[davelj]

Land write-downs can, in fact, cause bankruptcy because those write-downs, although they are non-cash, reduce the company’s equity which negatively affects the debt-to-equity ratio, all else being equal. The covenants in the loan agreements between a builder and its lenders stipulate that certain minimum capital ratios remain in place or else funding can be pulled and… whoops!… the builder can be out of business. Generally it’s operational losses that put a builder out of business, but land write-downs have pushed companies over the edge in the past (although it’s an exception to the rule).

[davelj]

Chris Scoreboard,

I think what some of the posters are getting at with the “this time it’s different” and “throw the models out” mantra is that we’ve only had three similar credit contractions like the current one in the last 20 years. So, while the “models” may “properly correlate” – to simplify the terminology – 90% of the time, serious credit contractions are fairly rare and throw everything into a tailspin. The late-80s S&L crisis (credit contraction I) wafted into the early-90s recession (credit contraction II); then we had the 1998 LTCM debacle (contraction III). The Fed basically stayed out of the way – correctly, in my opinion – for I and II, so we got a nice cleansing recession followed by some nice growth. We probably needed a recession and some financial distress in ’98/’99 to remind people that with reward comes risk, but the Fed arranged a bailout, thus engendering the “Greenspan Put” which has lasted until recently (we’re waiting to see if there’s a “Bernanke Put”). The point in all of this is that credit contractions of this magnitude are fairly rare and this one is particularly rare because it involved trillions of dollars of structured finance and derivatives, much of which existed on a MUCH smaller scale at the time of the last contraction. In other words, this one is shaping up to be MUCH larger than the previous three. Therefore, we are, in fact, in uncharted waters. That is why I believe that, in fact, “this time it’s different.” To quote Charles Barkley, “I could be wrong, but I doubt it.” Many people like to say that “this time it’s different” are the four most expensive words in investing, and 90% of the time that’s correct. But sometimes things are a little bit different… and when they are the “models” – generically – often miss it. Again, we could start a mega-bull market on Monday – I ain’t no trader man – but I think these problems have been brewing beneath the surface for several years and are just now starting to percolate to the surface. I think we’ve just scratched the surface of the ultimate damage to stocks.

[davelj]

Chris Scoreboard,

I think what some of the posters are getting at with the “this time it’s different” and “throw the models out” mantra is that we’ve only had three similar credit contractions like the current one in the last 20 years. So, while the “models” may “properly correlate” – to simplify the terminology – 90% of the time, serious credit contractions are fairly rare and throw everything into a tailspin. The late-80s S&L crisis (credit contraction I) wafted into the early-90s recession (credit contraction II); then we had the 1998 LTCM debacle (contraction III). The Fed basically stayed out of the way – correctly, in my opinion – for I and II, so we got a nice cleansing recession followed by some nice growth. We probably needed a recession and some financial distress in ’98/’99 to remind people that with reward comes risk, but the Fed arranged a bailout, thus engendering the “Greenspan Put” which has lasted until recently (we’re waiting to see if there’s a “Bernanke Put”). The point in all of this is that credit contractions of this magnitude are fairly rare and this one is particularly rare because it involved trillions of dollars of structured finance and derivatives, much of which existed on a MUCH smaller scale at the time of the last contraction. In other words, this one is shaping up to be MUCH larger than the previous three. Therefore, we are, in fact, in uncharted waters. That is why I believe that, in fact, “this time it’s different.” To quote Charles Barkley, “I could be wrong, but I doubt it.” Many people like to say that “this time it’s different” are the four most expensive words in investing, and 90% of the time that’s correct. But sometimes things are a little bit different… and when they are the “models” – generically – often miss it. Again, we could start a mega-bull market on Monday – I ain’t no trader man – but I think these problems have been brewing beneath the surface for several years and are just now starting to percolate to the surface. I think we’ve just scratched the surface of the ultimate damage to stocks.

