It is unnecessary for ANYONE to borrow money to own a home!

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kmarinas86's picture
kmarinas86
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It is unnecessary for ANYONE to borrow money to own a home!

Several criteria:

1) The value of the home, upon completion, must be paid to the builder in full.

2) The method of payment must not be borrowed money.

3) The payments by each homeowner must be distributed over time.

The consequences are:

1) The IMMEDIATE payment to the builder for a home cannot come directly from the owner(s) of that home who pay OVER TIME.

2) The total of payments by homeowners NEED TO BE be enough to pay some percentage of existing housing in full.

3) That percentage, applied to the value of existing homes, MUST COVER the value of newly constructed homes.

The conclusion is:

A system can be developed that allows homes to be paid on the spot with NO BORROWING.

What are the consequences of borrowing money to pay for homes?

1) MORE DEBT ISSUED, WHICH LEADS TO...

2) MORE INFLATION, WHICH LEADS TO...

3) MORE INTEREST, WHICH LEADS TO...

4) MORE DEBT ISSUED.

How then does one justify the issuance of debt just to live in homes, when:

* It is proven to be totally unnecessary to do so.

* It is proven to cause inflation.

* It is proven that debt-based mortgages are less affordable than the houses they finance.

Take heed to the magnitude of debt issued to pay for homes in
comparison the typical CREDIT CARD LIMIT of an American consumer! The
debt issued to pay for housing can be in great excess of consumer
credit card debt!

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kmarinas86
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I post the following from another forum to clarify what is said

 

 

californian conservative wrote:

kmarinas86 wrote:
californian conservative wrote:
it is quite necessary for most people to borrow money to pay for a house.

If you live in the present, then that is the reality. While practically it is necessary AS A RESULT OF THE CURRENT SYSTEM, IN GENERAL, A SYSTEM CAN BE DEVISED THAT does not require this AT ALL!

really? No good system can come out of it, I can assure that.

Out of what?

californian conservative wrote:
kmarinas86 wrote:
californian conservative wrote:
And that isn't a bad thing.

This is an unprovable statement, and therefore it can only be opinion, not fact.

LOL! As opposed to all of your statements, which of course have been proven? Fine, then, you want to take it this way?

Any system that does not require debt to pay for housing requires

1. The owner pays the complete cost upfront

False.

californian conservative wrote:
2. There is an installment type plan to the builder

True. That is what is needed.

californian conservative wrote:
#1 is completely impractical to implement on a widespread scale.

Right.

californian conservative wrote:
Most people, to save up that much money, would take many decades, and the home ownership rate in this country would plummet.

Right again!

californian conservative wrote:
Actually, it would just serve to to shut out many people from business opportunities, as well as just owning a home.

Right again!

californian conservative wrote:
Renting would become way more common, but the only people who could really buy would be those that were rich already.

Right again!

californian conservative wrote:
See a problem with this?

Yes!

Question for you: Did I just propose this?

californian conservative wrote:
#2 is also completely
impractical to implement on a widespread scale. You would have to have
the home builders acting as lenders,

False.

californian conservative wrote:
which would add a very
large amount of completely unnecessary risk among all participants, as
well as consolidating the construction industries among a very very few
giant players

It would, if you didn't eliminate borrowing.

californian conservative wrote:
kmarinas86 wrote:
californian conservative wrote:
And why you created a new thread when you had an EXACTLY THE SAME thread that's current I have no idea

If you have "NO IDEA", how did you come to the conclusion that the "NEW
THREAD" is "EXACTLY THE SAME THREAD" as the "OLD THREAD"? Count the
chickens AFTER they have hatched, not BEFORE!

dude, just look at the thread titles. The other thread, you ask a
question, then in this one you answer that exact same question.

A title of a thread is not a thread and a thread is not a title of a thread. Ok?

 

 

kmarinas86 wrote:
Several criteria:

1) The value of the home, upon completion, must be paid to the builder in full.

2) The method of payment must not be borrowed money.

3) The payments by each homeowner must be distributed over time.

Why do I have 1? Because the HOME NEEDS TO BE PAID UPFRONT. The
question remaining is, "Where does the money to pay upfront come from?"

Why do I have 2? Because if one uses borrowed money to pay for the
home, then that fails to show how it is UNNECESSARY to do so! The
question remaining is, "If we cannot used borrowed money or our savings
to pay for the home upfront, how are the costs of the home going to be
covered?"

Why do I have 3? Because if payments were not distributed over
time, then the great majority of homeowners would not have enough
savings to afford the house (even a very tiny one) and they would be
forced to borrow money, IF NOTHING ELSE IS DONE. The question remaining
is, "What reserve of money is there that will pay for the house
upfront, and how will it be funded?"

kmarinas86 wrote:
The consequences are:

1) The IMMEDIATE payment to the builder for a home cannot come directly from the owner(s) of that home who pay OVER TIME.

2) The total of payments by homeowners NEED TO BE be enough to pay some percentage of existing housing in full.

3) That percentage, applied to the value of existing homes, MUST COVER the value of newly constructed homes.

Why do I have 1? It is the observation that the builder needs the
money now, but the homeowner doesn't have the money at the moment. So
does this require the person to borrow? In our current system, yes it
would. That requires that the solution be UNFAMILIAR to those who fail
to find a viable alternative.

Why do I have 2? Because the entire value of the housing needs to be covered to justify its construction.

Why do I have 3? Because the entire value of the new housing needs to be covered to justify its construction.

kmarinas86 wrote:
The conclusion is:

A system can be developed that allows homes to be paid on the spot with NO BORROWING.

That is, in essence, what is being proposed.

kmarinas86 wrote:
What are the consequences of borrowing money to pay for homes?

