May 30, 2024

There’s more than one way to own a house these days.

Sites including real estate startup Pacaso are opening up a new market for people looking to own just a fraction of a house — for a fraction of its total price. Instead of laying claim to an entire single-family home, Pacaso sells luxury single-family homes to groups of buyers, a practice known as fractional home ownership. Someone could, for example, own one-eighth of a multi-million dollar mansion in Florida’s coveted Marco Island for just $736,000.

“There is a pressing issue: an affordable housing crisis,” Austin Allison, Pacaso’s CEO and co-founder, said in an emailed statement. The effect of fractional home ownership models like Pacaso’s is two-pronged, he said: They create additional inventory and optimize the use of existing housing to help keep up with demand and improve affordability, he said.

“The current imbalance between supply and demand is a catalyst for transformative changes and innovative solutions within the real estate industry,” Allison said. “Our focus at Pacaso lies in the latter — efficiency in the use of existing supply through co-ownership, which not only addresses affordability but also contributes to the creation of more available inventory.”

The prospect of owning a house has begun to feel increasingly out of reach for many Americans, particularly first-time buyers. Renters’ self-reported probability of ever owning a home fell 4.3 percentage points to a record low 40.1% as of February, according to a New York Federal Reserve survey published Monday.

That’s thanks to a confluence of factors, including soaring home prices and stubbornly high mortgage rates. In March, the median sale price of a home rose 4.8% from a year earlier to $420,321, according to Redfin data. The average rate on a 30-year-fixed mortgage has remained above 7% for the past month.

Read more: Home prices aren’t going down in a single major U.S. metropolitan area

While Pacaso, which was founded in 2021, says it helps ease the affordability burden and supply constraints, it remains a niche part of the real estate market, Bankrate analyst Jeff Ostrowski said. And while it does address supply, he said, the effects are felt more in discretionary markets given that most of its listings are luxury properties.

“The real housing shortage problem is not a shortage of beachfront vacation homes,” Ostrowski said. “It’s a shortage of three-bedroom, two-bathroom homes, near schools and jobs that families can live in.”

Co-buying itself isn’t new: 62% of home buyers said they purchased and share ownership of their home with at least one other person, according to a 2023 report by real estate listing platform Zillow. But the fractional home ownership model as it exists today is aimed at wealthier individuals who are looking for a second home, Ostrowski said, rather than first-time buyers or those who are looking for their primary residence.

“I think this is pretty clearly targeted to the upper-middle class folks,” he said. “People who have enough wealth that they can own their primary home and they can consider buying a second home, but either don’t want to or don’t have the cash to go out and spend $1 million or $2 million on a second home.”

Other models of fractional homeownership have also cropped up allowing investors to own a share of homes much like retail investors can own shares of companies. Sites like Jeff Bezos-backed Arrived, and Fundrise, which received $770 million in financing from JPMorgan Chase, allow people to directly invest in residential real estate.

Arrived’s CEO and co-founder Ryan Frazier said the company’s “goal is to make the wealth building potential of owning rental homes & vacation rentals more accessible,” thanks to a simplified process and lower costs.

Policymakers, however, are not too keen on these ventures, which they say are hurting ordinary people looking to buy and rent homes. Congressman Ro Khanna, a California Democrat, has blasted Arrived’s model.

“The last thing Americans need is a Bezos-backed investment company further consolidating single-family homes and putting homeownership out of reach for more and more people,” Khanna said on X in December. “Housing should be a right, not a speculative commodity.”

Khanna is the sponsor of a 2022 bill, known as the Stop Wall Street Landlords Act, which would impose taxes on existing and new acquisitions of single-family rentals by institutional investors.

“The financialization of the housing market by Wall Street exacerbates corporate profiteering and anti-competitive practices that make it harder for Americans to afford housing or access homeownership,” he said in late 2022.

Kurt Carlton, president and co-founder of the real estate investment marketplace New Western, said these ventures are a net positive for the housing market. With 15.1 million vacant homes in the U.S., accounting for 10.5% of all housing inventory, there is a demonstrated need for innovative models to shore up investment in the sector, particularly when it comes to single-family residential units, he said.

For Carlton, anything that encourages investment in the single-family market is good — but it may not be the future of real estate investing just yet, given that their market share is still small. Instead, he sees the “real winner” as local independent real estate investors who are buying in neighborhoods they know and understand.

“They’re not nonprofits, but they’re completely aligned with the needs of the community in terms of they’re finding vacant inventory, returning it to market, and giving the builders a run for their money right now as well,” Carlton said. “And that’s what we need. We need supply.”

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