[davelj]

Allan from Fallbrook and one-muggle,

Actually, that quote is from John Maynard Keynes’ “General Theory of Employment, Interest, and Money.” JKG wasn’t nearly that astute.

[davelj]

Allan from Fallbrook and one-muggle,

Actually, that quote is from John Maynard Keynes’ “General Theory of Employment, Interest, and Money.” JKG wasn’t nearly that astute.

[davelj]

Actually, I’d argue that the Fed has failed miserably at “price stability.” Although it has been magnificent at playing the game of “the marketing of the appearance of price stability.” Anyone who believes the government’s CPI stats with their “rental equivalents” and “substitution effects” is a nutjob. Inflation’s gotta be running at least 2 percentage points above what the govies are reporting to us. See John Williams’ Shadow Statistics for the details…

[davelj]

Actually, I’d argue that the Fed has failed miserably at “price stability.” Although it has been magnificent at playing the game of “the marketing of the appearance of price stability.” Anyone who believes the government’s CPI stats with their “rental equivalents” and “substitution effects” is a nutjob. Inflation’s gotta be running at least 2 percentage points above what the govies are reporting to us. See John Williams’ Shadow Statistics for the details…

[davelj]

Doh!! I got confused and posted this on the wrong rent/buy thread, so here it is again:

We actually had a decent-sized thread about this a few months back. I forgot what the general consensus was, but my argument, in summary, was that a rational person should be willing to pay at least a 20% premium to comparable rents in the form of monthly ownership costs (mortgage interest + HOA + taxes + insurance, etc.). The logic is that there is some benefit to the interest deduction (although often less than people think) and, more importantly, over the long term you don’t have to worry about paying a higher rent each year, which is the norm, particularly in California. This really adds up from a present value standpoint. Once you factor both of these issues into the equation you come up with a decent-sized premium. Then many people would add in a “peace of mind/settled” intangible premium to the dollars and cents premium – this will vary from person to person. I think sdrealtor thought a 50%+ (total) premium was in order (which for some people might, in fact, be the case) while I was more in the 20%-30% range. The bottom line is that the average, rational person (absent special circumstances) should be willing to pay some premium over the comparable rent in order to own. The issue is what the premium should be and it will vary from person to person. For the most part, in my opinion – and most here obviously agree – that the “ownership premium,” as it were, is waaaaay too high.

[davelj]

Doh!! I got confused and posted this on the wrong rent/buy thread, so here it is again:

We actually had a decent-sized thread about this a few months back. I forgot what the general consensus was, but my argument, in summary, was that a rational person should be willing to pay at least a 20% premium to comparable rents in the form of monthly ownership costs (mortgage interest + HOA + taxes + insurance, etc.). The logic is that there is some benefit to the interest deduction (although often less than people think) and, more importantly, over the long term you don’t have to worry about paying a higher rent each year, which is the norm, particularly in California. This really adds up from a present value standpoint. Once you factor both of these issues into the equation you come up with a decent-sized premium. Then many people would add in a “peace of mind/settled” intangible premium to the dollars and cents premium – this will vary from person to person. I think sdrealtor thought a 50%+ (total) premium was in order (which for some people might, in fact, be the case) while I was more in the 20%-30% range. The bottom line is that the average, rational person (absent special circumstances) should be willing to pay some premium over the comparable rent in order to own. The issue is what the premium should be and it will vary from person to person. For the most part, in my opinion – and most here obviously agree – that the “ownership premium,” as it were, is waaaaay too high.

