Bypass Banks to End The Housing Slump

There is a major anomaly about the current housing slump that everyone
is ignoring: there is no weakness in the demand for houses. In fact,
demand is so overwhelmingly in excess of supply that we should have a
boom with no end insight. Instead, we are facing a major economic down-
turn, with the prospect of a bad recession.

There are two major factors contributing to the current situation. One is
that bankers lent large amounts of money to people who could not repay,
and then packaged their paper as investments for others, in
essence making the loans risk-free for themselves. As the investments
in sub-prime mortgage securities went sour, credit became much tighter;
even credit-worthy home buyers are reported to be finding it difficult to get
loans. The second factor is that the boom in house prices over the last
five years has raised them beyond the reach of many buyers.

The credit crunch and affordability are quite separate issues. If we
address them simultaneously and let the basic supply/demand equa-
tion in housing come into play, the slump would be over in a matter of
weeks. The question then becomes technical. How do we do it?

The Solution
It used to be that there was no national market in housing; every
neighborhood was considered a separate market, and all were
illiquid because matching buyers and sellers was a painstaking and
time-consuming process. Equity in housing became more liquid with
the innovative loans and lines of credit in the 1990s, but since 2006,
when the rapid run-up of house prices came to an end, there has been
a return to more conservative trends. This is being applauded as a return
to economic virtue, but there is no innate value in keeping real estate
captive to a system that dates back to medieval Europe and gets in the
way of a free market. We could transform that system by selling houses
by lottery on the Web under the following conditions:

1. Houses would be listed on the Web with three prices. One would be the
price it would fetch in the lottery. The second would be the “buy it now” price
set by the owner. And the third would be a “minimum guaranteed price” (MGP)
set by the listing real state agent.

2. Houses would be listed on the Web only through a licensed realtor. If the
person who won the house did not want to occupy it, the realtor would guar-
antee its quick sale by conventional means at the MGP.

3. A house could be sold by lottery only once every
five years.

4. All house prices sold by lottery would be set in multiples of $25,000, and
all lottery tickets would be $25. Vending of tickets would be entirely
electronic, with money held in escrow until the necessary number of
tickets was sold. [For instance, a $500,000 house would require the
sale of 20,000 $25 lottery tickets, and till that number was sold the money
received would remain in escrow.Cheaper houses would require the sale
of fewer tickets, improving the odds of winning; more tickets would have
to be sold for expensive houses, raising the odds.]

5. The winning numbers would be drawn once a week, using the same
mechanism as is now used for Lotto, and would apply to all houses for
which the necessary complement of tickets had been sold.

These arrangements would

(a) Create a new national housing market.

(b) Make home equity highly liquid.

(c) Provide a large number of houses at an affordable price (the MGP).

(d) Ease the credit crunch: those who elected to stay in the houses won
by lottery would have no mortgage; those who bought the houses at the
MGP would find it much easier to find mortgages for the lower amounts
financed.

A two-tier system of selling houses should be viable as long as
the demand for housing remains overwhelmingly more than supply; which
is to say, for the foreseeable future.

Wider Implications
This proposal will make it feasible for everyone to have a realistic hope of
realizing the American dream of owning a home (the odds of doing so
would be much better than with any lottery game now available). It would
support a steady growth in new housing and create a powerful incentive to
reclaim and upgrade derelict and old properties. Communities could
generate revenues from lottery sales to make all housing more energy
efficient and eco-friendly. Revenues could also be generated to lower
school and municipal taxes, and perhaps eliminate them altogether
in larger communities.

Transforming the real estate market as proposed will require
firm regulation and oversight. One aspect of this must be to prevent
organized crime from trying to muscle into control of a lucrative new market,
or to use it as a means of laundering money. A second area of oversight
must be to ensure that MGPs are set fairly. Either state bodies or industry
associations would have to set guidelines and provide oversight to prevent
conflict of interest; the “due diligence” requirements now in place for real
estate agents would have to be adapted. Local habitability codes and
inspection requirements for housing offered for sale could remain largely
the same.

Reactions So Far
I had this idea about solving the housing slump in October 2007, and
wrote it up as an op-ed piece for the New York Times; they didn't publish
it. Then, thinking the idea had money-making potential, I tried it out on a
few real estate agents in the suburban town where I live; they were
enthusiastic about the idea, but said the state Gaming Commission
would have to authorize the sale of houses by lottery. After a half hour or
being passed from person to person at the Gaming Commission and
Games of Chance office, I decided that Wall Street clout might be
necessary to get a fair hearing for the idea and called up the wife of
an investment banker in New York. She was intrigued by the proposal
and said she would try it out on her husband. "But I must warn you,
he doesn't like new ideas," she said. The next day she called back.
"He said to tell you we're not real estate agents." (The major
investment bank he worked for had taken a bath on subprime
mortgages, and his understanding was probably clouded on the
issue.) Finally, I sent the proposal to the CEO of a state lottery,
thinking someone already in the business
might see the potential. The CEO's assistant, who I called
after a few days, said her boss had taken the paper home to
study it. Two weeks later, another call revealed that my paper
had been passed on to some one else for possible action.
And so it stands.