One method of home sharing and ownership that is often proposed by late-night infomercials is the “equity sharing” program.

In it’s simplest terms, this is an agreement between two people to share in the money or labor and to share in the profit. The idea is often advanced as a method for handling the party facing foreclosure. It is a bad idea. If you’re going to be sharing a title with people who are constantly in financial hot water, you are asking for trouble. 

You have to know the territory, and you have to know the numbers. So how do you learn the numbers?

The most important rule of investment is so simple, it’s easy to be taken lightly: You decide what will happen with your money. What it can do for you is up to you.

What to do with it

The moment you receive money, you have to use it. Whether you can’t let go of it, need to keep it close by, or can easily trust others to borrow it, you always have something to gain or lose. Here are the main choices.

Spend It

You can buy things with it (always the crowd favorite).

As the housing market completed its 11th consecutive quarterly decline and the residential slump extended into its 4th calendar year, the pace of the slide accelerated at the end of 2008. New housing starts fell 15.5% in December to 550,000 units. Single-family starts, off 14.2% in November, fell another 13.5% to 398,000 units in December. In the 50 years that these data have been compiled, December marked the lowest level of activity recorded. Additionally, the 64.8% annualized pace of decline in Q4 was the most rapid quarterly decline ever. The momentum of recent housing declines has increased in response to the overall economic weakness inherent in the steep recession. Finally, single-family starts in December were off 48.9% from a year earlier, the largest year-over-year decline of the current collapse.

The U.S. housing market is still suffering from a significant supply/demand imbalance. In the half decade to 2006, there was a significant housing construction boom (adding to supply) that was not matched by sufficient population growth (limiting the demand side of the equation).

Although short & medium-term issues such as interest rates and even the sub-prime market influence the U.S. housing landscape for now, demographics can ultimately also play a role.

The influence of this factor has waned somewhat in recent years in the U.S. as housing excesses have muddied the water, but the historical record is clear that demographics must ultimately determine the amount of housing stock in the U.S. market.

• U.S. housing is important for two reasons.
• First, it is the cause of U.S. economic woes and the credit crunch due to excessive sub-prime lending in recent years.
• Second, it is the most leading of leading indicators for the U.S. economy, and thus serves as an important bellwether for both the bond market and the economy.
• The U.S. housing market is in a dismal state, and should remain a drag for several more months.
• It is important to note that residential construction is now less than 4% of GDP (Source: BEA), and so this by itself does not spell doom for GDP.
• Its impact also spreads to sentiment and the multiplier effect of housing on the overall business cycle.
• The weakness in housing is driven by higher mortgage rates, poor affordability, high debt-service ratios and tightening lending standards.
• Even more fundamentally, some Americans were able to purchase homes without the obvious means to afford the homes if house prices ever ceased to rise at a robust pace, and are now facing foreclosure.
• The largest set of sub-prime mortgages were issued over the past few years, constituting roughly 20-25% of all mortgages (Source: Mortgage Statistical Annual and Inside Mortgage Finance). Many mortgages offered an initial teaser rate followed by a sharp increase in rates. These higher rates will hit quite hard over the next year.
• For the U.S. housing market (and thus economy) to improve, one first needs to see substantial improvements in affordability which will in turn boost home sales (it is estimated a further 10-15% drop in home prices). As a result, inventories will begin to fall. Finally, construction activity will pick up again. This means an improvement no sooner than late 2009.
• In the meantime, although the direct economic impact of the housing slowdown is clear – further bank losses, less construction activity, diminished furniture sales – there is also an equally important potential indirect impact. This is via a reduced wealth effect and mortgage
  equity withdrawal that affects consumers.

Despite continuing declines in home prices during the second half of 2008, home sales continued to plummet. While lower home prices tend to improve conventional measures of affordability, fundamental negative factors predominate. Deteriorating labor markets have reduced disposable personal income, and constrained access to mortgage credit. The considerable pace of home price declines and expectations that home prices will fall further has deterred demand.

One expects construction, which will decline at a 20%+ pace in 4Q 2008 and 1Q 2009, to contract more modestly through much of 2009. The recent sharp decline in mortgage rates and further declines in home prices will improve affordability, providing support to sales activity. Over time, inventories of unsold homes will diminish, and construction and home prices will stabilize.

Will demand pick up?