Tuesday, September 30, 2008

Residential Homesteading for Every Citizen?

For quite a few years BB (in this case "Before Blog," not "Before Billionaire Bailout Bonanza") we've advocated empowering ordinary Americans with the means to acquire and possess wealth-producing assets. Abraham Lincoln's 1862 Homestead Act made it possible for thousands of people who had previously owned no land to acquire it relatively easily. As an advance on this, we've been pushing a program we originally called "Industrial Homesteading," which we changed to "Capital Homesteading." With the probable acquisition by the U.S. federal government of thousands of residential properties, we think it's time to add Residential Homesteading to the Capital Homesteading proposal through the Homeowners' Equity Corporation.

You might reasonably ask whether this is a change in our stand on using credit for nothing that does not in some way produce a good or service that results in income that can be used to pay for the asset. Not to sound flip, but that is a very good question.

Ordinarily, you'd be correct. Using newly-created money to purchase a home in which you live instead of renting out would be an explicit violation of our principles regarding money and credit. What the HEC would do, however, is use newly-created money to purchase the federal government's soon-to-be portfolio of distressed properties, and rent them out.

As "rentable space," the homes would be capital investments. That is, they would be "self liquidating," generating a service (a place to live) for which a tenant makes a monthly lease payment. Using capital credit to invest in rental property is as legitimate as any other capital investment.

The difference is not in the asset — rental properties — but in who owns the asset. Ordinarily, an owner of rental property does not live in the rental property and make lease payments to him- or herself through the real estate holding company he or she owns. Using the HEC, however, allows the tenants to build up equity, not a faceless owner somewhere upstate. The equity is not directly in the home being rented, however, but in the company (the HEC) that owns the home being rented. The home itself is a capital asset, not a directly-owned consumer item. The tenant owns part of the company that owns the home, not the home itself.

If you stop to think about it, who would make better owners of the rental properties than the people who are renting? The HEC, the commercial banking system, and the Federal Reserve could bring this about quite easily.

On the other hand, should the federal government divest itself of the properties it seems ready to acquire in the usual way, the only beneficiaries will be the Billionaire Boy's Club as they reap another windfall bonanza from one of the biggest short sales in history.

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15 comments:

bloguista said...
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bloguista said...
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Michael D. Greaney said...

I don't think so. When the HEC's liability is fully repaid by receiving lease payments from the tenant, all the shares representing the original purchase of the house are in the hands of the tenant. If at that point a tenant exchanges his or her equity in the HEC (which is indirect equity in the house) for direct equity in the house, all that happens is an exchange of the form of ownership.

This is similar to the way a Participant in an ESOP "sells" his or her shares in the ESOP to the remaining Participant when he or she "cashes out," that is, receives cash for the value of his or her shares when leaving the company. This cash can then be taken and reinvested in other shares that will, presumably, generate future income in the form of dividends.

For a HEC, when a tenant exchanges HEC shares for title to the house, the change is from actual rent payments to what economist Frank McKnight called "imputed rent," that is, what you, an owner, would be paying to someone else if you were a renter.

Ultimately, the HEC is a way to become an owner of your own house. Whether you continue to own it through the HEC once it's fully paid, or whether you take direct title, is a "prudential decision." It doesn't change any of the basic principles of the Just Third Way, just the application of them with respect to the form of ownership.

bloguista said...
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Michael D. Greaney said...

The key to understanding the HEC is that while a tenant is in the process of paying for his or her equity, the home is a capital asset, owned by the HEC. At the point where the acquisition loan is paid off by the HEC out of the tenant's rent payments, the tenant has accumulated savings equal to the value of the house.

That is, "pure credit" has been used to accumulate savings (savings = investment in all cases) in the form of equity in the HEC -- which, when paid off, become not the future savings of pure credit, but existing savings of investment.

A fundamental right of private property is the right of disposal. An owner of capital or consumer goods should be free to trade for consumer goods or capital, respectively, thereby "changing" the form of what is owned from capital to consumer goods, or vice versa.

While the HEC equity is being acquired, it is capital. After it is acquired, the rights of private property dictate that, should the owner so choose, he or she can trade his or her capital for a consumer item (title to the house), or retain his or her capital investment in the HEC by remaining a tenant and retaining the shares.

Politically, if you mandated that a tenant could NOT exchange HEC shares for title, you'd never get the politicians to enact the necessary legislation. On the other hand, if you don't use pure credit and Kelsonian capitalization techniques to solve the mortgage crisis, we'll be right back where we were before, only worse off.

bloguista said...
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Michael D. Greaney said...

Absolutely. As long as anyone owns capital, he or she is a capital owner (we try to avoid the word "capitalist," as it is a pejorative invented by socialists to describe a system in which only a few people own the means of production). If a person voluntarily trades capital for consumption goods or services, that is his or her right, whether or not it is a wise decision.

bloguista said...
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Michael D. Greaney said...

Yes. The shares would be released into the possession of the tenant as payments are made, thus gradually building ownership over time as the debt is repaid. We have even proposed that a tenant pay one month's rent in advance (common practice in the U.S.) to release a minimum of one share immediately, so that each tenant is a capital owner from the very beginning.

bloguista said...
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Michael D. Greaney said...

Did you mean post tax earnings (that is, after tax)? Capital Homesteading would actually not be financed out of tax deductions, but by tax deferrals. The "natural limit" on private property (death) would trigger a "taxable event" to the heirs, thus adhering to the Kelsonian principle of taxing income once, instead of the current two or three (and even, rarely, more) times.

A HEC would use the same principle. A tenant would make lease payments out of post tax consumption income. The HEC, as the holder of the mortgage, would deduct payments of principal as well as the more usual interest and administrative costs of running the HEC. This is because the tenant has already paid taxes on the income used to make the lease payments, and (because the tenant is also the owner of the HEC) should not be taxed twice on the same income.

When a tenant moves and sells HEC shares back to the HEC, the tenant would only recognize whatever capital gain or loss resulted from the sale, not the total amount of the sale. Under current U.S. law, even that is deferred if the amount realized in the sale of a house is used to purchase another residence.

bloguista said...
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Michael D. Greaney said...

Yes -- the tenant of a HEC-owned property is analogous to the customer of a customer-owned utility. He or she is the same individual in two different capacities. He or she acquires shares in the utility (or the HEC) by paying for the service (utilities or rent) as a customer. In essence, the customer/tenant is paying the money to him- or herself as an owner, but to the person of the corporation of he or she is part owner. Instead of benefiting the State or a rich financier, however, the amount of the lease or utility payment that goes to purchase shares benefits the customer/owner. This is why, once the acquisition debt is retired, the lease payment (or utility costs) can be reduced to what it costs to run the system. The arrangement is in microcosm what Say's Law of Markets is for an entire economy, where "production = income." In micro, the producer (owner) and the consumer are the same individual.

bloguista said...
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Michael D. Greaney said...

Yes, exactly. The HEC shares are purchased by the tenant with the earnings on the shares themselves -- which, due to the "dual nature" of the tenant as both "customer" and "producer" can sound a little confusing until you realize what's going on.