1) MORE DEBT ISSUED, WHICH LEADS TO...

2) MORE INFLATION, WHICH LEADS TO...

3) MORE INTEREST, WHICH LEADS TO...

4) MORE DEBT ISSUED.

Question: Do you think that it is reasonable to reject such observations as "irrelevant" to a properly functioning economy?

kmarinas86 wrote:
How then does one justify the issuance of debt just to live in homes, when:

* It is proven to be totally unnecessary to do so.

* It is proven to cause inflation.

* It is proven that debt-based mortgages are less affordable than the houses they finance.

Take heed to the magnitude of debt issued to pay for homes in
comparison the typical CREDIT CARD LIMIT of an American consumer! The
debt issued to pay for housing can be in great excess of consumer
credit card debt!

Question: If you don't think this is problem, have you shown yourself
to be caring of the need to find root causes to our current economic
situation? Do you have the mentality of one who is capable of solving
problems, or do you have the mentality of someone who tries to diminish
awareness of the problems by denying responsibility to account for them?

 

 

 

 

californian conservative wrote:
dude, think about this
(because you seemed to ignore it in the last post). You have the
builders giving out a loan (in this case, a house (which has a large
cost)), and in exchange the renters have to pay a monthly fee.

What loan? LOANS REQUIRE BORROWING! Are you DEAF?

Why would the builder loan out money if they are going to be paid UPFRONT!

californian conservative wrote:
You just shifted the lending from a bank to a construction company.

ABSOLUTELY WRONG!

californian conservative wrote:
This has very notable implications.

You don't even have a CLUE what "this" even is! You are arguing against
a STRAWMAN, even if you didn't mean to! Either way, you have committed
yourself to a Strawman Fallacy.

californian conservative wrote:
1. It forces all the small
players out of the market. No small player can afford to build, and
then be payed in installments. I could appeal to reason to argue this
point, or my dad's experience as a small time concrete contractor, but
let's try numbers. Let's say it costs $200,000 to build a house that
can rent for $750 dollars a month (much of this is highly dependent on
location).

Rent?

californian conservative wrote:
So what happens is that the builder sports the entire upfront cost, and gets paid in installments.

FALSE.

The builders get PAID UPFRONT (that means 100% of the value of the
homes) with money derived from a fund into which homeowners pay in
installments. Call it rent if you want. Can you see how mathematically
that those rental payments can collectively pay for the construction of
new houses UPFRONT. If the rent was valued at 5% of the value the
properties, it makes mathematical sense that such money could pay the
costs for new housing construction of matching value.

californian conservative wrote:
Most of the small
contractors can't afford to implement on any reasonable scale. Even the
mid sized contractors (~100 employees) couldn't do this reasonably. The
upfront cost is too high to make any reasonable profit measured against
the risk.

The risk you speak is entailed by a system of borrowing money. That is NOT what I am proposing in this thread!

californian conservative wrote:
Construction is already a
risky business, many companies go under. Add in the risk of owner
default, added legal fees for defaults, the interest rates required to
cover the upfront costs, and you have shut anyone but the largest names
out of the business. There would just be sub-contractors left, no small
contracting firms.
2. The reason that banks are able to loan at such low rates,

Are you kidding me? Low rates? What low rates?

californian conservative wrote:
is because of the
combination of depositors and other sources of cheap capital.
Homebuilders do not have this luxury. Homebuilding is risky, as such
borrowing money as a homebuilder requires much higher interest rates.
To cover the rates, add in a reasonable margin of safety, and then add
profit, and your rates are going to be a ton higher than they are now.
Which would a) price people out of the market, and b) further act as a
consolidator for the industry.

3. It seriously doesn't work with the homebuilding housing model. Take it from someone whose done it

You acted against the strawman. Show that you understand the problem I am outlining!

Source: 
http://www.politicalcrossfire.com/forum/viewtopic.php?p=3292415

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kmarinas86
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The KEY POINT

I am going to emphasize again the major piece of information that seems to escape most people when I present the idea.

"The builders get PAID UPFRONT (that means 100% of the value of the
homes) with money derived from a fund into which homeowners pay in
installments. Call it rent if you want. Can you see how mathematically
that those rental payments can collectively pay for the construction of
new houses UPFRONT. If the rent was valued at 5% of the value the
properties, it makes mathematical sense that such money could pay the
costs for new housing construction of matching value."

Thus:

1) The builder gets paid in full and upfront.

2) The payment comes from a RESERVE FUND.

3) The reserve fund is paid into by homeowners in installments.

Now can you see how borrowing, interest, and prinicipal to finance property construction can be avoided in its entirety?

machinehead's picture
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Re: It is unnecessary for ANYONE to borrow money to own a ...

No. I can't.

If the homeowners' payments into the fund equal 5
percent of the housing value, then the fund will be able to pay upfront
for 5 percent of the total new housing, not 100 percent.

There is
no 'magic formula' in finance which will create something out of
nothing. A magic formula to turn lead into gold is probably a better
bet. Happy prospecting. Call me when you get rich.

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Re: It is unnecessary for ANYONE to borrow money to own a ...

kmarinas86,

    Some questions for you:

         1) who are you proposing would run the savings fund that pays the contractors who build the houses?

         2) how do you transition to such a system - do you require all those who have build a house under the old system to pay for their houses again? 

         3) How is the decision made to build a house - is it just when someone needs one?  Who designs it? 

         4) How long do payments by any one home owner continue?

         5) What happens when someone wants to sell their house before they have paid for it's full value?

         6) Who owns the houses?  Is it the people living in it, or the people running the savings fund?

