This story,about a new way to buy a house, appeared on page 8 of the LA Times on December 15th. Check it out. http://www.latimes.com/business/realestate/la-fi-lew-20131215,0,7858562.story#axzz2nh3BQaDN
This story reports on a new method of financing home purchases. It enables a buyer who can’t come up with the full down payment, to sell shares in the home to investors. The home buyer uses his own money plus investors’ contributions to secure the mortgage.
The primary owner may reside indefinitely in the home, but when it’s sold, the investors receive a percentage of the capital gain (or partake in the loss). Investors can trade their shares, just as we can sell our Microsoft stock, at any time. Will the primary owner hold have to hold meetings every year so that stockholders can vote on whether it’s OK to paint the house pink? Lots of possibilities.
This story is potentially important on many grounds. If the idea takes off and financial wizards add opaque features, the possibility for bubbles and crashes are as great as the securitization of sub prime loans. On the other hand, if reasonably regulated, this method can lead to more home ownership (which I suppose is good), or increase the efficiency of buying and selling homes, which is also good, if not transformative. (Back to this point a little later).
The Primarq story and model has other implications. For example: Why not allow kids or their parents to sell shares in student loans? When the student gets her first job, or opens a business, investors receive a percent of the income, with time limits. Investors could choose among prospective students on a website, and direct their capital to the kid just accepted into Yale’s Astrophysics program. Down the road some investors will cash in big when she wins a Nobel prize for discovering what preceded the Big Bang. The possibilities for the Primarq idea, like the universe, are endless.
The most important implication of this story is that it provides yet another example of how the financial sector dominates the US economy. Or, put another way, how the business of using money to make money has become the main end of capitalism, rather than just its hand-maiden or life blood (with which I would have no problem).
The dominance of the financial sector is made possible (or a lot easier) by technology, which allows voluminous and immensely complex transactions to occur with ease, at very little cost per unit. Primarq could probably not have made money with this idea twenty, or even ten, years ago. Technology, software, and the internet have dramatically lowered transaction costs.
It is my sense, that instead of trying to make money inventing new tangible, possibly transformative products (the wheel, the basic telephone, the automobile, the computer) and services which materially change our lives (medical treatments, taxi rides, education), way too many smart people are engaged in economic activities which use money to make more money. Any other impacts are incidental.
Entrepreneurs of companies like Primarq are not only hoping to make money from fees and advertising, but are playing lottery capitalism. If the web business gains traction, maybe Schwab or Ameritrade will buy it for $20 million….even it it hasn’t turned a profit yet.
The consequences of the Primarq model, even when you trace its impacts up (or down) the chain of economic activity, are not, at least in my (limited) vision, transformative. Not every new business venture can or needs to transform lives. But if so many of our best and brightest are using their creativity and hard earned MBAs to manipulate financial instruments, or get out front with the latest scheme with Ponzi overtones, or get noticed in the lottery economy so they can be bought out for millions, capitalism is being stood on its head; the tail is wagging the dog. Meanwhile Tesla — you can actually see, touch, and drive the cars — struggles to overcome jibes and obstacles from jealous or threatened interests because they (presumably) couldn’t be making it without selling emission credits. (Well, Boeing would never have made it without federal government contracts which effectively subsidized their R&D).
The Primarq story on page 8 reminded me of all that. Hey, want to buy shares in a new blog? As beta testers and founding followers, you will be the first to know about the IPO. I promise. Shhhh!
Page Seven 
Good topic, Irv. It seems like a natural market reaction to an unnatural disruption and over reaction to the mortgage market by government “protectors”. A hot market recently has been “group funding” for anything from a new brewery (Plan 9) to Escondido’s new Saturday market. When I studied this concept, it looked very “new agey” to me. You become or are a fan of something and you donate your money for the start up of that something without gaining any equity or return on investment. Oh, you might get a new t shirt with the company logo on it, though. It’s like your new start up is a non profit organization without the mountains of paperwork and IRS colonoscopy for you conservative sounding ventures. This new private funding of tangible assets sounds interesting, but consequently, probably has local attorneys dreaming of loads of billable hours negotiating the exponential growth of possible conflicts. If it was done in a professional way, like many financial instruments are, the possibilities could be exciting. Entrepreneurs write prospectus and self governing documents stating what they are going to do, when, and for how long and then put it out to the masses. A badly written plan with too many caveats or escape clauses will scream “warning” to investors and simple, sharply targeted ones will be embraced if the underlying premise is sound. Somebody wanting to invest in real estate who worked his way through business school, as a handyman, with an emphasis on real estate management and holds a real estate license, may be able to attract investors with cash and good credit for down payments and a pledge for one year of mortgage payments, while said graduate does all the acquisition leg work and all fix up to the property for flipping or renting. You make a budget and project costs on agreed upon work and then calculate long and short term returns to investors depending on how you hold or sell the asset. In the current economic climate, that graduate wouldn’t be able to get a mortgage and those passive investors are hungry for yield on their cash in this low interest rate environment. The important thing is the investors have collateral, just like a bank, and a chance to put their money to work for a better than market rate return. Unscrupulous people could still prevail in this scenario, so caveat emptor is always rule #1.
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Well, Alex, I just wrote a long reply to your good comment, and it vanished a split second before i could hit the send button. I just learned , in this beta test, how unstable this blog is in my windows 7/IE8 environment when comments get too long. What I recall most about my comment is this: I grew up with what is now a quaint concept of capitalism: I was told the whole idea was to “build a better mouse trap” and the money will follow. Primarq like activities seem to put money creation before anything else. Will the Primarq way of financing a home result in more home ownership or in a larger stock of quality housing in America? I don’t know. I don’t think Primarq or the investors are even thinking about that. How much investing and trading in the equity markets today is really based on someone’s view of which company has the best product or the best ideas?. I saw one estimate in a WSJ article which said investors with that sort of orientation are no more than 20% of the market. Thanks for the very thought provoking post and being the first commenter.
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Boy, Irv, I’ve been there. Wrote some brilliant, caffeine induced replies and had them disappear into the ether, LOL. Just can’t re capture the same magic when that happens. I agree with that 20% figure. Too many people have been burned by a generation of compounded interest projections and monthly drip investment pitches, all (cynically) stated to convince the average investor to just “send the money and let the professionals take care of the rest.” Then, that hatched a day trading mentality of self reliance until that group realized they were still the last ones to get the pertinent information and short term capital gains coupled with low $10 trades can add up to loss at the end of a day. I think the next straw was 9/11. The market was closed so you couldn’t get your money out and then all the professional’s trades were processed before mom and pop’s, thus resulting in big losses. Finally, 2008 was the last straw in many minds. Also, I think the insular reaction to 9/11 fueled the real estate excesses of 2002 through 2008. It’s been a rough decade and an amazing decade for the skilled investor and the novice alike, filled with vast opportunity and immense danger. Dancing through that mine field and still willing to be in the game takes great skill and courage. The only thing more dangerous, is NOT being in the game (not necessarily the market) as inflation and dollar devaluation cuts into your net worth at a time when creating income for retirement is so prevalent on the minds of baby boomers and Korean war generation alike.
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