Housing Partnerships: A New Approach to a Market at a Crossroads

Although the United States has developed highly sophisticated markets for fundingcorporate 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. Incontrast, to buy a home, a household must take on debt in the form of a mortgage. The authors ofthis book propose the development of new markets, called Partnership Markets, that would allowhouseholds to use equity finance to buy their homes. With these new markets, a household would beable to finance housing not only with a mortgage, but also with an institutional investor who wouldprovide part of the equity capital for the house in exchange for a share of the ultimate sellingprice.The new markets would offer many benefits to both homeowners and the broader financialcommunity. In the current market, many Americans are forced to rent housing because they cannotafford to buy. Those who do buy are burdened with high debt payments. They also have the vastmajority of their wealth tied up in their home and are exposed to the high risk levels of such anundiversified portfolio. With Partnership Markets, households would be able to buy homes with muchsmaller mortgages, thereby greatly reducing their expenses. They would also be able to diversifytheir assets and create less risky portfolios. For the broader financial community, PartnershipMarkets would provide an opportunity to diversify into the residential real estate market.To givethe reader a rounded view of their proposal, the authors explain the economic theory of the housingmarket and the housing finance market, as well as key aspects of the institutional structure andperformance 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 thehousing market, the composition of assets held by institutions, and the general level of risk forindividuals.

Joseph Tracy is Director of Research at the Federal Reserve Bank of New York.