In this post I propose a housing program that combines the flexibility and low financial risk of renting with some of the stability and wealth generation of homeownership. By establishing renting as a desirable alternative to homeownership — not a second-best option but a genuine competitor — this approach also has the potential to break down long-standing barriers to housing abundance and affordability: Renters are more motivated to support policies that stabilize or reduce the price of housing, rather than pushing it ever upwards, and so increasing the share of the population who rent should lead to improved affordability in the places that need it most.
I recognize this is an extremely ambitious proposal that cuts against the stories Americans tell themselves about success and the intrinsic value of homeownership, and I make it with full awareness of the political obstacles it would face. My goal in publishing this is not to see such a program established in the near future (I’d support such an effort, but what power do I have anyway?), but to offer a different perspective on what housing might look like in the future — not only to become more affordable, but to address many of the inequities I believe may be unfixable in a free society where homeownership is the norm. This is very much a work in progress, so constructive criticism is welcome. Thanks!
A lovely urban street in Vallestaden, Sweden. (source)
Introduction
Homeownership is propped up by myriad governmental policies and programs as the primary generator of wealth for most households in the U.S., and this approach is at the root of our housing affordability problems. On the one hand we celebrate the wealth-building potential of homeownership while on the other hand we condemn the rising price of housing, as though these aren’t two sides of the same coin.
Our emphasis on homeownership and rapid home value appreciation has left renters behind. In 2019, the median homeowner household had a net worth of $254,900; for renters it was $6,300 (Survey of Consumer Finances, table 4). This disparity also drives the racial wealth gap, with 76% of white households owning a home compared to only 46% of Black households. Due in large part to this disparity, the median net worth of white and Black households is $188,000 and $24,000, respectively.
This chasm between owners and renters might not be such a problem if everyone had a realistic shot at homeownership — if everyone could eventually become a homeowner. But they don’t, and they can’t: The median price of housing has been rising faster than household income for decades, putting ownership further and further out of reach for those who rent. We now live in a society where young people are expected to move to another city, another region, or even another state so they can buy their first home, as though this is a reasonable or necessary sacrifice in a wealthy society.
Growth in home prices has outpaced household income growth for decades.
In high-demand cities, the root of this problem is housing scarcity resulting from sharp restrictions on residential development. And as prices rise in these cities, lower- and middle-income residents flee to more affordable locales and many wealthier households cash out to join them, causing the housing crisis to cascade outward. More homes need to be built in high-cost cities where demand is strongest, but efforts to do so are often stymied by property owners who benefit from scarcity. We are left with two groups, each with opposing goals: one — the homeowner class — who want prices to rise, and another — renters — who want them to fall or stabilize. Homeowners are more numerous, more wealthy, and hold greater cachet as keepers of the “American Dream,” and their interests have typically won out. By keeping housing out of their communities and pushing it into suburban and sprawling locations, “homevoters” have imposed massive costs on our economy, our health, and our climate, and those burdens are falling disproportionately on younger generations.
Despite this, high rates of homeownership are still central to most proposed solutions.
Two visions, both insufficient
Nearly every proposal to fix the housing market and ensure it works for more people falls into one of two categories, or both at the same time. Neither category resolves the harmful incentives for homeowners to promote and maintain housing scarcity.
The first is to make homeownership accessible to more people, often through subsidies of one kind or another: mortgage interest deductions, down payment assistance, community land trusts, and so on. While this can provide more households with the wealth and relative stability of homeownership, it also means growing the share of the population inclined to support rising home prices. To succeed at any meaningful scale could — probably would — mean impoverishing the remaining renters even further relative to homeowners. Or, as we saw with the Great Recession, it could impoverish homeowners themselves.
