How Universal Basic Income Could Change Real Estate Investing

180 Replies

The other day I was having a discussion with some associates about the upcoming Presidential Election, and one of them brought up the Democratic Candidate Andrew Young and his Universal Basic Income Plan called "The Freedom Dividend."

From his site: https://www.yang2020.com/policies/the-freedom-dividend/

"Andrew would implement a Universal Basic Income, ‘the Freedom Dividend,’ of $1,000/month, $12,000 a year for every American adult over the age of 18. This is independent of one’s work status or any other factor. This would enable all Americans to pay their bills, educate themselves, start businesses, be more creative, stay healthy, relocate for work, spend time with their children, take care of loved ones, and have a real stake in the future."

While I must admit that this seems like a ploy to literally buy votes, I do think that Universal Basic Income (UBI) is an important thing to consider with automation on the horizon in the years to come. 

As a Realtor and real estate investor, I couldn't help but think how this extra $1,000/mo might affect the housing market.

INCREASED HOUSING AFFORDABILITY

The first implication of this extra $1,000/mo is that it would make housing much more affordable in most markets, potentially reducing the monthly costs by 33% or greater for most bread and butter housing markets.

A $250k home with only 5% down and a 4.5% interest rate has a PITI of roughly $1,700/mo. With the full $1,000 going towards the mortgage, this payment would basically be reduced to $700/mo, about the same if they had purchased a home for $100k at the same terms.

This is obviously a complete game changer for the housing market, allowing many people to afford homes that couldn't afford one without this plan, increasing the housing demand particularly at the lower end of the housing market.

INCREASED HOUSING DEMAND, WITHOUT INCREASED SUPPLY

At the bottom end of the market, this UBI of $1,000/month would suddenly allow many people who could not afford a home without it to suddenly purchase one. 

Using a DTI Ratio of 45%, a married couple would have an extra $900/mo (45% of $2,000/mo) to allocated to their housing expenses, allowing them to more than double their pre-approval amount in some cases.

Without UBI: Max Purchase Price = $117k at $800/mo

With UBI: Max Purchase Price = $250k at $1,710/mo (+$900/mo to take new DTI to 45%)

(Note: I'm not a lender, and surely there is more to this calculation than I am sharing here, this is merely just meant for illustrative purposes)

Further, the extra money would allow many people who already have the income and credit but no down payment to suddenly be able to save up for the down payment, creating additional buyers at the lower price ranges.

But without increasing the supply of available homes, the base floor price for housing would certainly be raised. Simple supply and demand.

MORE POTENTIAL MOVE-UP BUYERS

With more income available for housing, some buyers will be tempted to "trade up" and purchase more housing than they could normally afford. 

Suddenly you'd be able to move into that better school district or nicer neighborhood instead of settling for what you could previously afford. Thereby creating more demand in the mid-range markets as well (Under $500k in most areas).

But still, the increased demand would be felt at the bottom end of the price range where it already exists. I recently received 9 offers in the first weekend for a $150,000 home in Phoenix, and could easily see that number doubling to 20+ offers with a UBI plan for an extra $1,000/mo.

EFFECTS ON THE RENTAL MARKET

You'd likely see a similar trend in the rental market, with people moving out of their relative's house and into their own rental who couldn't afford to do so before. 

Also, you'd see renters at the lower end in not-so-nice neighborhoods suddenly move out into nicer neighborhoods that are safer with better schools.

The big question is how many landlords are going to jump ahead of this demand and automatically bump the rents a superficial amount now that everyone has an extra $1,000 every month.

QUESTION: If you were a landlord and had a 10-unit apartment building, and suddenly all your tenants are now receiving an extra $1,000/mo, how tempted would you be to raise the rent sharply for no other reason?

If that happens, you might see an even greater increase in demand for purchasing lower level housing, with tenants perceiving they're getting a bad deal in their current rental, motivating them to finally buy a home instead.

