Limited Equity Cooperative Housing

In the October edition (#116) of the Left Business Observer, Doug Henwood makes a great proposal for housing policy:

First he suggests the creation of a public housing institute that buys up defaulted mortgages (instead of letting the banks keep them). The defaulted former owners would become tenants, allowed to stay in their homes, who pay rent to the public housing institute. When the tenants move out, the house is sold as a limited equity cooperative.

Under a limited equity cooperative arrangement, the owners sell the house back to a cooperative (set up by the public housing institute) at a price reflecting inflation and improvements. The owners would not get speculative gains.

This would help avert the growth of a too large, parasitic landlord housing economy–and while economists would like to think renting indefinitely would not be such a bad option, in reality, landlords in general mean housing stock degradation and failure to improve housing stock. For good reason was Adam Smith was no fan of the rentier class. Having a stake in the place you live is much more likely to result in improving its livability and sustainability, as well as the neighborhood.

A limited equity cooperative would create a market of housing based on needs rather than casino capitalism. After all, housing should be treated as a basic need. As Henwood says, “We’re accustomed to treating rises in house prices as good news. But why is it good news when one of life’s essentials gets more expensive?”

Additional facts:

Whereas houses on average cost only about three times their owner’s income in 1985, by 2005 they cost over 5 times their owner’s income. (Harvard Joint Center for Housing Studies)

Currently, housing prices are staying the same as last year. But from 1995 to 2004, housing prices continued to increase more and more every year. By 2004 housing prices were increasing nearly 12% over 2003. In the last housing boom and bust cycles, housing prices continued to deflate for four years after the boom broke. That means housing prices should begin to decrease until about 2010. Economists estimate that the most recent, credit-fueled boom overvalued houses by about 40%; but they warn that the market will not be elastic enough to return to correct valuation. Instead, housing prices are more likely to decrease by 20-25%.

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