As most people are undoubtedly aware, the whole point of requiring a down payment on a home is to make sure that homeowners have "skin in the game" and to prevent the kind of rampant speculation that undoubtedly comes when banks and other lending institutions make it easier for American gamblers (a.k.a. "real estate investors") to play around with other people's money.
As we all learned the hard way back in 2008, lack of discipline on enforcing down payment rules results in massive pricing bubbles in a $30 trillion residential housing market that has devastating consequences when they pop...it all results in charts that look like this:
Alas, regulations designed to thwart speculative housing bubbles (regulations that likely wouldn't be required if banks were simply allowed to suffer the consequences of their bad financing decisions...but that's a discussion for another post) are only as good as the latest business model designed specifically to evade them. And, as Axios points out this morning, two of the latest such business models are eerily reminiscent of the insanity we all witnessed in 2006.
The first is called Unison Home Ownership Investors and is a company that raises capital from pension funds specifically to "invest" in down payments on houses where the buyer can't afford to put 20% down. It's a "win-win" relationship where the buyer gets to purchase a house he/she really can't afford and some unsuspecting teacher in Minnesota gets to "invest" in the equity slug of a highly levered house in Bubble Town USA.
Unison co-invests with prospective homebuyers—typically putting 10% down along with a bidder's own 10%, helping them qualify for a standard 20%-down home loan. Depending on the lender Unison partners with, a homebuyer can end up putting as little as 5%:
Unison's investors—who Riccitelli says are typically large pension funds with long investment time horizons—realize a profit only when the home is sold. The product is attractive to such investors because they need assets that match their liabilities, i.e. pension payments sometimes 30 or 40 years away.
Other than a few private equity funds that bought up cheap single family homes at the housing market's bottom between 2010-2012, there are few ways for investors to own a diversified pool of residential real estate, a market that at $30 trillion is more valuable than the U.S. stock market
A homeowner can buy Unison out at any point after three years—as long it recoups its original investment. A homeowner can sell the home to another party at any point, however, even if it results in Unison taking a loss.
Meanwhile, a startup called Loftium will pay you entire down payment if you just agree to rent out one of the rooms in your new house over Airbnb for a specified period of time. But there's a catch...for now Loftium is only available in Seattle.
Loftium has an alternative strategy. It will will contribute $50,000 for a down payment, as long as the owner will continuously list an extra bedroom on Airbnb for one to three years and share most of the income with Loftium.
This strategy might be particularly appealing in booming markets like Seattle, where rent prices are rising even faster than home values themselves, and which are popular tourist destinations.
All of which may help explain why Seattle home prices have suddenly gone parabolic...
Well, that and all of the Chinese money that needs to be laundered...