EFFECTS ON SHORT TERM RENTALS (STR)

Since short term rentals are associated with travel, which itself is somewhat of a luxury, I don't think UBI would have as much impact on the STR market.

Surely, more people that couldn't afford to travel in the past would suddenly be able to, but they may choose to spend that money elsewhere instead.

And that's the whole rub with UBI. When everyone has a larger supply of money, the demand for ALL things naturally increases. People will spend money they didn't have in the past on new non-essential items (things they only wished they could afford in the past, but suddenly now can).

LOW PRICED MARKETS BUBBLE FROM INVESTORS

With extra income every month, and a resulting increase in local housing costs, real estate investors would swamp lower priced housing market like Ohio where homes are under $100k. 

Investors who may not be able to invest locally because of the increased demand and raising of the lower home prices would look to other states where homes are already more affordable.

This could have a devastating effect on those markets who are already experiencing fierce demand in the lower price ranges from owner occupants, with an additional demand coming from out of state investors, making the housing situation worse than it was previously.

INCREASED PURCHASING POWER FOR MULTI-GENERATIONAL & EXTENDED FAMILIES

Probably the biggest opportunity for aspiring investors would be pooling the UBI funds with fellow family members to drastically increase their purchasing power.

Imagine a family of four adults: A married couple, one of their retired parents, and one child who is an adult teenager getting ready for college. Together, they would have $4,000/mo in UBI to spend every month, or $48k/year.

Which just so happens to be roughly the amount needed to put a 20% down payment on a $250k property, and be able to do this every single year.

Together they could purchase their first $250k home and owner occupy, paying the $1,350/mo PITI with the retiree's social security. The working income from the two parents could pay all other living expenses, and they could still save $4,000/mo from the UBI.

They could easily repeat this process every year, or even buy cheaper homes in other states as investments (see above). Sure, they'll run into a little trouble once they get enough loans, but if they took a break in buying from years 5-10 and focused on increasing the current properties value or accelerated loan pay-down, they could pick this strategy back up and continue to purchase property.

By the time the 18 year old teenager is 40, he'd be absolutely loaded. And this is just with a family of four. Imagine if an extended family of 10-20 people pooled their money together. They'd have $120-240k per year to invest in real estate, stocks, and other businesses.

UNIVERSAL BASIC INCOME CAN'T BE UNDONE

Probably the biggest consideration with enacting a UBI program is that it can't be undone. NO ONE will vote to give themselves less money and handouts, even if it's shown that maintaining the program is unfeasible.

For example, just look at social security. Since 2010, Social Security's Cash Expenses have exceeded it's income, with the combined reserves likely to be fully depleted by 2034.

https://www.pewresearch.org/fact-tank/2015/08/18/5-facts-about-social-security/

We've known this for quite some time, yet we all are still complicit in keeping the system up and running. Millennials pay into a system they'll likely never receive the benefits from, and Boomers would start a revolution if the benefits are suddenly taken away after paying in for their entire lives. Same thing with the coming Gen X getting ready to retire.

More likely, the system will be altered to keep it afloat and kick the can down the road to future generations, by changing the benefit formulas, raising the payroll tax, or makes other changes such as raising the cap on taxable wage income.

BIGGER PROBLEMS AHEAD

But combine this with Artificial Intelligence Experts predicting as much as 45% of all jobs could be replaced by automation by 2035, and we've got a serious problem on our hands.

Serious changes are ahead, and the government only has so much "bread and circuses" (UBI being the bread) before seriously addressing the issues at hand.

For now, UBI is presented as Social Security 2.0, but instead of just the retired population too old for most work it's going to affect everyone because soon there will be very little work at all.

And with humans projected to live 3-8 years longer than previously expected by 2050, and even with just the current US adult population of 250 million over 18 (UBI recipients under Andrew's plan), that's an additional $3 trillion per year UBI would cost us BEYOND the additional $3.2 to $8.3 trillion we hadn't planned to spend with our erroneous calculations.

