Blurring the Line Between Renting and Owning to Solve the Housing Crisis

Blurring the Line Between Renting and Owning to Solve the Housing Crisis

Dave MerinDave Merin

February 2021

The American Housing System is Failing

By many measures, the post Second World War American Dream of widespread home ownership has been cracking. The number of new homes built per year has been trending down, so the average age of the housing stock has been increasing, ensuring that operating these energy inefficient old buildings remains a leading contributor to climate change. As economics would predict under these circumstances, home prices have outpaced inflation, so it should come as no surprise that the median age of first time home buyers has been increasing as first time homebuyers struggle to come up with the cash for a down payment.

And all of this leads to a general lack of dynamism in our cities. While Shanghai and Dubai have risen from nothing over the past 30 years, cities like San Francisco look much as they did 50 years ago.


San Francisco in 1970 or 2020?

Atomized Ownership Inhibits Progress

A key underlying cause of this disfunction is that vast swaths of the population are incentivized to vote for policies that are designed to drive ever increasing property values, but in a suboptimal way that continuously exacerbates the aforementioned disfunction.

The failure here is perhaps easiest conceptualized as a series of prisoners dilemmas. Voters are incentivized to set policies in a way that benefits existing property holders at the expense of newcomers, yet in a way that’s suboptimal for all. It’s zero sum in a way it needn’t be.

Zooming in on one prisoners dilemma, the aggregate value of the land on a centrally located block would be maximized if people collaborate to build more housing since multi-family zoned land tends to be more valuable than single family zoned land, as it can provide housing for more people. The problem is that when your neighbor builds a multifamily property on his property, the value of your property decreases since housing prices are a function of supply and demand. What this means is that when you hold demand constant, if the supply of new housing units increases, irrespective of whether the units are designated "affordable", then the value of each unit of housing in the area decreases.

This should make intuitive sense as a renter has a greater ability to negotiate terms, including rent, with landlords when there are more available rental units than there are renters in a given location, than they are when there are more renters who want to live in a given location than there are available rental units.

This means growing the housing supply is good for renters as rents should fall, or at least increase at a slower rate, but is bad for property owners, as the prospective rent for their existing property declines, or at least grows at a slower rate, unless of course they are the land owner building the units, in which case they could stand to profit from building additional housing units on their property.

The result of this game theoretic setup is that the status quo is for neighbors to oppose all construction on each other’s property, ending up with neither property improved, resulting in the lowest value creation in aggregate.


This is a problem that gets worse as it scales up since coordination becomes increasingly difficult. As this plays out across the city, it leads to a situation where all property owners are collectively incentivized to discourage the construction of new housing. This results in making it more difficult for new residents to afford to move to a city, causing it to ossify and atrophy as the occupants of the city get older, reducing the tax base and thereby the ability to fund social infrastructure, and generally making the city smaller and less influential than it otherwise would be, all while making it increasingly difficult for the next generation to get on the home ownership ladder and teeing up a battle between the generations.

Does it need to be this way? Might it be possible to let people invest in their community without creating these suboptimal dynamics? As others have suggested, maybe so. Perhaps cooperative for profit ownership could provide a path.

Cooperative For Profit Ownership Could Provide a Better Option

Despite these issues, there are certainly benefits to the current model of property ownership in the United States, whereby the government subsidizes the ownership of residences by those who occupy them though subsidized loans and the tax deducatibilty of mortgage interest payments.

Homeownership helps provide stability in where people live, incentivizes people to invest in their community, and forces people to save by ensuring all subsidized loans are fully amortized.

Cooperative for profit ownership could blur the lines between renting and owning, providing these benefits to a broader swath of the population, while ensuring that land is still put to its highest and best use.

This would involve granularly slicing the ownership interests in various pieces of property so that neighbors could own pieces of each others property and all could share the upside from building additional housing units.

Taking it a step further, making these ownership interests freely tradable would allow renters to gradually buy into their communities. Rather than struggling to save up for a big downpayment, renters could just purchase a little piece of the building they are living in by paying a little extra in rent each month. As they grow their ownership stake, the "distributions" from their ownership stake could gradually offset their rent, a snowball that would compound over time to the point where eventually they’d not be paying any rent, just like a fully amortizing mortgage.

On top of that, if a resident were short on cash one month, they could automatically sell off some of their stake to make their payment. This is a big deal when a large share of the population doesn’t have $400 to cover an emergency.