Homeownership as a societal goal also has many other flaws. For one, it’s not a good wealth-building strategy for a large number of households: The U.S. is littered with cities large and small where home prices have declined through no fault of individual homeowners, and there’s probably no way to avoid that. Homeownership is risky, and it’s deeply unjust and arbitrary that a teacher who bought a home in Cleveland in 1970 should end up with virtually no assets while another who bought a home in the right parts of Seattle or New York or San Francisco is today a millionaire. People who can afford to buy in high-cost areas earn much higher returns (as a percentage of their investment, not just in absolute terms) than buyers in lower-cost cities and neighborhoods, and white neighborhoods recover value faster than Black neighborhoods and appreciate more rapidly as a general rule. Buying and selling real estate also involves large transaction and financing costs that lock people into their homes even when moving might be advantageous. In the context of the existing housing market, homeowners’ lack of mobility must be juxtaposed against the instability of renting, but it’s not inevitable that renting should be so precarious. A better system would combine the flexibility of renting with the stability of homeownership.
The other category of solutions leaves homeownership mostly unchanged but attempts to make renting more affordable through a combination of housing production, tenant protections such as rent control, and public subsidies. This provides stability for renter households, but little prospect for future homeownership and the wealth it can generate. Renting is still the clearly inferior option, implicitly or explicitly, and is mainly reserved for those who lack the resources to own. Many renters in this framework view themselves as “temporarily embarrassed homeowners,” and may still support policies that restrict the supply of housing and otherwise disadvantage renters because eventually they would like to benefit from these policies as homeowners themselves.
Both of these strategies can be pursued in tandem, and often are, but neither addresses the fundamental problem of homeowners’ interest in bolstering the value of their single largest asset at the expense of renters and younger generations. Further, while the latter approach does at least seek to make renting less bad, few proposals actually strive to make renting good, both practically and normatively, in ways similar to homeownership.
We need a vision for housing that doesn’t rely on mass homeownership and the great risk and misaligned incentives that accompany it. In this post I lay out an alternative vision — one based on public and non-profit property ownership, widespread renting, and a program similar to Social Security. Social Housing Security, if you will, or a Rental Pension. You might also call it a Public Option for Housing, but one in which members of the public don't just live in the housing but earn an ownership stake over time. Whatever the name, it’s an ambitious vision, to be sure. But it’s also one that, if enacted, could be politically and economically durable in a way that affordable ownership models in a democratic society are not.
Program structure
The two key elements of this proposal are 1) widespread public ownership of housing and 2) a Social Security-like program that derives its funding from rents rather than taxes.
Government would buy and build multifamily housing, and tenants of these homes, much like homeowners who build equity by paying down their mortgage, would see a share of their rents returned over time as a defined monthly benefit. Similar to Social Security, the size of the monthly payment would depend on how much and how long the individual paid rent into the program, with a maximum benefit regardless of one’s lifetime contributions. Unlike Social Security, participants would (or could) be eligible to begin receiving benefits before retirement, though only in small quantities in their first decade or so of renting and likely with early withdrawal penalties. Every person would still have the right to own their own property; the Rental Pension program would simply provide an alternative for those who couldn’t or didn’t want to. The properties themselves could be directly government-run, but could also be managed by either non-profit or for-profit contractors.
In effect, it would be a “public option” for housing — one in which renters could build wealth rather than merely subsist. Tenants would move in and pay rent as they normally do, but instead of paying off their landlord’s mortgage, their money would be invested in a public asset that pays dividends over time. Today being a “homeownership society” means two-thirds of households own their home and nearly everyone else owns nothing; under this program far more people would own a home, but many would own collectively, as a stakeholder in a public portfolio of properties, rather than individually.
In its simplest form, only two numbers would be needed to calculate the individual benefit amount: how long the tenant has been renting and their average monthly rent over that time. For purely illustrative purposes — please don’t read too much into the specific figures — here are three examples:
In the first scenario, the resident might only be 30 or 40 years old after ten years of renting, and they might very well continue renting. If so, they could use the $150 benefit to reduce their rent to $850 per month, or they might upgrade to a larger or better-located home that rents for $1,150 per month and continue paying $1,000 out of pocket each month. They, or the people in scenario 2 or 3, might also count the benefit toward their household income and buy a home instead, if that was their long term goal. Alternatively, the renter might forestall receiving any benefits until later in life, increasing the benefits they receive at that later date.
Given the obvious benefits relative to present-day renting, limitations would need to be placed on eligibility at the outset. To start, anyone who already owned any real estate should be ineligible. Beyond that, priority should be given to applicants with low or negative wealth (including family wealth, though this is challenging) and efforts taken to ensure that people of color historically excluded from homeownership are proportionately represented at a minimum, and preferably overrepresented.
