Notes from Ground Zero

[john67elco]

I can post tons of ads like this:
http://www.imrmls.com:8080/servlet/lFullDetail?proptype=RESIDENTIAL&ml=I608542

I know that area and it would have sold for the first listing price last summer for sure. My best friend is selling is same exact house without pool and bonus add-on 5 houses down that steet(divorce). He is lowering list price to $480 this week. He started at $515 a while back. http://www.imrmls.com:8080/servlet/lFullDetail?proptype=RESIDENTIAL&ml=C607466

[Lickitysplit]

Your best friend is still coming out quite nicely based on his 2002 purchase price of $245k (Zillow). My heart goes out to him on the divorce, but that’s quite a nice little ROI on the house, even if he has to drop the price lower than he already has.

[john67elco]

naw he bought it as a dump and had to refi– his butt off. If he doesnt clear $450 after buyer and seller comp/closing cost.. He walks away in the hole after divorce. So ya $245 back then still turned into nice size debt.

[4plexowner]

Amen, brother!

[davelj]

You CANNOT be serious: “People who understand interest collect it while those who don’t pay it”? This is what passes for wisdom? Good lord.

I’m neither for or against debt in the generic sense. It all depends on what the purpose is for taking on the debt.

But please send your “adage” to Henry Kravis… or Thomas Hicks… or the Basses… or the Pritzkers… or anyone who’s made money in leveraged buy-outs. I’m sure, as billionaires, they’d love to hear your opinions on all the things they don’t understand about utilizing debt.

[powayseller]

The time to leverage debt in RE has passed.

We are well served to mind the quote given by 4plexowner: it is far better to collect interest than to pay it. That’s the position I am in now. Individuals’ net worth is improved when cash, which would go to pay interest on cars, credit cards, houses, furniture, is instead used to invest in savings, education, or other appreciating assets. Using cash to service debt is a horrible use of resources and shows a lack of discipline in financial matters. Americans love to take on debt to buy what they want when they don’t have the money. Imagine the average American spends $300/mo. paying interest on her car and credit cards. Imagine she didn’t have those debts, and instead used the $300/mo. to put into a savings account, sends it to orphanages or Doctors Without Borders, or uses it to get a Masters Degree. What a more productive world we would have. Interest paid enriches financial institutions, but doesn’t create anything of value.

Corporations can use debt to invest in their future: expansion, research and development, mergers.

The quote made about interest is a good one. I am in agreement with 4plexowner on this one. His post refers to individual debt, not a corporate leveraged buyout.
I do love a good debate, and am open-minded to being corrected. Did I make any mistakes in my argument? Do you see a benefit to an individual taking on debt, specifically the debt discussed in the post, mortgage debt?

[davelj]

Why do I bother… look, the issue of whether or not “it is far better to collect interest than to pay it” is DEPENDENT ON THE SITUATION. That was my point. I thought I made that clear…

I believe that 85% of the assets on this planet – whether stocks, commodities, bonds, real estate, etc. – are either fairly or over-valued. Having said that, there are plenty of situations out there in which an investor can earn a return substantially above the cost of servicing the cost of borrowing associated with making such an investment. The problem, of course, is that such opportunities are few relative to the total set of investment opportunities. In other words, it’s hard work to find these opportunities. But, I will guarantee you that in 10 years you will be able to look back and with 20/20 hindsight find investments that returned well in excess of the borrowing costs associated with these investments.

I invest principally in private companies. Unfortunately, it’s very difficult to borrow against equity interests in private companies. Bank regulators more than frown on banks that try to lend against private equity as collateral, and for good reason. Nevertheless, I have several investments that, if possible, I would be happy to borrow against at 8% floating (and increase my equity investment in these companies with the debt) because I’m highly confident that these companies’ ultimate IRR will exceed that 8% rate by a multiple. So, it would make all kinds of sense for me to borrow right now, despite the fact that I’m very bearish on the economy, real estate, stocks, etc… but it’s very difficult to do.

As to your specific question, for the most part, no, I don’t see much benefit to an individual taking on mortgage debt right now. But, again, IT DEPENDS ON THE SITUATION. This forum focuses on San Diego and California where leverage will likely be hazardous to investors’ financial health over the next several years. But the world is a large real estate market. (I know people who are active buying properties in such far flung places as Peru and Russia.) I’m sure there are plenty of CRE and MFR properties in the midwest (and other places) that yield positive cash flow after debt service and will show modest appreciation over the next several years. And for people that have the patience and skill to find such properties, then they should borrow as they see fit. It’s not necessarily stupid to do so, and may in fact be quite smart given the circumstances.

