My Ads
When speaking of stocks and shares, people immediately start thinking about stocks for businesses.
The truth of the matter is that people can trade shares for all sorts of different types of equities.
The primary reason that I would like to engage in the process of creating an Open Source Real Time eXchange is to develop a trading system for shares in real estate.
It is my belief that the primary cause of the "Mortgage Mess" is that the market uses the wrong tools for financing real estate purchases. In the status quo, people take out a loan based on current money market rates to buy a house. The terms of the loan confirms to fluctuations in the global money market.
The property owner ends up with a mixed bag of financial tools. They have a fixed valued loan set the fluctuating value of the real estate. The equity of the property owner is the final selling price of the property minus the loan. Since the final selling price is unknown, the real equity of the property owner is never known.
Mortgage financing might make sense in a market where everyone is seeking full ownership of their property. The price of real estate in America today has risen to a point where a large number of people in the market are not in a position to ever own their property free and clear. There is also a growing number of property owners who want to use the equity in their homes for other things.
The goal of shared equity financing is to create a tool where there is a lien against a property. The value of this lien fluctuates with the local housing market and is ultimately settled each time that a property changes hands.
With such a tool, people would have a more clearly defined equity in their property. Rather than having a $50K mortgage on a $100K, the lien would be for halve of the value of the house, whatever that value might be when the home is sold.
It would be difficult to talk investors into buying shares of individual houses. I imagine a robust trading system would develop where there's a pool of shares in local real estate. Trading shares of the equity pool would be interesting as there would be multiple types of transactions going on. There would transactions of people speculating on the value of the pool. There would be transactions from people selling portions of their property into the pool, and transactions of people wanting to buy back portions of their poperty previously sold into the pool.
There would also be transactions where the market is checked by the real life buying and selling of real estate in the local market.
To create an equity pool, there would need to be an advanced system to appraise and value the different attributes of a property. Things that affect value include location, zoning, the type and quality of the structure on the property, depreciation, property taxes, and the environmental profile of the property.
An equity trading system would involve an an advanced appraisal system that would allow a continuous re-evaluation of the various attributes of a property in a given region.
You can do some funky things with appraisals. Instead of valuing a property as is. A property might be assessed as a collection of appraisal points. For example, a property might get poor appraisal points because it has single pane windows and poor insulation. Replacing windows, adding insulation and an array of solar panels would add appraisal points to the property. These added appraisal points would help cash strapped homeowners finance improvements to their lot.
Conversely, properties might lose appraisl points for letting their lawn go or just for the steady depreciation in the value of the building.
The goal of shared equity financing is to give property owners tools to help them control their exposure to the risks of the local housing and global financial markets.
I imagine that most home purchases would include a mix of financing options. At the time of purchasing a house, a new home owner might place 20% down, take out a loan for 50% of the purchase the let the final 30% drop into the regional equity sharing pool.
As the property owner pays down the their mortgage, they may choose to transfer the equity shares into their mortgage at current market values.
The goal is to give the buyer tools to regulate their relative exposure to the interest rate of the loan verses the vagaries of the local real estate market.
One of the largest segments of the equity trading pool would be the elderly who wish to gradually draw down their equity during retirement.
The system could also replace the home equity loans which seem to have added to the volatility of the mortgage market.
In the business world, the market value for a company is generally a multiple of the company's earnings. A trader buys a stock because they are hoping that the company will grow with its profits. Stock trading is basically gambling on future earnings of a stock. As stock purchases are about future equity, one might argue that shorting is in order.
The goal of an exchange trading in real estate or other existing equities is for the equity to match the real price of the goods. Specutlative shorting would be out of the question. Such shorting would be equivalent to taking out a mortgage on someone else's house; however, there may be a need for derivatives designed specifically to keep the exchange in check with real market prices.
Mortgage financing for houses is inherently instable. Mortgage financing uses fixed obligations to finance purchases in a fluid real estate market. The system seems to work when housing prices rise; However, the financing scheme fails during market downturns when people realize that they would do better to walk away from their homes and default on loans.
Banks and regulatory agencies have tried to counter the inherent risks of mortgage financing with complex re-insurance programs such as the FSLIC, FannieMae and FreddieMac programs. These big insurance programs have proven themselves to be unstable and tend and have led to massive financial turmoil.
Financing through a shared equity program creates a situation the property owner and financier share the risks and rewards of the property. This eliminates the need for re-insurance and eliminates the global market turmoil caused by crashes in the housing market.
Creating an a shared equity exchange is also a great benefit for the consumer as it gives them the tools to regulate their personal exposure to fluctuations in the local housing market v. global money market.
A shared equity exchange might even help reduce fluctuations in the housing market. The equity pool would loosely track local housing values. When people feel that regional housing values are too high, they are apt to sell shares of their property into the equity pool. When they feel that the prices are too low, they will buy shares of their property back out of the pool, providing price support to the rest of the local housing market.
index - y-intercept - Salt Lake - sponsors