In yesterday's issue of Financial Express, I read an article by Steven Kurutz, "Playing the real estate game with a raffle"
I don't know anything about economics, except that you don't get paid unless someone is capable and willing to pay you, and if you borrow you have to pay. So this post carries no authority, as you well know.
I think the crisis in US is really desperate. The article mentions that people are giving away their houses through raffles- there are two sites for this: HowToWinMyHouse.com and USAHomeRaffle.com. And the case of Crawford and Kelly, the owners of HowToWinMyHouse.com holds some lesson for us, I am not sure what it is.
Two years ago, the couple bought a house for $375000. They hoped to sell their old house and pay for the new one with the proceeds of the sale. Two months after that, with real estate prices down and burdened with costly mortgage, they decided to sell their new house. Even after a year, it remained unsold. So, they decided to do it different.
They held a raffles for which the entry price was $100 per head. They sold almost 6500 tickets, and thus they gave away their house for $100 dollars and still made a profit. Spirit of innovation, right? If everyone had gumption of this kind, the world will be different, eh?
They worked on this business model and put up a website where people can get rid of their houses and make a profit. But it seems in some states, holding a raffle to give away your house is illegal. So there, they are holding skills contests with entry fees, and award their houses as prizes. So for a $100 entry fee, you can write an essay on the theme, "Aloha, what does it mean to you?" and win a house.
Or if you are more comfortable with painting than with writing, for $49 entrance fee, you can download a black and white line drawing of a dancing couple; and then color it by hand. Your creativity will be rewarded with a one-story ranch house in Florida, worth $250000.
All this shows that when you are innovative and daring, you can get out of trouble. That was what I thought till I came to the part where it says what happened to the man who got lucky and won the raffles for the house that Crawford and Kelly put up.
Dennis Weaver who got that house in that $100 raffle, had to take out a mortgage to pay the $135000 in taxes on the prize. Which means he has to pay interests on the mortgage, right? Well, he couldn't, so he has decided to sell this house. He has held an auction, no bidders. Should he hold a raffle now?
As I said, you don't get paid unless someone is capable and willing to pay you. There might be individual winners in an economy on a freefall, but people on the whole will end up worse than before.
Like in Tsunami, individual bravado carries no weight.
US is going through a financial crisis. They are in a state of their own making. Combination of factors contributed to it, all of which could have been reined in if only better sense prevailed.
ReplyDelete1. Real estate boom took housing prices sky high
2. People whose creditworthiness was sub-prime, was given money to buy homes at sky rocket prices
3. These sub-prime loans were then securitised (converted in securities) and sold to greedy investors. Obviously these securities would earn more return considering the high risk associated with sub-prime lending
4. US to fund its war in Iraq kept borrowing in the market and put pressure on interest rates. As demand for money increases, interest rate increases.
5. Raising interest rates made mortgage payments more stiffer. Defaults started, panic struck investors sold their assets which busted the real estate boom.
6. House prices fell, defaults mounted, investors couldn't sell their assets and as a result could not service their debt.
7. Bear Sterns went down. Most of these companies borrowed hugely to invest in sub-prime securities. When those assets (securities) lost value they were left with illiquid assets. How can they service the debt they borrowed to fund these illiquid assets.
8. Almost the entire financial industry, world over, took varying degrees of hit.
9. Lehmann brothers, AIG followed
10. Govt. of US of A, the capitalist, has now turned a socialist and is bailing out these financial companies (AIG, Freddie Mac, Fannie May etc.)
The irony is reckless investors and greedy lenders are getting bailed out. Whereas small borrowers who bought houses with mortgaged loans left high and dry.
US is no different from India when it comes to leaving commoners in dire straits.
You just wait. I have my suspicions about India.
ReplyDeleteHow feasible is it for people to pay 40 lakhs and more for a double-bed room in a country where more than one-third struggle to make hundred rupees per day?
I think we will get our comeuppance sooner than later.