Further, with an annual inflation of 3%, the buying power of a dollar today will equivalent to $2.50 in 2050, begging the question if $1,000/mo will even be enough by then?

And if Andrew does win the next election and successfully implements the Freedom Dividend of $1,000/mo, what's to stop a later presidential candidate like Elizabeth Warren from running on a platform where the freedom dividend is expanded to $2,000/mo or more?

Interesting times for sure... much to consider with the big changes ahead.

DISCUSSION QUESTIONS:

1. If you received $1,000/mo in UBI, how would your family use this money to better your lives?

2. What market are you in? How do you think $1,000/mo in UBI would affect your local housing market?

3. Would you automatically increase the rent on your investment properties because your tenants are now receiving an extra $1,000/mo?

Hugo Chavez did something like this in Venezuela.  That worked out well, didn't it?

If this sort of thing ever passes in this country, it's time to leave.

$12K/year per person X 300 million people = $3.6T (trillions!)

Who is going to pay for it?

Where does this $1k come from? For the future sake of our country, I hope we are not stupid enough to elect a socialist President. It is super important to educate our kids on money, hard work, debt, entitlement, career choice, investing and on and on and on. 

Interesting analysis.  But the key points are:  That ($1,000 or $2,000 or however high it goes) has to come out of somebody else's paycheck, (Higher Taxes on Landlords for example)  and it's a great assumption to say that those receiving the $1,000 would use it towards housing.  Sounds like creeping towards Cuba, Russia, China... dictators go vey slowly and make everything sound "nice" on the surface, until everyone is equally poor (except the Party Bosses, they have all the goods and means of production)

What's going on is downright vote buying using OPM! Politicians promoting these programs by taxing those that are willing to work and doling it out to those who lack ambition and don't really want to work for a living.

Vote for me and you will get free stuff! And the more freeloaders that penetrate our Southern border the worse it will get. Sorry I couldn't help myself.

@Bjorn Ahlblad

Well, vote for me and get free stuff is what our current president is actually doing with a deficit funded tax cut at a time when the economy is already doing well. The discussion of a ubi was brought up after a few studies made the point that AI will make regular employment obsolete for up to half of the population. If such a development ever occurs, a bui is the only way to feed people.

@Wes Blackwell , Way to throw a kitten into the dumpster fire! :) Clearly this topic is way too touchy and political among real estate folks to have a rational discussion. 

For my two cents, technological advancement is kind of like climate change but happening faster with a more personal impact. Even if people find the idea of free money abhorrent, there will eventually have to be a solution whether it fits with current cultural sensibilities or not. The tipping point is inevitable and I’m living under the assumption that there won’t be a solution enacted until after the fact. 

So I guess my answer to your post is it doesn’t matter because universal income won’t be attempted until after a huge market shake up that will negatively impact real estate due to massive job loss. 

Also, it’s Andrew Yang (sp)...

@Nick B. , I’m only repeating what the candidate has proposed and I’m not necessarily a supporter (just reading up on most of them). He calls it a “dividend” because he views it as Americans sharing in the prosperity of the technological advancements that will be replacing their jobs and altering society. So the bulk of the money is meant to come from taxing the tech companies and returning that money to citizens. The argument is that tech is paying $0 in taxes right now. He sees it as a virtuous cycle where that money will be spent in local communities and some of it will also float back to tech companies as well through things like online purchases. 

This was the longest post I think I’ve ever seen in the 10+ years I’ve been on this site. So I couldn’t read it all.

That said, one, it will never pass. And two, people overall make short term decisions. The thought that everyone is going to take that money and spend it responsibly is silly. If this insane bill ever passes I’m selling everything and buying stock options in target, amazon, and some auto company. That’s exactly where that grand will go every month.

@Wes Blackwell so much economics ignored.

Increased demand without increased supply will lead to higher prices.

This post assumes so much that isn’t true.

