What if Cash Sales for Houses Were Banned?

Here’s a thought experiment:

Suppose that millions of households are supplied with standardized, government-issued 2-bedroom, 2-bath condominium apartments.  Households have clear title to the property, and therefore have full property rights to their housing units, but there is a government law that forbids selling those apartments for cash. The apartments can only be transferred through a barter transaction, where one household exchanges their apartment for the apartment of another household, possibly in a different part of the same city or same state, or in a different part of the country. 

For reasons that might be related to employment, family, health, retirement, or education, individuals or households could relocate only if they can arrange an “apartment swap,” and there is an inefficient, but active market for those swaps. The apartment swap would basically require a barter arrangement that relies most frequently on the “double coincidence of wants” - which is the central requirement for all barter transactions. For example, if I have an apartment in City X and want to move to City Y, and Person A in City Y has an apartment and wants to move to City X, and we can be brought together through a website like Craig’s List, then we can execute an apartment swap and trade apartments.

(For simplification, ignore complicating factors like differences in quality, size, amenities, neighborhoods, etc. and assume that apartments are like tradeable, homogenous commodities.)

But what if I want to move to City Y and I like Person A’s apartment, which is available for a swap, but Person A doesn’t want to move to City X, but wants to move to City Z.  Maybe there’s an apartment available in City Z for Person A, but that owner, Person B, doesn’t want to move to City Y, he wants to move to my City X.  Well,  now we’ve got all of the necessary parties to arrange a 3-way apartment swap.  We don’t have a matched “double coincidence of wants,” but we do have a matched “triple coincidence of wants.” I take possession of Person A’s apartment in City Y, Person A takes possession of Person B’s apartment in City Z, and Person B moves to my apartment in City X.

Sound a little complicated? Well it is, and the convoluted swap arrangement wouldn’t have been necessary at all except that cash sales of apartments are illegal in the example. In the absence of a ban on cash sales, each of the parties involved would simply put their apartments up for sale like currently happens every day in our current real estate market.  Obviously that type of normal market operation would be much more efficient than a barter, swap market because it eliminates the key feature of barter trades that makes them so inefficient: “double coincidence of wants.” And the example above illustrates an additional inefficiency of barter markets - the “double of coincidence of wants” frequently doesn’t exist, in which case a complicated series of swaps involving 3 or more people may be required for apartment exchanges to take place.  Maybe there would have to be dozens of parties involved as part a 20-apartment or 30-apartment exchange. 

Sound like a far-fetched example with no basis in reality? Well, the example above was meant to describe the current situation in the U.S. for kidney transplants. Because kidneys are not allowed to be sold for cash, and because blood type incompatibility often prevents a family member from providing a kidney to a loved one, complicated kidney swaps have become increasingly common, and they’re getting larger in size. A record was recently set with a 60-person, 30-kidney swap, I posted about it here, and here’s a recent story in today’s San Francisco Chronicle.

Bottom Line: In the same way that the housing market would operate extremely inefficiently under a no-cash, swap-only, barter system of exchange, the market for kidney transplants will always suffer from extreme levels of inefficiency, compared to a cash-based system of exchange. In other words, there will always be a chronic, and growing shortage of kidneys under a no-cash, swap only system. At least in the apartment example above, the worst that can happen is that you get stuck in your apartment for an extended period of time, but it probably won't be fatal.  In the case of kidneys, a "no-cash swap-only" system of exchange translates into thousands of death sentences annually for those on the waiting list who die waiting (about 13 per day).

HT: Morganovich for the SF Chronicle article, and posing the question "Can you imagine trying to buy stocks this way?"  I changed it from stocks to apartments.