This fluid and granular value transfer could blur the lines between renting and owning, ultimately making it easier for people to get on the ownership ladder.

Beyond that core ownership benefit, this would produce better housing. It would incentivize the construction of more beautiful housing, which is traditionally underproduced since the positive externalities generate mostly public benefits while all of the costs are born privately. Moreover, the entity would be incentivized to use its profits to continuously upgrade the property and ensure it is desirable for current and prospective residents since, unlike government housing, the entity would be profit maximizing.

The result would economically incentivize everyone to improve the value of their collective property. As more housing is built, there will be downward pressure on rent for each individual housing unit even as aggregate profits from the land go up, benefitting all in the community.

The Challenges are Solvable

There are three main classes of obstacles that need to be overcome to make this a reality: (1) management of the properties could look different, (2) it'd be difficult to administer, and (3) the lost federal government subsidies need to be offset.

Property management. There is the question of who is managing the assets if they are collectively owned. One option could be to engage a property management firm to maintain the collective group of homes. It would certainly be more efficient, as it's not clear that homeowners are even the best positioned to handle maintenance of their own homes today. After all, there are material economies of scale to property management / maintenance. A sub issue that could arise is whether the homeowner / occupier should still pay for improvements (e.g., a new kitchen) if they do not own all of the equity in the home. These incremental improvements are important if you want to ensure buildings continue to learn to be places people want to live. One possibility would be to sell some equity in the home via the liquid market for tokenized home equity to fund the improvements. There could then be a corresponding rent increase to offset the dilution to existing equity owners from the issuance of this new equity.

Administration. This arrangement would have been very difficult and expensive to implement historically as fractional ownership would have caused a torrent of paperwork and the market for shares in the building would have been deeply illiquid, but much of this can be automated with software today. Ownership in each building could be divided up into security tokens, each lease could be represented by a non fungible token, rent payments and distributions could be made via stable coins, automated market makers could enable continuous liquidity for equity stakes, smart contracts could automate transaction execution, and software could autogenerate all of the tax forms.

Lost Federal Subsidies. There have historically been two primary forms of tax incentives for single family home ownership in the United States: (1) the tax deductibility of mortgage interest and (2) the deductibility of property taxes. The Trump tax reform bill passed in 2017 blunted these incentives, reducing these incentives going forward. At the same time, an arrangement discussed above is not without tax benefits. When managed correctly, Commercial Real Estate can be extremely tax efficient via depreciation enabled passive losses and tax free transfers of ownership stakes. How powerful these incentives are will vary materially based on jurisdiction and an individual’s personal financial situation and is beyond the scope of this post. However, as the benefits of this model come to be recognized, perhaps it too could benefit from new and tailor-made subsidies.

The Journey of a Thousand Miles Begins with a Single Step

Unfortunately, it’s not feasible to convert the entire property base of a major city, like San Francisco, to a corporate entity that could facilitate this granular and dynamic value transfer overnight.

There are two approaches that could provide easier starting points: (1) incremental conversion within an existing municipality or (2) a blank slate approach in a new development.

Starting with an incremental approach: one could envision the neighbors on a block or within an HOA banding together as a collective and gradually absorb their neighbors to expand the scope of their control. They'll have an advantage on two fronts: (1) by tapping new sources of capital they should be able to slightly reduce their aggregate cost of capital and (2) by providing this added perk to renters, they should be able to command slightly above market gross rents. In this highly competitive world, these small advantages could build over time. As this smaller scale experiment succeeds, they’ll increase the value of their assets, allowing them to expand faster and faster until they take over an entire city.

Alternatively one could start with a blank slate in a new development, whether a master planned development, like Culdesac , or a Charter Cities project, like Bluebook Cities. For these new developments, it could provide a model for an eventual exit to community, as the residents gradually buy out the investors over time. Done right, this could even accelerate the success of the new development by using granular and widespread ownership to bootstrap network effects of a new neighborhood or new city.

As with any new idea, this is something that should be tried on a smaller scale, proven out and then scaled up, but as this model spreads, it could help dramatically broaden access to home ownership without resorting to the 20th century model of building cheap new housing through sprawl.

If you’re building something like this, please reach out. I’m interested in investing in companies working to make this a reality and am also happy to try to leverage my experience across finance, law, blockchain technology, and business operations to help you make this a reality.