You are presenting an interesting idea, and potentially a good one, but it smells to me like Mathematically Perfected Economy, or what ever it is called - it sounds good at first, but I see it as basically being central planning, which, in my mind, is not a very sound system.

All the best,

Reuben

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Re: It is unnecessary for ANYONE to borrow money to own a ...

There is no money until someone, somewhere in the economy has borrowed it.  The simple answer to your question is it is currently impossible for someone to pay for a house without someone having to have gone into debt to a bank.  Whether is was them or someone else.

 BUT,

this can change.

in the 'details' section there is links to the Minnesota Transportation Act.

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Re: It is unnecessary for ANYONE to borrow money to own a ...

I knew from the title who authored the thread... to say anymore would waste more space.

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Re: It is unnecessary for ANYONE to borrow money to own a ...

Why all this talk of building homes?!   9 months ago (the most recent data I could find googling: if someone finds more recent please post), there were over 4.3 millions unsold houses for sale.  We don't need to be building more houses.  We need to be adjusting house prices down to a market-sustainable level. 

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kmarinas86
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Re: It is unnecessary for ANYONE to borrow money to own a ...
machinehead wrote:

No. I can't.

If the homeowners' payments into the fund equal 5
percent of the housing value, then the fund will be able to pay upfront
for 5 percent of the total new housing, not 100 percent.

There is
no 'magic formula' in finance which will create something out of
nothing. A magic formula to turn lead into gold is probably a better
bet. Happy prospecting. Call me when you get rich.

Since you clearly don't get it, let me express it mathematically.

Value of All Homes at the end of the period = a + b + c + d + e + f + g + h + i

Value of newly constructed homes = i

Rate = Value of new construction divided by value of established homes

Rate = i / (a + b + c + d + e + f + g + h)

Amount due by Homeowner a = Rate * a

...

Amount due by Homeowner h = Rate * h

Amount due by Homeowner i is deferred to next period.

The result? i is completely paid for upfront while homeowners pay in installments. Even though i
is completely paid for by the collective, the individual has not
contributed enough money to the fund to match the value of the home.
Thus the person, like his more established counterparts, must pay into
the fund (c.f. "their is no free lunch").

If I am sure that you understand this, THEN I'll explain what I
think needs to be done regarding the mortgages remaining in the system. 

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Re: It is unnecessary for ANYONE to borrow money to own a ...

kmarinas86 - You leave several important  questions unanswered that are key to the process.  For example, how would the construction costs be funded?  You say that the contractor should be paid in full upon completion but you do not mention who writes the check and from what account will it be drawn?

Larry

 

 

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Re: It is unnecessary for ANYONE to borrow money to own a ...
"reubenmp3" wrote:

kmarinas86,

Some questions for you:

1) who are you proposing would run the savings fund that pays the contractors who build the houses?

I used to say the government, but it is not necessary for the government to control this. All that is required is that the appropriate payments be made. Anyone who can do the math should be able to control it.

"reubenmp3" wrote:

2) how do you transition to such a system - do you require all those who have build a house under the old system to pay for their houses again?

No. First you consider how much in payments have been made to a conventional mortgage (=A) and how much in payments are still remaining (=B). If B=0 (no payments remaining), then there is no charge to the house. Therefore, the only people who must continue to pay are those who have payments remaining. The payments remaining must be changed to (B)/(A+B) times the value of the home.

"reubenmp3" wrote:

3) How is the decision made to build a house - is it just when someone needs one? Who designs it?

Factors that justify building a house, such as market size, demographics, and economic trends, remain relevant.

"reubenmp3" wrote:

4) How long do payments by any one home owner continue?

5) What happens when someone wants to sell their house before they have paid for it's full value?

For someone who still has a conventional mortgage, the remaining amount owed for owning the property is reset to the percent of the conventional mortgage not paid times the current value of the home.

For someone who never gets a conventional mortgage to obtain a piece property, the remaining amount owed for owning the property is simply the value of the home minus payments.

"reubenmp3" wrote:

6) Who owns the houses? Is it the people living in it, or the people running the savings fund?

The people running the saving fund would have the ability to recognize missed payments. Therefore, this is not a foreclosure proof system. If payments are not made, then it would be a free lunch to have people to own that home. Because we cannot have a free lunch, the ownership must be conditional. Private property is not free property.

"reubenmp3" wrote:

You are presenting an interesting idea, and potentially a good one, but it smells to me like Mathematically Perfected Economy, or what ever it is called - it sounds good at first, but I see it as basically being central planning, which, in my mind, is not a very sound system.

All the best,

Reuben

Thanks for the time putting that post together! It is much appreciated.

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Re: It is unnecessary for ANYONE to borrow money to own a ...
DrKrbyLuv wrote:

kmarinas86 - You leave several important questions unanswered that are key to the process. For example, how would the construction costs be funded? You say that the contractor should be paid in full upon completion but you do not mention who writes the check and from what account will it be drawn?

Larry

If one sells a house before it is constructed, then the builder can recieve the payment immediately from the fund.

If one sells a house after it is constructed, then the builder can recieve the payment from the fund only after it is constructed.

Now that the fund has been used, money is needed to refill the fund.

First add all the housing sales for the period: new sales=t+u+v+w+x+y+z...

Then divide this by the value of housing of homeowners who have not completely paid for the amount due for their house: new sales/(a+b+c+d+e+f+g...) This will equal a percentage.

That percentage is charged on those established homes (a+b+c+d+e+f+g...). That is how the funds will be maintained.