So much fake cause and effect assumptions

Basic Economics 101 teachers just rolled over in their grave

Having an intellectual argument on these three questions is at best as useful as arguing science fiction philosophy

@Greg Scott if you gave everyone 12k then that would be the new $0. Basic economics/math. Just like tasing minimum wage to $15. The people coming up with this stuff are smart enough to know that it’s impossible mathematically. Fortunately for them, their voters aren’t very smart.

If you ever took a deep dive into what the single woman 'raising' 4-5 kids on welfare, medicaid, Heap, food stamps etc etc actually gets it's astounding & most still live in & subject their offspring to, abject poverty & filth.

That's a long post so I didn't read all of it, so I apologize because it appears you put a lot of thought/effort into it. First, I don't think such a bill would ever pass. Second, 90% of the population would just blow that money on stupid stuff anyway. They aren't going to buy houses or invest it. They'd be no better off financially than they are now. I heard someone say one time "You can give everyone in America one million dollars. In a year, the people who were already rich will be richer and the people who were poor will be poor again." There are some exceptions obviously, but the point is is that giving money to someone isn't going to help them if they don't have the knowledge/ambition to want to do better. That $3.6T would be better spent on educating people on financial literacy. 

Not sure where the money would come from.  They tried something like that in parts of Canada, but it was more of a top up, so people were making a minimum of $X every month.  There were stipulations, I think they had to be working; but rather than people making  $28K/yr (minimum wage), they were at $35K (making up the numbers).

@Wes Blackwell

This has been tried in other countries and has not worked, what makes you think it will work here?

There is a greater issue at hand.  The single largest employment for men 18-35 is driving, delivery, service, etc.  What happens when that class of job is replaced by driverless cars?  What will these lower skilled people do to create value and make money?  I know I don't want to start cutting checks for 1k a month to each of them.  Retraining a 35 year old with a high-school education to be a python developer seems far fetched.   

Historically whenever enough people become disenfranchised, there is a change and it is violent.  

Every Revolution 

WWII (WWI was more ego and aggresive empire building)

I am a huge proponent of merit, and was sure I would disagree with Yang, and then I heard him on Joe Rogans podcast. While I agree with the others above,  that people will blow the money, how do we pay for it, etc., what do all of the low income workers do when the jobs are gone! As in, gone forever, not coming back. Kiosks at McDonalds, self checkout everywhere, Amazon, self driving trucks,  robots picking our fruits and vegetables. The list is virtually endless. It also isn't only low end jobs. Doctors are no longer entering radiology, because that job is getting replaced by computers that can do the job faster and more accurately. Ever heard of Betterment? Why hire an advisor when the computer can allocate my funds without emotion! 10 years ago, I didn't have a cell phone, because I "would never need one". We literally can't see the oncoming train. I have no idea how to fix it, but we must at least see that it is happening.

Without getting overly political.  For those who ask "who's going to pay for it?"  The answer is we are as a society.  Right now with 4% unemployment the general consensus is that 60% of the population is living pay check to pay check and some high percent don't have a $500 cushion.  Imagine what happens if unemployment goes to just 10% or 15%.  

The reality is that we are not far from this today with all the social programs out there.  I see it every day with my tenants.  Imagine a society where 20% of the population can not afford food, what do you think will happen?  Do you think they will just quietly sit and starve to death?  Likely not, either they will go and do something they normally wouldn't do, or the government will provide something they normally won't.

However to answer @Wes Blackwell 's questions.

1) An extra $1000 a month wouldn't not affect us at all.  It would go into the general budget and be spent as needed.

2)Phoenix market.  I think if the population has more money and the demand for house stays the same then the rents will go up significantly.  I don't see why the rents in Phoenix wouldn't be comparable to current rents in CA since the disposable income for residents have increased.

3)We would continue with our current system of annual increases and adjusting to market rents when tenants move out.  It would be in alignment with our current strategy of staying just below market rents and offering a good product and experience.   The market rents however will sky rocket!

https://fee.org/articles/the-real-cost-of-universal-basic-income/

Originally posted by @Jonathan Watt :

@Wes Blackwell so much economics ignored.

