A Housing Model To Change The World

Most of you know that I am a Clayton Christensen fan. The video link below talks about market creating innovations and the limitations current financial ratios puts on innovations that create and expand markets. It is about 16 minutes long and, I think, worth the time.

I believe Christensen's theories can lay the ground work for innovations that can change the world.

Consider a project that focuses on housing for the very poor and creating a business model that would be sustainable and built on capitalistic principles. The idea stems from the belief that housing is a fundamental economic endeavor and can be the impetus for real economic growth. That is, housing drives other industries that provide materials and support services. Housing and the associated industries create jobs that create demand for goods and this creates more jobs. Additionally housing provides the chance at home ownership, which leads to stable communities.

The approach of choosing the least profitable customers in the housing industry is based on Clayton Christensen’s theories of disruptive innovation and the notion that market leaders are displaced by market entrants that enter the market and profitably serve that market’s least profitable customers. These market entrants then begin to serve a broader cross section of the market leader's customers and at times displace the market leader. A project based on serving the least profitable customers in the housing market provides the opportunity to apply Christensen's theories in a way that is "market creating" as described in the video above.
I have for some time thought that if a sustainable housing industry could be developed in third world countries, real economic growth could take place and a lot of misery could be ended. I thought if this could be tested there might be a model developed that could be replicated in countries around the world. It seems to me that a good place to start the process would be to focus on the Colonias that are situated along the U.S. – Mexico border. These settlements consist of poor, mostly Hispanic, families and result from the sale of nearly worthless land to individuals on a contract for deed basis. These individuals then build structures on the land as their homes. They usually do not have water, sewer, power or decent roads. The structures that exist are, in most cases, dilapidated.
The income for individuals in these settlements are far below the poverty level and may be in the $8,000 to $10,000 range and would be able to afford less than $200 per month for housing. My thought is to develop a sustainable business model to serve this market.  As is described by Christensen this is a market that simply cannot afford and does not need all of the amenities provided in the standard housing model. 

This would require the ability to develop a program in which a house, land and infrastructure could be provided and financed over 30 years for $25,000 or less. Monthly payments would be less than $200 per month. Risk of default would be minimal since most of the people have been living in the Colonias for years and making payments faithfully on their contracts for deeds. Because of the feeling of community the residents would more likely be receptive to staying in the current location but willing to upgrade the property.

To develop a project that would provide land and structures for less than $25,000 would require significant innovations. But as was the case with the iPhone, most of the technologies already exist  and just need to be properly packaged.

Elements of this program would include:
  1. Finance – Develop a model that would provide financing for homes to be purchased by individuals living in Colonias that are purchasing a lot using a “Contract for Deed” and then building a structure on the land. These individuals and families make less than the poverty level and may average $8,000 to $10,000 per year. The financial model would have to  consider how to purchase the contract for deed from the developer/owner and restructure an instrument that would finance land and housing that would be within the purchasers wherewithal to pay (estimate of $150 to $250 per month).  If land is owned by the resident a model would need to be developed that would allow refinancing that would include housing. Costs of the homes would have to include infrastructure costs. Traditional mortgage structures might have to be replaced with a new model.
  2. Pricing – at today’s mortgage rates the amount that could be financed on a 30 year mortgage and afforded by very low income families would be around $15,000 to $20,000. Monthly mortgage payments would be around $120 per month at current interest rates.
  3. Housing - housing would have to be high durability and very low cost. Houses would probably need to be built for $5,000 or less. MIT and others have developed several such models. LED lighting and methods of natural heating and cooling might be employed.
  4. Infrastructure – many Colonias have no fresh water, sewer, electricity and very poor roads. Technology would have to be incorporated that would provide Colonias with water using efficient water collection and filtration systems (slow sand for groups of homes). Sewage systems would need to be developed to serve homes or groups of homes efficiently at a very low cost that are extremely durable (these are available on the open market). Solar and wind energy would be used to generate basic energy needs if other forms of energy are not available. Roads and drainage would need to be low cost and very durable.
  5. Create an environment that is self-sustaining and promotes growth for supporting local economies as well as fueling next generation innovations. Much of the needed construction and infrastructure work could be provided by the residents of the Colonias.
To initiate such a project would be fairly simple and not very risky. It might be as simple as contacting residents of a Colonia and refinancing their current home in a way that would allow a new structure to be built. An organization could use construction, engineering, architecture and technology companies or schools to develop a plan to provide housing developments to replace substandard housing in the Colonias with quality basic housing.

A developer could then use the plan to redevelop Colonias. The developer would orchestrate the purchase/refinancing of homes, the development of infrastructure and building of homes.

The developments would not require government subsidies. As with most disruptive innovations the beginning would provide a "good enough" product and over time the processes and technologies would improve and provide for further market creating innovations. The result would be a sustainable, profitable enterprise that would provide significant economic opportunities. For example, the first desk top computer was nothing more than a word processor with limited capabilities.With each new generation more capabilities were added. As a result of more elegant software and more efficient chips, over time, desk tops replaced mid range computers (DEC) and now handle low end main frame tasks.

I believe that this housing model has the ability to provide housing for the very poor, create new economies and provide for market creating advances in architecture, technology, engineering, manufacturing and infrastructure.

To start this project will not cost much, if any, money but will require a good deal of research and time spent on creating investment and finance models that would sustain the program. A new housing model has the promise of transforming the world economy by giving the poorest segments of the population an opportunity to become an important part of their local economy.


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