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Re: It is unnecessary for ANYONE to borrow money to own a ...
"affert" wrote:

Why all this talk of building homes?! 9 months ago (the most recent data I could find googling: if someone finds more recent please post), there were over 4.3 millions unsold houses for sale. We don't need to be building more houses. We need to be adjusting house prices down to a market-sustainable level.

Consider the fact, which you clearly recognize, that construction of new housing is down. Then consider the fact that prices are going down as well, especially for housing remaining to be sold. Combine those two facts together and the result is a high probability that new housing this period has fallen percentage-wise with respect to the total value existing housing.

Now if the value for new housing were paid for by a fund, that fund must be refilled. To obtain those funds a calculation of charges to current houses not totally paid for must be made. One divides the value of the new homes of that period by the value of established homes not totally paid for. If the new homes of that period are 5% of established homes, then the rate that owners of those homes would pay would only be 5% of the value of the home per period.

When taken to the extreme level, in a case where builders do not build any new houses, the charge to own a home would be zero. As soon as new housing is projected, the rate can no longer be zero, and everyone who has remaining payments must continue to pay. Therefore, a stable rate is desirable and chances are very good that such a rate will not be zero.

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Re: It is unnecessary for ANYONE to borrow money to own a ...

kmarinas86 - you have lost me - are you suggesting a cooperative be formed similar to the J.A.K. Medlemsbank, member-owned bank based in Sweden?

Larry

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Re: It is unnecessary for ANYONE to borrow money to own a ...
kmarinas86 wrote:

Since you clearly don't get it, let me express it mathematically.

Value of All Homes at the end of the period = a + b + c + d + e + f + g + h + i

Value of newly constructed homes = i

Rate = Value of new construction divided by value of established homes

Rate = i / (a + b + c + d + e + f + g + h)

Amount due by Homeowner a = Rate * a

...

Amount due by Homeowner h = Rate * h

Amount due by Homeowner i is deferred to next period.

Here
you are assuming that the system already has been in existence for a
period of years (eight years, in your example). But homeowners 'a' thru
'h' cannot have benefited from the system during its initial years, and
have no incentive to pay into it. Indeed, for payments to be as low as
they would be on an ordinary 5 percent interest rate mortgage, the
system needs to have existed for at least 20 years. Otherwise, the
'rate' will be more burdensome than a plain old mortgage.

This
system might be sustainable if it were fully capitalized when it
started up on Day One. But raising that much capital for start-up is
just as burdensome as having individual buyers borrow it themselves.

Effectively, you are trying to wave a magic wand and declare 'fiat
pecuniam' ('let there be money'). If you can do that, why not just make
yourself a trillionaire, and give the money away? Share a million with me, and I'll do nothing but sing your praises. Thanks in advance.

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Re: It is unnecessary for ANYONE to borrow money to own a ...

kmarinas86,

     the other factor that you have completely left out is the sale of existing homes - who pays for that?  How is a price arrived at for them?  If the seller has not yet paid for the house in full, what happens?

all the best,

Reuben

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Re: It is unnecessary for ANYONE to borrow money to own a ...

 

Come to think of it, I would not want to see my daughter, son in law and their baby moving into a shoebox for their first home, which is all they can't afford at the moment.

 

I think they should have a 7 bedroom ( 3 en-suit ) house with 2 living areas, dining room, gym, covered swimming pool and tennis court.

Since they won't have to pay interest, only capital over a long period, They will be able to afford it even on a minimum wage...

So this system sounds great    .Wink

 

 

Cheers Hamish

 

 

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Re: It is unnecessary for ANYONE to borrow money to own a ...
reubenmp3 wrote:

kmarinas86,

     the other factor that you have completely left out is the sale of existing homes - who pays for that?  How is a price arrived at for them?  If the seller has not yet paid for the house in full, what happens?

all the best,

Reuben

User "machinehead" too has wondered about the transition.

Current mortgage lenders - NOW: These people have lent money and need a return. The truth is that mortgage lenders get this money from a bank. That money leaves the bank and is used first by the building companies and then by everyone else. Over time that money will be deposited in many banks, both in individual and business accounts. That money will go around, lowering interest rates, etc. Now, when paying the mortgage, the money comes from the homeowner's bank account(s). That money will go from that bank to the bank that is due money from the mortgage. In many but not most cases, the bank withdrawn from would NOT be the same bank that recieves the funds as a result of mortgage payment. However, in cases where the bank having the homeowner's savings is the same bank the homeowner owes money to through mortgages, there would be no net change of assets (or cash) for that bank. However, with liabilities reduced, stockholder's equity would increase, thereby increasing the tendency for the bank to pay dividends to shareholders. Think about that. See how if banks were consolidated further, just like they have in the past, money to shareholders would rise without corresponding increase in assets. This problem might be a component (but certainly not a major one) in the failure of Fannie Mae and Freddie Mac.

FUTURE: In the future the current banking system would not serve as a financial intermediary between homeowners and home builders. In each period of time, a common rate on the value of housing, would be applied in relation to the value of newly constructed housing. The more new housing relative to total housing, the higher the rate. Each period's payments would account for all of new housing if rate is determined accurately. By using this type of intermediary (a fund), then borrowing and interest can be avoided enitrely.

However, it is impossible to change things unilaterally. What will happen is that some companies, not all, will adopt this plan first. They would do this by serving the homeowner's needs to pay periodically for a percent of the value of the home due. Since the payments would be less than they are now, there is very little in the way of resistance to the idea on the part of the homebuyer. What would be offered is a way to pay for housing without indebtedness to a bank, with no interest, and no principal. A fee would be charged as the companies see fit to make their business competitive and profitable, because after all, they need to make money too.