Increased demand without increased supply will lead to higher prices.

This post assumes so much that isn’t true.

So much fake cause and effect assumptions

Basic Economics 101 teachers just rolled over in their grave

Having an intellectual argument on these three questions is at best as useful as arguing science fiction philosophy

 Amen!

https://fee.org/articles/universal-basic-income-has-been-tried-before-it-didn-t-work/

Of course, a ubi shouldn't replace work for money with all its individual and societal benefits. What Mr. Schwarz discounts is that no policy will shield us from the consequences of an ever more efficient economy in which manual and a lot of brain power related labor can be replaced by cheaper robotics. We are already on our way to that future. Just think about the number of jobs of retail establishments that got replaced by fulfillment workers at Amazon doing rudimentary tasks with little to no chance of advancement. One of the next big waves will be job losses caused by automatic driving technologies. Amazon delivery drivers, bus drivers, cab drivers, truck drivers, train engineers will be mostly obsolete in 15 years or maybe 20 years, nobody can say when right now, but it is just a matter of time. Where does Mr. Schwarz think those people get their income from?  The Amazons of the world won't need them.

Originally posted by @Chris Szepessy :

That's a long post so I didn't read all of it, so I apologize because it appears you put a lot of thought/effort into it. First, I don't think such a bill would ever pass. Second, 90% of the population would just blow that money on stupid stuff anyway. They aren't going to buy houses or invest it. They'd be no better off financially than they are now. I heard someone say one time "You can give everyone in America one million dollars. In a year, the people who were already rich will be richer and the people who were poor will be poor again." There are some exceptions obviously, but the point is is that giving money to someone isn't going to help them if they don't have the knowledge/ambition to want to do better. That $3.6T would be better spent on educating people on financial literacy. 

You can't do that the US economy depends on the majority spending every cent and then some.

If everyone were like us driving old cars, not buying junk we don't need and putting everything extra in savings/investments. The economy would grind to a halt. The spenders are needed to keep everything moving at this point. 

As for the topic, everyone will just blow the money, prices on everything will go up to compensate and we will be back to square one.

Looking at recent history (ie China).  Once we have all these unemployed drivers and retail workers etc the solution is obvious ... we need less population.  Government will try to regulate population growth. Couples < 27 yrs old are allowed 1 child.  After that no kids for you.  Of course, this is wildly speculative but who doubts that some bureaucrat wouldn't propose something like this.

I just wanted to make a brief point on this "Artificial Intelligence will Take all our Jobs" scare. And make no mistake, that's all it is -- a scare.

Every time we have an advance in technology, it costs somebody their job. Sucks for that somebody to be sure. Yet, a few years later, nobody would ever think of going back to not having said advance. And somehow we always find new things that need doing, people are willing to pay to have someone do it, and other people are willing to do it for pay. And generally for overall more pay than what we were all making before. Or, at the very least, what we are paid will buy more than before.

History has proven this time and time again.

Imagine the blacksmith who loses his job because nobody rides a horse anymore. So instead we have auto mechanics, aircraft mechanics, computer programmers, offshore wind farm engineers, information security analysts -- and hundreds of other things that were not even thought of a hundred years ago.

This whole mess about "Robots will take your job" is just another scare tactic used by the Socialists and people leaning that way to invoke an ever larger Welfare State, considering every other tactic to convince people has failed as badly as Socialism has.

So then you ask, "But Alvin, what POSSIBLE jobs could there be after the Robots take over?" Heck, I don't know. Did Henry Ford know we'd invent "information security analyst" when his automobile took over from horses? Did Alexander Bell know that, after his telephone made couriers obsolete, there'd be a market for "communications specialists"? No, they had no way of knowing what future jobs would come into being.


And today, we still have no way of knowing what future jobs will come into being. But we can rest assured we will come up with something.

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