A virtuous cycle, and other benefits
Aside from wealth, there are many other potential benefits to a Rental Pension program.
In many cities, “entry-level” homes can cost $300,000 to $500,000 or more. This first step on the homeownership ladder is out of reach to many millions of households, and it’s pulling further away. The threshold for participation in a Rental Pension program would be much lower. There would be no requirement to save up for a down payment or earn enough to qualify for a mortgage, nor meet other requirements like a high credit score. Rents in publicly-owned buildings would be the same as (or similar to) those in privately-owned housing, so anyone who can afford their rent today could immediately begin to build their Rental Pension benefit. It wouldn’t be as good of an investment as homeownership in most cases, but it would be a sure thing, more flexible, and much less burdensome.
Renters in this program, like renters everywhere, would have the flexibility to live where they want, and to move when they like, without the precarity and volatility faced by renters on the private housing market. (Notably, options would be more limited early in the program if residents wanted to stay in a publicly-owned unit.) Homebuyers, in contrast, must stay in the same home, regardless of changes to job or family status, for quite a few years if they don’t want to lose money on their investment — they’re stuck. Renter households in the program would benefit from professional property management, including repairs and upkeep for which homeowners are personally responsible whether they value that self-sufficiency or not. Many do not. Major unexpected repairs can sink a homeowner financially; for rental properties these costs would be shared by all.
After becoming homeowners, many Americans end up supporting exclusionary policies that worsen scarcity and drive up the value of their homes at the expense of renters and future generations. Given our nation’s meager safety net, one can understand why so many households feel the need to circle the wagons and protect their one major asset. These exclusionary tendencies are worst in coastal cities, where the cost of housing is extraordinarily high and homeowners have more to lose. The Rental Pension program offers an alternative path, not just financially but politically as well.
As a general rule, homeowners are motivated to push prices higher while renters wish to see prices fall. Providing an abundant supply of homes is the most fundamental and straightforward way to improve affordability, and 75% of California renters support having more housing built in their community, compared to 51% of homeowners. At the most basic level, an increase in renting — a trend already underway due to the growing inaccessibility of homeownership — is very likely to increase support for building more homes throughout the state.
Even with these rosy assumptions, building support for such a plan would be a massive political challenge. One might ask why we shouldn’t simply invest that effort into something more straightforward, like a combination of rezoning to allow more homes and direct spending on construction and rent vouchers. The reason is that most such proposals have no clearly demarcated end point. Greater affordability and stability, sure, but when is the work done? No one can really say. Worse, “success” might only mean that things don’t get even more expensive, or they grow more expensive more slowly. It’s not an easy message to rally behind, but it is easy to pursue in a piecemeal fashion and fail as a result. With a Rental Pension program, the underlying goal is similar — affordability, stability, wealth — but there’s a more immediate goal that holds it all together: growing the stock of Rental Pension housing to meet demand. As long as demand to participate in the program outstrips the supply of Rental Pension housing, strategies like upzoning and direct public investment would be recognized as necessary elements of the program’s success.
The Rental Pension program also offers something to a much broader swath of society than current local, state, and federal renter programs — up to the middle class or even beyond — while also enabling the kinds of reforms that will directly benefit and protect poorer households. If we only have solutions for the poor or middle class, but not both, we will likely fail to build the support needed to make real change.
Just as important as providing enough homes is providing them in the right places. Today we do a poor job of building homes in communities with the best jobs, schools, transit, parks, air quality, and other amenities. Instead, we build disproportionately in working class communities and communities of color, where residents have less political power and may be more vulnerable to displacement. As part of a Rental Pension program, new housing production should be prioritized in places with the greatest demand. Demand could easily be measured using wait lists for publicly-owned Rental Pension program housing.
Prioritization of new housing in these communities would take the form of policy changes, namely upzoning and direct public investment. First and foremost, building housing in high-demand neighborhoods would keep prices stable, protecting renters and preventing property owners from capturing all the value of rising prices for themselves, to the detriment of renters and future generations. It would also ensure that the burdens of new development — construction noise and traffic diversions and the like — were borne by the most privileged residents, rather than the least. Strong displacement protections like right of return should accompany such a program to further protect those most vulnerable to redevelopment. (Such protections should exist even in lieu of a Rental Pension program.)