Transitioning from activity due to mortgage products: For those who have a relationship with their current mortgage lender, they would untie themselves from the mortgage. This means that the bank where they withdraw the money from must give up its assets to the bank to which the mortgage is owed. This situation would not be problematic at all only if there was a single bank for all. However, because the fragmented nature of the banking industry, it is likely that movements of assets between the banks would favor banks that did not loan out many mortgages, because such mortgages would have to be written off.

Now that the context has been set, now to answer the questions: 

"the other factor that you have completely left out is the sale of existing homes - who pays for that?"

The homeowner must pay to get. That is a first class requirement.

The homeowner must have a right to building up equity. Now, first we must consider what net future cash flows will go from the homeowner if the entire mortgage is eventually paid. Then, we must compare that to the total funds that would be paid to the mortgage from beginning to end. We divide the former by the latter and apply the resulting percentage to the value of the home. That will equal the effective equity applicable for moving to a different property in exchange of losing ownership of the previous home.

Now, whether the homeowner moved to a new or old home makes little difference as the builder is compensated for by the fund at the moment of sale. Now, if the value of the home goes up due to add-ons made by previous homeowner, that previous homeowner is to be treated like the builders, by receiving the increase of the market value. Any drop in the market value as a result of the previous homeowner's negligence would result in a drop in negligent's hold of the equity in the house by the percentage drop in the market value of the home.

"How is a price arrived at for them?"

How much does the buyer think the house is worth? The average buyer will seek a better deal with greater percieved value for less money. Their perception of the value of the home, as well as their finances, is critical in deciding how much they are willing to spend on that home. In other words, prospective home buyers will consult the people who will help make the decision to buy the home more rewarding.

"If the seller has not yet paid for the house in full, what happens?"

The seller must sell the house, otherwise it cannot consider itself a seller of that house. Only at the moment of sale should it recieve money from the fund, whether it is before or after construction. For new home builders, sales are likely to be before construction, due the need of appropriate funds, so they can avoid the costs of borrowing.  The challenge of selling a house before making it encourages start up home builders to effectively convey the value of the homes before they are even built - I see that as fair game for anyone wanting to start a construction company for residential units.

The sale must be valid in that the next homeowner to live there pays for value he or she is getting if his/her equity is less than the value of the house. If the buyer already has a lot of equity with enough remaining to cover the home+improvements, then the seller, without question, has a valid sale.

kmarinas86's picture
kmarinas86
Status: Silver Member (Offline)
Joined: Dec 29 2008
Posts: 164
Re: It is unnecessary for ANYONE to borrow money to own a ...
DrKrbyLuv wrote:

kmarinas86 - you have lost me - are you suggesting a cooperative be formed similar to the J.A.K. Medlemsbank, member-owned bank based in Sweden?

Larry

What is necessary is simply determining the rates on current homes to pay for new homes. A cooperative is all that is really needed to make this possible. If one wants to divide the rate into local, state, and federal components, then a confederation of cooperatives can be formed to make that happen. The arithmetic of this system can be applied on other property besides houses. It can perhaps apply to any long-term type of capital having a reasonably low rate of production relative to current inventory (in the 1% to 6% range). Because of the balanced nature of the arithmetic, trillions of dollars in future debts between lenders and owners of property can be safely avoided.

There are even some positive externalities in relation to the adoption of green technologies, which tend to be more expensive in terms of research, development, and adoption by the market. By not paying interest on property, homeowners will find it easier to lower energy costs while green technology companies can avoid interest on the value of manfacturing plants, which amounts to additional capital investments. The green industry is not alone in this though because the same priniciples can be applied to any long term property, plant, and equipment. This makes it reasonable to believe that this system proposes positive externalities comparable to, or in excess of, other proposals, including "FairTax".

machinehead's picture
machinehead
Status: Diamond Member (Offline)
Joined: Mar 18 2008
Posts: 1077
Re: It is unnecessary for ANYONE to borrow money to own a ...

In medieval times, there was a financial device called a 'tontine.'
As an example, twenty people would pay 50 guilders each into the
tontine. Then a drawing was held, and one lucky individual would win
the whole pot, 1,000 guilders. It was an early version of the lottery,
but without the cruel 50 percent haircut that states take now before
payout.

Your redistribution system is like a tontine in which
every member pays in 50 guilders, the drawing is held ... and EVERYONE
wins 1,000 guilders. Yay ...

This scheme has to be described in
qualitative terms -- words -- because numerically, it does not and
cannot work. It's an elaborate fallacy -- a system which might be
sustainable if fully capitalized, but to fully capitalize it would
necessitate a debt burden no less than individual borrowers are
undertaking now.

Interest
is the time value of money. Your scheme proposes to add value by
eliminating interest. But to capitalize the system, either interest
will have to paid to attract the start-up capital, or the generous
contributors will have to forego interest they could have eaned
elsewhere. If you examine your scheme closely, it resembles 'Social
Security for houses.' 

Frankly I think a 300 mpg carburetor or a free-energy device would be a
better bet. There is no 'free energy' in finance, except through Ponzi
schemes.

kmarinas86's picture
kmarinas86
Status: Silver Member (Offline)
Joined: Dec 29 2008
Posts: 164
Re: It is unnecessary for ANYONE to borrow money to own a ...
machinehead wrote:

In medieval times, there was a financial device called a 'tontine.'
As an example, twenty people would pay 50 guilders each into the
tontine. Then a drawing was held, and one lucky individual would win
the whole pot, 1,000 guilders. It was an early version of the lottery,
but without the cruel 50 percent haircut that states take now before
payout.

Your redistribution system is like a tontine in which
every member pays in 50 guilders, the drawing is held ... and EVERYONE
wins 1,000 guilders. Yay ...

