Re: It is unnecessary for ANYONE to borrow money to own a …
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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,
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 In many but not most cases, the bank withdrawn from would NOT be the same bank that recieves the funds as a result of mortgage payment.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.