Very importantly, renters would be motivated to support more housing in their communities because it would directly affect the rent they pay. In this framework, more renters beget more housing begets greater affordability, which in turn attracts more renters: a virtuous cycle. In left-leaning cities, and where residents are more skeptical of for-profit development, housing production could be further supported by a Singapore-style development corporation, building homes that would be part of the Rental Pension program from day one. That said, with the right tenant protections there’s no reason many of the homes couldn’t also be built privately.
By making renting more appealing, homeownership would likely become more affordable too. Homeownership would still be preferable for many households — perhaps even the majority — but it would no longer be the only path to security. As a consequence, demand for owner-occupied housing would fall and prices would moderate. Today, homeownership is the smart choice for nearly anyone who can afford it; a Rental Pension program would make renting a genuinely viable alternative depending on how each household valued things like risk, return on investment, stability, and flexibility. It can’t be overstated how valuable it would be, the peace of mind it would offer, to let people simply live as renters without worrying that their choice was condemning them to poverty and precarity in their later years.
Finally, a combination of increased affordability and housing abundance in the highest-demand areas would pay financial dividends beyond the pension itself. People would be less burdened by the cost of housing, with more money to spend on food, healthcare, education, and so forth. They’d also be able to access jobs, good schools, and other amenities more easily. Homelessness would be less common, and less easy to fall into. Housing wouldn’t cause so much financial stress, which along with more walkable neighborhoods and less air pollution would lead to better health. Greenhouse gas emissions would fall, helping avert the worst impacts of climate change. Public agency budgets would improve since it’s less expensive to provide services to dense communities than sprawling ones.
Paying for it
Where does the money come from? How can the government afford to distribute these benefits after paying its own debts on property acquisition, management, taxes, insurance, any utilities not paid for by the tenants, and maintenance and capital expenses? The short answer is: from the profits currently being captured by landlords and lenders. With low-interest municipal bonds — or better yet, super-low-interest federal loans — state and local governments can acquire multifamily housing with little or no down payment and still break even on all these monthly expenses.
For instance, take this 12-unit property listed for $4.675 million in a popular Seattle neighborhood. (Note: the listing has since been removed, but the numbers are still illustrative.) The building currently brings in $26,745 a month in rent. If it were purchased with a loan for the full value of the building, with 2% interest (slightly below market rates right now) and a 30-year term, the monthly payment including property taxes and insurance would total around $21,500. This would leave a little over $5,000 per month to cover all remaining costs — a pretty narrow margin for 12 units, admittedly. Even in this case, though, with no money invested up front, the public would own the property outright at the end of 30 years, with a value far in excess of any necessary rehabilitation costs over that time. That value could be returned to the tenants who paid it off, with the cycle restarting and repeating for each new household. If the government gave itself more favorable financing it could be far more affordable; with a 1% interest rate and 40-year term, for example, the monthly payment would fall to $16,000 per month. This would mean more value available for distribution back to renters.
The 12-unit property listed for $4.675 million in December 2020.
To take a step back, the U.S. health insurance system might serve as a useful analogy. Right now we (or our employers) pay a lot of money for health insurance, mostly on the private market. That involves a lot of middlemen who each take their cut along the way, driving up the overall cost, and as a country we’re left with some of the worst health outcomes and by far the highest healthcare prices in the developed world. A single-payer insurance program — even a voluntary one in which you could keep your private insurance if you preferred — would cost a lot of money, but it wouldn’t be additional money, necessarily. We’d just be taking what we’re already spending on the private market and diverting it elsewhere. In the case of health insurance, we’d be replacing premiums with taxes. In the case of a Rental Pension program it’d be even simpler, replacing rents paid to private landlords with rents paid to a public ownership entity. And as with a public option for health insurance, a public option for housing would likely lead to reduced costs for everyone.
Whatever the particulars, the overall concept is straightforward: The government goes into debt to acquire apartments, renters pay off that debt and thereby build equity in the government’s property portfolio, and the government returns most or all of that equity in the form of a Rental Pension benefit.