False.

machinehead wrote:

This scheme has to be described in
qualitative terms -- words -- because numerically, it does not and
cannot work. It's an elaborate fallacy -- a system which might be
sustainable if fully capitalized, but to fully capitalize it would
necessitate a debt burden no less than individual borrowers are
undertaking now.

How so?

machinehead wrote:

Interest
is the time value of money. Your scheme proposes to add value by
eliminating interest. But to capitalize the system, either interest
will have to paid to attract the start-up capital, or the generous
contributors will have to forego interest they could have eaned
elsewhere. If you examine your scheme closely, it resembles 'Social
Security for houses.'

You mean something very specific when you say "capitalize". Let me put my idea to you this way.

Let's say we have 20 housholds by end of the first year, before my proposed system is implemented. 4 of them have paid for their entire mortgage. 12 of them have paid part of their mortgage, and 4 of them have not made the first payment. Out of those who have not made thier first payment, 2 of them have equity from a previous home.

The housing industry projects that the new home(s) to be built in the second year will be 5% of the estimated current valuation of all homes. In this case, it is expected that just 1 new home will be built. Yet the number of households is expected to increase by 10%, which is possible because there are old vacant homes.

In this scenario, the first thing to occur in the second year is the passing of a bill utilizing the system I have described earlier. What follows only has relevance to those who have not paid their mortgage in full. In the first year, 16 households have not paid for their mortgage in full, but 2 of them will make their last payment in the end of the second year. In end of the second year, there are now (a different set of) 16 households who still have not paid the full mortgage. 2 of those 16 will make their first payment in the second year, but each of them will move into a new and old house respectively. There is only 1 new house in the second year, while the old house was previously vacant. The new house is sold at the beginning of the third year to to a household which has not built up equity while the old house is sold in the middle of the second year to a couple who has built up enough equity to cover half of the home.

According to the bill, the payments in the second year will go to a fund which will pay only for new house(s) and improvements to old homes. There are 21 old houses and 1 new house. The value of old houses owned by households with payments remaining will be summed. At the end of the second year, there are 22 households and 6 of them have finished all their payments, however, only 4 of them had done so at the beginning of the year.The total value of the old homes occupied by those with payments is determined to be $5.1 million.

However, 1 household that owns one of the old houses starts paying after the first six months of the year has passed. Thus the average value of old homes that year is less than $5.1 million. In this case, the average value of old homes that year is determined to be $4.95 million.

In the second year, two households swap houses, and each of them has built up their equity to substantially cover the cost of the homes they swapped. The difference between the two homes is that first one rose in value and the other one fell in value. The increase in value of the first home will count as "new construction" and its former tenants will be compensated for by the fund. While the second home which fell in value by some proportion will eat the equity of its former tenants, by the same proportion.

The estimated value of new housing (1 house in this case) plus the rise in the value of 1 of the old homes is equal to $300,000 (from the new home sale) + $30,000 (from the improvements to the old house). Thus the combined value of these equals 6.7% of the average value of old housing occupied by those with payments remaning. Thus 6.7% of the value of old housing must collected from the tenants of that old housing. The simple method explained in the bill requires that people pay in direct proportion to the value of their home. Thus a percentage must be determined that will allow the housing fund to remain solvent. As new housing demand grows, the rate must be set higher to avoid insolvency, which will prevent housing demand from growing too fast. When the rate is high enough, the demand for new houses falls, allowing the rate to be set lower. Thus an equilbrium in the rate is inevitable and will be determined by feedback between affordability of the rates and the desire for new homes.

Quote:

Frankly I think a 300 mpg carburetor or a free-energy device would be a
better bet.

Maybe I should convince you otherwise.

Quote:

There is no 'free energy' in finance, except through Ponzi
schemes.

There is no free energy, period! A comment like this shows how little you grasp the idea I am explaining. Nevertheless, thanks for the criticism. I rely on critics for direction as to what I should explain in the idea. They are helpful, whether they sound cynical or not.

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DavidLachman
Status: Silver Member (Offline)
Joined: Jul 4 2008
Posts: 153
Re: It is unnecessary for ANYONE to borrow money to own a ...

"According to the bill, the payments in the second year will go to a
fund which will pay only for new house(s) and improvements to old
homes." 

This is the sentence that troubles me about this proposal.  Don't the mortgage payments on the unpaid for homes have to go to the banks that hold the mortgages, someone needs to pay the mortgages if the previous mortgage payments are going to be diverted to the "fund," no?

What happens to the outstanding balances on existing mortgages?

Reuben Bailey's picture
Reuben Bailey
Status: Silver Member (Offline)
Joined: Mar 17 2008
Posts: 138
Re: It is unnecessary for ANYONE to borrow money to own a ...

kmarinas86,

    I'm sorry, but to me your example is as clear as mud.  I can't track the numbers well enough to make heads or tails of it.

Also, whether you want to call it that or not, money is being borrowed from the fund - granted, it is interest free, but it is being borrowed and repaid just the same.  In a different monetary system, this kind of idea is a possiblity, but I don't think that it is practical under the current system.

All the best,

Reuben

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Soulmaster
Status: Bronze Member (Offline)
Joined: Sep 16 2008
Posts: 27
Re: It is unnecessary for ANYONE to borrow money to own a ...

What happens when somebody decides to not pay into the fund?  Not everybody is honest and you would have to pay for eviction and court proceedings...not to mention the fact that even honest people can't pay their bills sometimes.  What if I were to move into one of your big beautiful homes under the assumption that I could afford it but then lost my job due to the failing economy?  I have nowhere to go; you can't just kick me out, it's illegal.  You still have to hire a lawyer and go through the court system.  All of this takes time and money.  How do you pay taxes and insurance premiums?

