Point – rethinking owner-occupied residential real estate
a16z.com
a16z.com
And they don't contribute to any property maintenance costs.
Nice. So they get to take part in full asset appreciation without having to pay to maintain the asset.
So if prices go up, you lose and if prices go down you also lose!
From the point of view of a prospective homebuyer, at first this seems attractive as an avenue toward mortgage reduction. However, as you point out, it's hard to identify where this service adds any value to the asset. I fear that it ultimately results in another large pool of money pumping up the demand side at the expense of new buyers.
A home which might ordinarily sell for 400 might now sell for 480 because sellers can expect homebuyers to Point their way into affording more home, so might as well charge more for that home.
I don't see this ending well for anybody long-term except for buyers and investors who buy into markets before Point et al. catch on.
What's the expression? "It's expensive to be poor," I think? This seems like a perfect example. Buyers, especially buyers with less capital to risk, trade some immediate cost for a decent loss of upside and a decent gain of downside. Except because quite a few of these less-advantaged buyers could probably have afforded to eat the cost they sold to Point, sellers realize they can charge more to still make that money back from the buyers who otherwise could've put that money to better use.
Good lord, the more this stews in my head, the more this entire pattern seems like a massive disaster waiting to happen.
It's an international problem.
I looked at a house 20 feet from a busy train track and no discount from identical houses a block away.
Another one by some kind of firehouse air raid siren and again no discount.
More recently REITs have begun buying up multi families in cities that have historically been owner occupied (typically by immigrant and other marginalized people).
You can see the direction they are moving. Point has done the math and concluded buying single family houses and condos is too risky as a landlord but buying a share of one with generous terms isn't.
Ultimately these shares themselves will be tranched and packaged as CDOs that the big REITs can buy, Point being the facilitator.
They all seem to have leveraged loans that make them sensitive to interest rates.
Normally when you're comparing asset classes you don't compare the average of one class to the absolute best possible case in the other. The last fifteen years have been, IMO, a bubble-fueled aberration, and places like Palo Alto are ground zero for that bubble. I'll bet the S&P 500 compares much more favorably to average real estate appreciation over the same time period. Also, why the 60 year time frame, as opposed to, say, 50 or 100?
If the idea is to put people in houses we should do what the Koreans do. They have a contract type called "jeonse", or "key money". It's kind of an intermediate between renting and owning - essentially you give the owner a large lump sum (but not enough to buy the property) for two years. You don't pay rent, and you get all your money back at the end of the contract.
You benefit by getting a place to live without paying rent. The owner benefits by having the use of your money for two years (which he may be using, along with his own money, to buy the place).
It's easier to go rent-->jeonse-->buy than rent-->buy. I'm not really sure why we don't have something like this in the US already, particularly when you can't get a decent return on your savings.
You can get a Home Equity Line of Credit for around 3%, so it's just not worth it to use jeonse. Compare these:
1. I get $100k jeonse for 2 years for my condo that is worth $200k. 2. I rent out my condo for $1,000/month, and take out a $100k HELOC for 3%. So every year I pay $3k interest and have $12k rental income, $9k win for me.
Clearly #2 is the superior option.
Although we often think of landlords and renters in an adversarial way, they might be able to work out a deal that is better for everyone than selling and transferring ownership to the new residents, especially in California.
Think about an an heir to a house in palo alto, a house that her parents purchased in 1970. She doesn't really want to live in it, and is deciding if she should rent it out or sell.
Let's also say that her parents were wise about refinancing and did so when rates were very low. Because prop 13 preserves the low taxes through inheritance, her taxes are extremely low, and would skyrocket if she sells. Furthermore, let's say interest rates have gone up, so whoever takes out the new mortgage will pay a higher rate. Alternatively, if rates are low, she can most likely refinance and pull some money out. If she's smart about this, she can remain cash flow positive and still have a large chunk of money without selling.
In some ways, it just doesn't make sense to sell. It might make sense, at this point, for people who own property to become permanent landlords, and for the vast majority of tenants to be renters. This might even be better for renters, since the overall cost of housing would be lower due to overall lighter taxes and interest rates.
Interestingly, that hasn't happened, so there is clearly a strong motivation to not be a landlord and/or to be an owner rather than a renter. The income tax break could be a big factor here as well - perhaps that exceeds the value of the property tax break?
This is exactly how prop13 distorts the market.
> This might even be better for renters, since the overall cost of housing would be lower due to overall lighter taxes and interest rates.
Until they want to buy. Or until income taxes / sales taxes are raised to counteract falling property taxes.
Individuals want to be levered as much as they can to the house they buy (I don't have to mark this to market daily), the main preventive cost of the 20% down, Point doesn't reduce the capital required for that, it just makes the mortgage smaller.
Why would I want a lower tax interest write off, still have to put up the same amount of initial capital, pay for all maintenance etc, but only down 66% of an asset?
So I'm not sure what the magic is supposed to be. Is it that they get a larger share of the capital appreciation upside than would be implied by their ownership stake? Also note that this relies on the (normally reliable) assumption that real estate will forever increase in value.
This seems both horrifying and inexorable.
