It’s Time to Change Housing Finance

By Josh Baker, Co-Founder of Fraction

The central problem of housing is simple: it costs too much. Whether that is due to NIMBYism, housing policy, or a glut of foreign investment, everyday people are facing down the prospect of never being able to enter the property market.

This isn’t the first time that this has been the case. Although there was an explosion in homeownership rates in the mid-to-late 1900s and early 2000s, for much of human history this wasn’t the norm. Before the 1930s, only 40% of American households owned homes.

The introduction of the modern mortgage fundamentally changed the homeownership landscape. With policies introduced by the Federal Housing Administration in the 1930s, the number of households owning their homes steadily grew, peaking in 2005 at nearly 70%.

But the trend has reversed. Accompanying housing crisis headlines all across North America is a significant drop in homeownership rates. In 2016, homeownership in the United States fell to 63% — the lowest in half a century.

Homeownership rates as reported by the US Census Bureau

We need a new solution. The mortgage model that had worked so well for us for the better part of a century has begun to falter.

The Solution: Policy?

Policymakers suggest that the only way to solve the issue is through policy change. But nobody is sure what the shape of that policy will be. Certainly more housing supply will help, but there’s debate as to whether a lack of supply is even the main problem.

And then there’s the problem of existing homeowners. For many homeowners, their home is the largest investment. Significant drops in housing prices would seriously affect the ability for our seniors to afford retirement. A fact policymakers are intimately aware of, and one of the reasons they are careful not to disturb the property market.

The Solution: Innovation?

So — what’s the new model that will encourage growth like the mortgage of the 1930s did? At Fraction, we believe we have the answer. Fraction has come out with a model that lowers monthly payments for homebuyers by up to 35%. We do this by investing in properties alongside homeowners, sharing in the growth of the property value. For many people, this would put mortgage payments more in line with what their rent currently costs.

For example, a traditional mortgage with monthly payments at $2800.00 would cost around $1980.00 with financing from Fraction. Fraction can enable this by investing in the first 40% of the property, meaning home buyers only need to pay mortgage payments on the remaining amount.

Will this solve the housing crisis? Not by itself, no. Not any more than the modern mortgage solved the housing issues of the 1930s. But will it help? History suggests it might.