 

Sorry but this would never work in an imperfect world.

kmarinas86's picture
kmarinas86
Status: Silver Member (Offline)
Joined: Dec 29 2008
Posts: 164
Re: It is unnecessary for ANYONE to borrow money to own a ...
DavidLachman wrote:

"According to the bill, the payments in the second year will go to a
fund which will pay only for new house(s) and improvements to old
homes."

This is the sentence that troubles me about this proposal. Don't the mortgage payments on the unpaid for homes have to go to the banks that hold the mortgages, someone needs to pay the mortgages if the previous mortgage payments are going to be diverted to the "fund," no?

Certainly so.

DavidLachman wrote:

What happens to the outstanding balances on existing mortgages?

If my proposal were not implemented, then the majority outstanding
balances existing right now would not be paid off until over a decade into the future,
when long-term inflation would reduce the value of the dollar
signficantly.

However, if my proposal were implemented:

Issue) If outstanding balances on existing mortgages were defaulted, net present value of mortgages would be lost by those banks to which a greater concentration of outstanding balances reside (in comparison to banks with little or no outstanding balances tied to mortgages).

Recommendation) One method to deal with this might be for every $x mortgage defaulted, the bank's debt to the Fed could be reduced by $x. This would encourage not only stability but also greater desire for banks to adopt the proposal. Even if my system were not applied, this could be done even in our current financial context (I suppose).

kmarinas86's picture
kmarinas86
Status: Silver Member (Offline)
Joined: Dec 29 2008
Posts: 164
Re: It is unnecessary for ANYONE to borrow money to own a ...
reubenmp3 wrote:

kmarinas86,

I'm sorry, but to me your example is as clear as mud. I can't track the numbers well enough to make heads or tails of it.

Also, whether you want to call it that or not, money is being borrowed from the fund - granted, it is interest free, but it is being borrowed and repaid just the same. In a different monetary system, this kind of idea is a possiblity, but I don't think that it is practical under the current system.

All the best,

Reuben

Oh. Now I get you. My ignorant side thought that there would have be interest on principal to call it "borrowing" ;)

machinehead's picture
machinehead
Status: Diamond Member (Offline)
Joined: Mar 18 2008
Posts: 1077
Re: It is unnecessary for ANYONE to borrow money to own a ...
DavidLachman wrote:

"According to the bill, the payments in the second year will go to a
fund which will pay only for new house(s) and improvements to old
homes."

This is the sentence that troubles me about this proposal. Don't the
mortgage payments on the unpaid-for homes have to go to the banks that
hold the mortgages, someone needs to pay the mortgages if the previous
mortgage payments are going to be diverted to the "fund," no?

What happens to the outstanding balances on existing mortgages?

Exactly.
If a Jubilee were declared to cancel all mortgage debt, then the new
scheme
potentially could supersede mortgages (although it sounds horrendously
complicated, and like Social Security, would require the brute force of
government-imposed involuntary 'contributions'). But then, the new
scheme would have been capitalized by expropriating existing lenders.

If the new scheme is not capitalized by expropriating existing lenders, then the double burden of paying a mortgage plus paying into the new scheme will bankrupt existing homeowners.

Again I raise the analogy of Social Security, where everyone pays
everyone else's retirement. In the early days, it looked miraculous
-- early beneficiaries could receive ten times what they paid in. But
now, three generations later, most people will be lucky to receive even
as much as they paid in. Intergroup transfers did not add value;
did not magically multiply capital beyond what individuals could have
done for themselves. When intergroup transfers were attempted on a
society-wide basis in the Soviet Union, the resulting value
substraction was so severe that the country's economic system crashed
and burned.

Capital is scarce. Even by combining the capital of millions of people, you cannot increase the per capita
amount of capital except slowly and incrementally -- the old-fashioned
way. There is no collective formula which will magically multiply
capital -- although fiat currency, with its 'money multiplier,'
purports to be one.

kmarinas86's picture
kmarinas86
Status: Silver Member (Offline)
Joined: Dec 29 2008
Posts: 164
Re: It is unnecessary for ANYONE to borrow money to own a ...
Soulmaster wrote:

What happens when somebody decides to not pay into the fund? Not everybody is honest and you would have to pay for eviction and court proceedings...not to mention the fact that even honest people can't pay their bills sometimes.

Unfortunately, humans are not perfect. So things like that are inevitable. 

Soulmaster wrote:

What if I were to move into one of your big beautiful homes under the assumption that I could afford it but then lost my job due to the failing economy?

The only solution for this is to have some way of making the economy work consistently and without any brash changes in monetary policy. In short, a different problem calls for a different solution.

Soulmaster wrote:

I have nowhere to go; you can't just kick me out, it's illegal. You still have to hire a lawyer and go through the court system. All of this takes time and money. How do you pay taxes and insurance premiums?

Well I haven't solved those problems, and I think many people are undergoing that right now.

Soulmaster wrote:

Sorry but this would never work in an imperfect world.

Well if you mean to imply that it would work in a perfect world, just what would that entail?

machinehead's picture
machinehead
Status: Diamond Member (Offline)
Joined: Mar 18 2008
Posts: 1077
Re: It is unnecessary for ANYONE to borrow money to own a ...
kmarinas86 wrote:

Recommendation) One method to deal with this might
be for every $x mortgage defaulted, the bank's debt to the Fed could be
reduced by $x. This would encourage not only stability but also greater
desire for banks to adopt the proposal. Even if my system were not
applied, this could be done even in our current financial context (I
suppose).