Clearly, there’s much more to say about the financial details, but I don’t want to get too hung up on them in this initial proposal. Suffice it to say that the government can afford to do this without accumulating large sums of capital up front, if it chooses to. The federal government’s participation could enable more favorable financing and a much faster pace of acquisition, without question, but it’s a model that could be piloted at the state or local level without that support. These jurisdictions could help make their case by pointing to all the financial benefits discussed at the end of the previous section.
Conclusion
We need to create a housing market in which renting isn’t just a step along the path to homeownership — a step that many people never manage to move beyond, and others fall off of into homelessness. Until that time, homeowners will continue to dominate the political scene, and governments will continue to choose scarcity and rising home values over abundance and affordability. A Rental Pension program, or something like it, could be how we break the hegemony of homeownership and all the negative consequences that accompany it. Let’s talk about it.
Questions
This is a big, complicated idea, as anything challenging dominance of homeownership must be. It’s also only a first draft, with much remaining to be worked out. Below are some questions I hope you can help me with — and please add your own questions or ideas if you don’t see them here and they weren’t addressed above!
What should this program be called? Social Housing Security is clever, perhaps, but not actually descriptive. Rental Pension is straightforward, yet possibly too simple. Something with “public option” in the name could also make sense — it accurately conveys the voluntary nature of the program, and has generally positive connotations.
How would you center equity, especially racial and ethnic equity, in the program? There should absolutely be an effort to provide disproportionate benefits to households of color, particularly those who’ve been prevented from building generational wealth. But what would that look like in practice?
There would likely be significant interest in the program, given that it would (hopefully) be indistinguishable from renting on the private market except for the pension benefit. The program would have to grow building by building, certainly unable to keep up with demand, so how would you determine eligibility for the program in its early stages?
The benefit is currently envisioned as something that begins to be paid out within ten years or so, then growing over time. If it didn’t begin to pay out until later, say after 20 or 30 years of renting, it could pay more at that time. Would that be better? Maybe the solution is to just give people the option, similar to how we let people start receiving Social Security payments several years early at a reduced rate?
Rather than being structured as a pension fund, maybe this would make more sense as a dividend similar to the Alaska Permanent Fund, which distributes a share of oil revenues to residents each year? This would certainly be simpler to manage, and you could still structure it progressively so that lower-paying participants received disproportionately smaller benefits and higher-paying participants received disproportionately less.
How do you handle the fact that some regions will decline over the coming decades, leading to poor or negative returns on housing investments? The most fair thing would probably be to pool all revenues and costs nationwide, including appreciation/depreciation of the property value, and distribute based on that surplus. That said, this might feel somewhat unfair to residents of higher-cost regions and would reduce the resources available for benefits/dividends.
What if the program is a huge success and it makes housing so affordable that there aren’t many dividends to pay out — too little equity? In the most important sense, this would be great news because it would mean that people’s rents weren’t constantly going up and we were building housing in places with the most jobs, good schools, sustainable transportation, etc., but people might not see it this way.
It would be great if people could invest their own money to support the rapid expansion of the program, beyond just paying rent, even if they weren’t renters. This would essentially be like a social impact investment fund. How might that work?
How does this fit into the COVID-19 pandemic? Having a nest egg built up from renting could have had a very positive, protective effect for many tenants over the past year. That said, government should have been providing direct support such that households didn’t need to dip into their own reserves to weather the storm. How else could this program have adapted to the needs of the time?
How would you handle situations where people lived with roommates? Would it just be a matter of self-reporting what share of the rent each household pays? Would married couples get individual or combined payments, and if they were combined and the couple split up, how would it be divided?
There would probably be pressure to make some units available to low income households, but if subsidies weren’t provided then it would reduce the pension benefit that could be paid out. How should that tension be handled?
I don’t think this proposal competes meaningfully with low-income housing production and acquisition, particularly if it doesn’t rely on public funding, but I’m sure there will be some conflicts. How might a Rental Pension program, which would serve people who could afford market rents, come into tension with existing programs like Low Income Housing Tax Credits and Housing Choice Vouchers, or possible future programs like public housing development and acquisition intended for low-income households?