I think this is super interesting! This type of financing is really common in larger real estate & project financing deals: one speaks of the "capital stack", which can include senior debt, junior debt, preferred equity, and common equity.
I think that the reason this hasn't been done before is because of the complications of finding, diligencing and funding individual homeowners. I definitely agree with the OP that this will be an attractive investment for institutional investors, but getting dealflow from the mortgage industry will be extremely capital intensive... I would expect both a lot of direct retail marketing expenses, as well as pretty rich commissions to real estate agent networks and mortgage brokers to kick home buyers their way. Really cool idea though!!
As other commenters have mentioned, this can only exacerbate any housing bubble, which is true but kind of beside the point. Yes, any reduction in cost of capital will eventually inflate asset prices, but is that a reason to stop offering mortgages, car loans, etc?
Dear god, definitely yes in the case of Point. Are we trying to price out a massive population of disadvantaged people? Mortgages made homes attainable, but there's a reason we enforce minimum down payments etc.: aside from mitigating risks to lenders, it's also to mitigate price inflation.
This is an entirely new product designed to help people with the capability to invest to do so on the backs of those who don't. If we're readily acknowledging the potential, ney, inevitability of price inflation for these assets, we're also acknowledging that there is absolutely zero benefit for people who might consider using Point to aid in lowering their upfront homebuying costs. The net result of this is that not only do disadvantaged homebuyers pay as much as they would pay before Point but for less home, they substantially lose out on upside as a result. All of this is an inevitability if the model proposed by Point catches on.
This has exactly zero long-term upside for tons of people who don't make substantial discretionary income.
Residential mortgages made houses affordable, but they also directly led to the historic inflation in housing prices that has happened over the last half-century. The vast quantities of capital that were unlocked into the residential mortgage market by mortgage-backed securities had exactly the same dualistic effect: they made it easier for middle- and low-income families to buy homes, and eventually inflated the market to dangerous degrees.
Providing senior equity, or junior debt, to finance these transactions will do exactly the same thing. It will make it easier in the short term to buy a house. It will mean that you can finance your house purchase without locking yourself into excessively high monthly payments. And, if successful, it will eventually mean that so many more people can afford houses that the prices will rise in the future.
This is just like how a judicious combination of venture capital and venture debt helps you finance your startup for a minimum of dilution, without excessively high monthly debt payments, but the availability of capital means that rent in SF is inflated.
Yes, Point and its financiers will get rich on this, as did the first mortgage-backed securities dealers and the institutional investors that backed them. But so did the people who bought houses in the 90s with suddenly flush access to mortgage financing.
As far as I can tell, we both see the same outcome, whereas you don't see how the loss of upside to disadvantaged (read: the vast majority of) buyers shifts wealth upstream while endangering the economy in the event of a downturn when homeowners will find themselves unable to fall back on appreciated equity in their homes.
All this seems to me to be is a sophisticated company attempting to pass off as new and innovative to the unsophisticated public something that already exists.
Even then, I'm not so sure. Because when renting, yes, you pay a premium, but if the house needs repairs, it's not on you. If something happens, you walk away free and clear, etc. For a "lower monthly payment", you are taking on a much larger amount of risk that is Home Ownership and giving away the upside of that risk to someone else who has no obligations for maintenance/home improvements.
This isn't "Reinventing Home Financing", it's buying a home with somebody else who isn't responsible for most of the costs of home ownership yet gets all the benefit. If you can only put 10% down on a home and are that desperate to have a 80% LTV mortgage, sure, this would do it. But there are MANY lenders who do a conventional home mortgage with 5% down. Using Point isn't worth the savings on the Mortgage Insurance. Maybe if you bought new construction, maybe. I'd still say on new construction you're better off taking the chance and not selling the equity in your home.
However, today, do you really ever own your home? Even if you owned it outright, you're still paying easily 1.5-3% of its value a year in taxes. This is a completely different argument of course.
They don't even help with down payments. Minimum buyer down is 20%. Better to go with a conventional lender.
But of course those acts actually would reduce housing prices.
http://help.point.com/article/15-how-do-homeowners-qualify-f...
(They want minimum 20% down, for example.)
Suggestion to Point: Allow potential customers to fiddle with quote parameters without redoing the entire form. And make it clear when a parameter will immediately disqualify them.
I am fascinated by the rhetorical device being deployed here. In the beginning of the sentence, the "lunch" is the money that you save through lower mortgage payments. By the end, the "lunch" is Point's profits, and the tidy transition suggests that everyone wins.
That makes the contract behave like a short position. If the price of my house starts to rise rapidly, I need to "cover" or risk not having the cash when the term expires.
It's like being long and short in my house at the same time.
That is where I stopped reading. Palo Alto 60 years ago is such a rigged example, why should I believe anything the author says?
Which means it's almost certainly trap. Fifteen years from now, we as a society may regret having allowed this.
I don't currently know of any way to lock in current prices for a future purchase.
"If you don't sell, you can buy back Point’s stake at any time during the term at the then current appraised property value."
So it's like a REIT but the income generation is on the appreciation of the asset?
Assuming Point is smart about the homeowners they choose to fund, this ends up being a bad deal for anyone creditworthy enough to qualify in the first place.