Okay, now we're down to the nub of the matter. You're
admitting that the new scheme is to be capitalized by expropriating
existing creditors -- that is, voiding contracts, which is unlawful.

However, the notion of expropriating 'banks' debt to the Fed' is
backward. In the ordinary course of business, banks keep reserves on
deposit at the Fed. Banks don't owe money to the Fed; the Fed owes them money. Oops, there goes that idea!

Recently,
there are some special cases of big, insolvent money-center banks which
have borrowed from the Fed and do owe it money. If this extraordinary
debt (TARP, TALF and the like) is cancelled out to fund your
scheme, then taxpayers are the bagholders who have put up the capital for the housing scheme.

No matter how you slice it, someone is putting up the
initial capital to fund the new housing scheme. If it's the big banks or the
Fed, then the capital is derived from Treasury
debt. Your housing scheme may claim to be debt and interest free. But
its start-up capital -- its original sin, if you will -- is entirely
debt-based. Replacing mortgage debt with Treasury debt is a shell game,
accomplishing nothing. You cannot create capital ex nihilo. There is no magic formula. Sorry.

 

kmarinas86's picture
kmarinas86
Status: Silver Member (Offline)
Joined: Dec 29 2008
Posts: 164
Re: It is unnecessary for ANYONE to borrow money to own a ...
machinehead wrote:
DavidLachman wrote:

"According to the bill, the payments in the second year will go to a
fund which will pay only for new house(s) and improvements to old
homes."

This is the sentence that troubles me about this proposal. Don't the
mortgage payments on the unpaid-for homes have to go to the banks that
hold the mortgages, someone needs to pay the mortgages if the previous
mortgage payments are going to be diverted to the "fund," no?

What happens to the outstanding balances on existing mortgages?

Exactly.
If a Jubilee were declared to cancel all mortgage debt, then the new
scheme
potentially could supersede mortgages (although it sounds horrendously
complicated, and like Social Security, would require the brute force of
government-imposed involuntary 'contributions'). But then, the new
scheme would have been capitalized by expropriating existing lenders.

If the new scheme is not capitalized by expropriating existing lenders, then the double burden of paying a mortgage plus paying into the new scheme will bankrupt existing homeowners.

Again I raise the analogy of Social Security, where everyone pays
everyone else's retirement. In the early days, it looked miraculous
-- early beneficiaries could receive ten times what they paid in. But
now, three generations later, most people will be lucky to receive even
as much as they paid in. Intergroup transfers did not add value;
did not magically multiply capital beyond what individuals could have
done for themselves. When intergroup transfers were attempted on a
society-wide basis in the Soviet Union, the resulting value
substraction was so severe that the country's economic system crashed
and burned.

Two of the prime reasons why Social Security failed are inflation and a large population (Baby-Boom Generation) approaching retirement age. The money paying into the SS Trust Fund is being paid for by a rapidly decreasing work force. On top of that the amount of goods in general that each dollar represent is falling. If one imagines that the vast majority of property and plants were paid through the system I propose, requiring virtually no issuing of debt, the consequences on the SS trust fund would be that money paying into that would preserve its value better over time. More importantly, the savings that results from not charging interest on property and plant investments would have tremendous capacity to allow for greater savings while simulatenously advancing the job market and increasing the value of our current jobs, including those which are outsourcable to other countries. Such savings on property and plant, as I have said before, also have benefical impacts by reducing the opportunity cost of starting a business.

machinehead wrote:

Capital is scarce. Even by combining the capital of millions of people, you cannot increase the per capita
amount of capital except slowly and incrementally -- the old-fashioned
way. There is no collective formula which will magically multiply
capital -- although fiat currency, with its 'money multiplier,'
purports to be one.

That's absoultely right. Capital (the accumulation of investments over time) are often denominated in terms of dollars (particularly in the equation for Gross Domestic Product). Then there is purchasing power parity, which brings the value of the dollar into context of other currencies. But the mathematical operators used in accounting, finance, and economics, are ill equipped to describe the behavioral and discrete nature of various raw materials, labor, and energy and its defining of productivity. Unlike money, the fruits of economics cannot be created out of thin air. Many economic theories, such as Communism act as "dividers" which make the production of capital less diverse and less adaptive. By removing barriers to production, one does not suddenly create a capital multiplier, instead one is removing the reigns of a divider of capital. Analogously, there is no such thing as a free lunch, but there exists a price for not adapting to the situation.

Farmer Brown's picture
Farmer Brown
Status: Martenson Brigade Member (Offline)
Joined: Nov 23 2008
Posts: 1503
Re: It is unnecessary for ANYONE to borrow money to own a ...
machinehead wrote:

Replacing mortgage debt with Treasury debt is a shell game,
accomplishing nothing. You cannot create capital ex nihilo. There is no magic formula. Sorry.

I disagree.  It does "accomplish" something: 

It keeps insolvent institutions, and in some cases, individuals, in business by propping up their balance sheets with assets taken from solvent institutions and individuals (in the form of future taxes that will have to be paid to cover the newly created debt). 

Instead of letting these institutions and individuals fail so that their assets can be absorbed by institutions or individuals with good balance sheets, who could then put these assets to productive uses, our government has decided to keep the unproductive assets in the hands of insolvent people for political reasons.  

This will only make the problem worse.  Unproductive companies and people should be allowed to go bankrupt so that their assets can be liquidated and absorbed for productive uses.  Obama's current strategy will only prolong our problems by keeping unproductive assets in unproductive hands, at the expense of not only future production, but also present costs.

So what I'm saying is, not only does the strategy mentioned not "accomplish" anything, it actually makes things worse.  I do wish everyone in government were be made to read your quote at least 3 times per day though!

 

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