 million homes. Yes, things have gotten worse - NAHB research shows this number was at 1.5 million in 2021. But no, this isn’t the sole reason why the homeownership rate has been so sticky at 65% for over 5 decades. But it can become the most significant barrier of all if things do not change over the course of this decade.
So now that we’ve crossed that one off of our list, it’s time to look at the next usual suspects, the barriers everyone knows all too well: affordability and eligibility. These two determine who can buy a home - and who is forced to continue renting. But why? It’s because mortgage lenders are worried that borrowers will default on their loans, costing lenders their money. They protect their capital by imposing both eligibility and affordability barriers on private households, who are the weakest entities in the financial system.
In the past decade interest rates plummeted, causing housing prices to jump. Throughout this period, affordability and eligibility were not that big of an issue for buyers as long as interest rates were so low. People just kept on buying as high demand pushed real estate prices further up. As a result, innovation in this space has become extremely challenging.
Now, with doubled interest rates, and with the rise of over 30% in house prices since the pandemic, we're seeing unprecedented affordability and eligibility barriers to homeownership. Potential buyers are waiting for either prices or interest rates to come down. Even if they could take on a mortgage in the current economic climate, they probably wouldn’t: according to Fannie Mae’s recent Home Purchase Sentiment Index®, 82% of respondents believe it is a bad time to buy.
So what’s next? The Fed’s attempt to drive down inflation is pushing down house prices, albeit not enough. That’s why now is the time for innovation and disruption in the field of mortgage finance - when it doesn’t just answer an immediate need, but also dismantles something that was fundamentally wrong and rebuilds it in a way that creates financial balance.
When looking closely at some of the start-ups out there trying to help people to become homeowners, we see so many good intentions. From Home Equity models, to Fractional models, to Rent-to-Own models - all trying to assist you in raising the capital you need in order to take on a mortgage, so you can enjoy the stability of homeownership. But good intentions are not enough. We need to rethink our whole approach and create financial balance, and in order to do that, households should avoid taking on credit risk.
If we’re aiming to push the homeownership rate up a notch in a sustainable manner, people need to be able to buy a home, even now. For that to happen, the famous American mortgage needs to change. We need a new mechanism that prices the risk and sells it to those who are looking to invest in it - instead of imposing it on households who have everything to lose.
Without the credit risk that’s currently tied to the mortgage, potential buyers can overcome the affordability and eligibility barriers - without compromising their entire equity. That same credit risk can be priced and sold to those who are interested in it, in a way that unlocks owner-occupied residential real estate and turns it to an investable asset.
This is exactly why Contigo Capital developed the Risk-Transfer model - creating RTMs™ (Risk-Transfer Mortgages™) for borrowers, and building RT-MBS™ (risk-transfer mortgage-backed securities™) that institutional investors can invest in. By shifting a portion of the risk and reward of homeownership from borrowers to investors, investors can finally get access to the biggest asset class in the world. Investing in owner-occupied residential real-estate is the missing piece of the puzzle - it finally brings them closer to the “Market Portfolio” - a theoretical and optimal portfolio of all investable assets in the world, weighted by market values.
With everything that happened during the pandemic, and with the ongoing economic turmoil ever since, the real problem is still the risk of housing. More specifically, it is the way that risk is misplaced, thus bearing down on homeowners and wiping out their home equity when home prices fall. Contigo Capital’s Risk-Transfer model targets that exact imbalance, aiming to create financial balance where it is needed the most. That financial balance, when finally achieved, will create a true alignment across both sides of the mortgage equation. Contigo Capital is bringing the revolution, and not a moment too soon.
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