The problem with adages, platitudes and pithy pronouncements that people read in the financial press is that often they are just plain wrong. For example, the idea that “it is far better to collect interest than to pay it” is COMPLETELY RIDICULOUS absent any corresponding context.

[powayseller]

Point taken. Thank you for taking the time to educate me.

[PD]

I’m a housing bear. My husband has a Masters in Real Estate Development. We have been doing a lot of research the last year and half. We sold our house in March of 2005 and locked in our profit (it is all air until it is in the bank). We moved into a rental in Coronado that is on the water. Our rent would only be enough to pay the property taxes and assoc. fees on this house if it was sold at the present value!

While we do not like renting, we feel confident that it will pay big dividends. I will be shocked if the San Diego market does not fall significantly.

Those people who have any form of adjustable mortgage right now are taking a big risk. Those mortgages are great in an upward moving market but are a bad bet in today’s uncertainty.

My prediction:
– Housing prices will really start to fall by Thanksgiving.
– Realtors and contruction people will start losing their jobs or quit making money. Unemployment starts to rise.
– The entire country could be looking at a recession starting about Thanksgiving (a whole separate issue but I think it is coming – this also shoots to pieces the “but jobs are great” argument).
– Housing prices drop further and continue downward for some time.

[powayseller]

Now LookOutBelow has two girls he wants to marry 🙂 I share your prediction. Just curious, how you arrived at the recession forecast?

[PD]

I’m Chicken Little.
I have been reading a lot of articles on how precarious things are for the US economy. The dollar is in bad shape and the world is moving away from using it as the main currency. We did not recover from the last recession in way that economists think was healthy or normal because of the low interest rates. Our debt, both personal and national is huge. People quit saving over the last few years because they didn’t think they needed to because their house was appreciating in such a crazy way. I think there is going to be a huge financial slaughter over the housing market when the dust settles. Many lending institutions are going to go under. In my opinion, the housing market is going to be a flash point for a big recession. Quite a few people are saying that oil could go to $100 or higher, depending on what happens with Iran. Then, if the bird flu hits….

I am in asset protection mode. After selling my house last year, I invested heavily in the stock market. I made a nice return. I sold 75% of my portfolio a week and a half ago. It goes against the grain to have all off that money sitting as cash but I’m having a hard time deciding where to put it. Everything has been on a bull run the last few years – housing, stocks, commodities. This very unusual. It seems to me that we could be looking a Perfect Storm.
For the first time ever, I’m considering buying some Puts.

[powayseller]

You must be my twin! Have you been reading my posts, bec. I have done exactly as you. Even down to selling all equities in the last 2 weeks, selling my house, going into asset protection mode. Why don’t you start some threads with what you’ve learned and how you got there? I’d like to hear more…

[PD]

I did not start reading any of the posts until last week. However, I did read the Bubble Primer articles some time ago. I read the articles on the Housing Crash page at Patrick.net every morning and frequently follow links. I’ve read so many articles lately, I could not retrace my steps.

I may end up wrong about my doom and gloom but if I’m right…. I’ve decided to tuck my money under the mattress.

This is an intersting housing link:
http://bwnt.businessweek.com/housing/2006/index.asp?sortCol=market_risk&sortOrder=DESC&pageNum=1&resultNum=100

[Anonymous]

PD

There are very good reasons to expect a stock market decline here which I have pointed out in this forum. I have a blog that has a chart of the S&P and the bond market and a particular formation that has spelled big trouble for stocks historically.

I posted it on Wednesday of last week. Go to http://iamafuturestrader.blogspot.com/ and look on the left for the “here is a graphic or rising stock prices and…”

Good move on the exit. You are going to be pleased with that move in a few months. A good buy spot should materialize in the fall.

[Anonymous]

None of the really wealthy people I know use max leverage, most use very little if any. I heard a quote once “leverage is for people that don’t have any money.”

I think it came from Buffett. It has it’s place to be sure, but the max leverage people always in the end wind up in the same place, broke.

The problem is they can never be wrong one time, and it is hard to go through a lifetime never being wrong. Hard to go through an hour for me LOL!

[Author]

Posts