Friday, May 30, 2008

Own-to-Rent with a Twist

I've been tossing this post around in my head for a while, and true to form as a lawyer, I didn't want to post anything until I had a fully developed view of the proposals. But I've decided to put my economist hat back on, throw out my impressions of the proposal, and then let other people tell me how wrong/stupid my impressions are. Ralph Liu, who apparently created the first yuan-denominated interest-rate swap for Chinese banks, is promoting a financial product called SwapRent to help with the foreclosure crisis. In a SwapRent contract, homeowners facing foreclosure would sell a percentage of the future housing price appreciation to investors in exchange for a monthly subsidy sufficient to keep the homeowner out of default. A homeowner who entered into a SwapRent contract would essentially become a renter, but without giving up legal ownership. The investors would essentially be betting that the value of the house will rise. It's a variation on the shared-appreciation mortgage idea. Housing prices would be determined by a price index, such as the MSA level of the OFHEO HPI. The duration of the SwapRent contract would vary (e.g. 1, 2, 5, or 10 years), as would the percentage of the price appreciation the investor gets. SwapRent contracts would also work the other way: homeowners could protect against declining housing prices by paying an investor a fixed amount to take on the downside risk. This Business Week article provides a nice summary of the SwapRent proposal (read the comments too, as Liu provides lengthy responses to some good questions). For a one-page summary, see here; for a Los Angeles Times article on Liu's proposal, see here. Residential real estate futures and options markets are not new ideas, but they've never been able to attract enough buyers and sellers to get off the ground. SwapRent, however, already has at least one large class of potential buyers: investors holding mortgage-backed assets. If SwapRent could attract enough liquidity, it would not only reduce the number of foreclosures, but would also help stabilize the housing market in the future. If there had been a real estate futures market 10 years ago, the housing bubble probably wouldn't be wreaking as much havoc on the economy as it is today. Ultimately, I'm not sure there are enough homeowners and investors in a position to use SwapRent for the proposal to have a huge impact on the foreclosure crisis. Assume housing prices have to fall another 15% nationally to reach the bottom (a generous assumption, given the most recent data). To make a significant impact on the foreclosure crisis, SwapRent needs investors who are willing to bet on price appreciation. But if housing prices still need to fall 15% to fully correct, then there won't be sufficient price appreciation to attract enough investors for a while. SwapRent would be very beneficial in communities where housing prices have reached the bottom in terms of supply and demand, but are in danger of falling too far due to foreclosures. If investors think housing prices are declining largely because of foreclosures, then using SwapRent to avoid foreclosures would not only stop housing prices from declining further, but would also increase the chance of future housing price appreciation (and thus profit). I could be wrong about the number of buyers and sellers in a position to use SwapRent, and feel free to correct me if I am indeed wrong. I do, however, think SwapRent could provide significant benefits beyond the foreclosure crisis. In the next post, I'll discuss the positive externalities generated by separating the legal and economic ownership of housing.


Unknown said...

Mình hiện tại cũng đang bán dong trung ha thao nhat banfucoidan. Nếu có điều kiện ghé thăm mình nhé
Nấm linh chi nhật bản là sản phẩm hiện đang rất hot trên thì trường. Được cung cấp uy tín nhất tại Chúng tôi còn cung cấp thêm những mặt hàng hot khác đến từ nhật bản như Shiseido Collagen, Đông trùng hạ thảo, ...

chăm sóc sức khỏe said...

Fire Ball said...

Bạn đang tìm kiếm một cửa hàng điện máy cũ ở tphcm. Nếu để tìm mua máy lạnh cũ giá rẻ tphcm, máy giặt cũ giá rẻ tphcm hay sở hữu cho mình một chiếc tủ lạnh giá rẻ tphcm. Hãy cập nhật những kiến thứccó thể bạn chưa biết chẳng hạn như từ pm là gì, fa là gì...

Emmly John said...

Great blog about economics. Very informative and detailed posts. Business Brokers Campbelltown appreciates and thanks for this post. Keep it up.

Bandar Poker Terpercaya said...

The article on this site is very interesting, thank you
Selamat datang di LENOVOPOKER™ Top 1 Judi Online
Promo Terbaru LENOVOPOKER :
- Bonus New Member Depo +20%
- Bonus All Member Next Depo +5%
- Bonus All Member Refferal 30%
- Bonus All Member Rollingan 0.5%
Contact : BBM : LENOVO88
WA : +6281375260652
Agen Domino 99
Bandar Poker
Agen Ceme
Bandar Ceme
Judi Poker Terpercaya