[davelj]

We actually had a decent-sized thread about this a few months back. I forgot what the general consensus was, but my argument, in summary, was that a rational person should be willing to pay at least a 20% premium to comparable rents in the form of monthly ownership costs (mortgage interest + HOA + taxes + insurance, etc.). The logic is that there is some benefit to the interest deduction (although often less than people think) and, more importantly, over the long term you don’t have to worry about paying a higher rent each year, which is the norm, particularly in California. This really adds up from a present value standpoint. Once you factor both of these issues into the equation you come up with a decent-sized premium. Then many people would add in a “peace of mind/settled” intangible premium to the dollars and cents premium – this will vary from person to person. I think sdrealtor thought a 50%+ (total) premium was in order (which for some people might, in fact, be the case) while I was more in the 20%-30% range. The bottom line is that the average, rational person (absent special circumstances) should be willing to pay some premium over the comparable rent in order to own. The issue is what the premium should be and it will vary from person to person. For the most part, in my opinion – and most here obviously agree – that the “ownership premium,” as it were, is waaaaay too high.

[davelj]

We actually had a decent-sized thread about this a few months back. I forgot what the general consensus was, but my argument, in summary, was that a rational person should be willing to pay at least a 20% premium to comparable rents in the form of monthly ownership costs (mortgage interest + HOA + taxes + insurance, etc.). The logic is that there is some benefit to the interest deduction (although often less than people think) and, more importantly, over the long term you don’t have to worry about paying a higher rent each year, which is the norm, particularly in California. This really adds up from a present value standpoint. Once you factor both of these issues into the equation you come up with a decent-sized premium. Then many people would add in a “peace of mind/settled” intangible premium to the dollars and cents premium – this will vary from person to person. I think sdrealtor thought a 50%+ (total) premium was in order (which for some people might, in fact, be the case) while I was more in the 20%-30% range. The bottom line is that the average, rational person (absent special circumstances) should be willing to pay some premium over the comparable rent in order to own. The issue is what the premium should be and it will vary from person to person. For the most part, in my opinion – and most here obviously agree – that the “ownership premium,” as it were, is waaaaay too high.

[davelj]

deadzone, your comment that “There is just no way demand for downtown living will ever match the number of condos they are building” is incomplete, in my opinion. I think it could be ammended to, “There is just no way demand for downtown living will ever match the number of condos they are building AT CURRENT PRICES.” I would agree with you there. Knock another 20% off prices and I guarantee you that demand will pick up considerably. Enough to put bodies in all the units for sale? That’s what we’ll find out. We’ll only know after the fact. (Do you really consider condos a “niche market”? My guess is that 15%-20% of all single family residences in San Diego County are condos. Is that what passes for a niche these days?)

Perry, although you may put Auckland below SD in a list of glamour cities, the populace disagrees – compare populations of people who have enough money to choose between the two and there’s your answer. I don’t understand why people live in NYC but I defer to “the tape” that more wealthy people want to live there than in SD. While we may disagree on what constitutes a “glamour city,” Robert Shiller came up with the list(which includes SD) and the moniker, not me.

Borat, you proved my case. That’s a great picture of Santa caught napping. Hell, even Santa Claus wants to live here. (That was tasteless. But, that’s my bag, baby.)

sdrealtor, yeah, our problems are minor in comparison with Miami, with a condo inventory that’s going to be 10x that of SD over the next few years. I don’t know where all of the buyers are going to come from. Sure, there are a lot of well-heeled foreigners that want to live in a big US city near the beach… but that’s a lot of inventory.

[davelj]

deadzone, your comment that “There is just no way demand for downtown living will ever match the number of condos they are building” is incomplete, in my opinion. I think it could be ammended to, “There is just no way demand for downtown living will ever match the number of condos they are building AT CURRENT PRICES.” I would agree with you there. Knock another 20% off prices and I guarantee you that demand will pick up considerably. Enough to put bodies in all the units for sale? That’s what we’ll find out. We’ll only know after the fact. (Do you really consider condos a “niche market”? My guess is that 15%-20% of all single family residences in San Diego County are condos. Is that what passes for a niche these days?)

Perry, although you may put Auckland below SD in a list of glamour cities, the populace disagrees – compare populations of people who have enough money to choose between the two and there’s your answer. I don’t understand why people live in NYC but I defer to “the tape” that more wealthy people want to live there than in SD. While we may disagree on what constitutes a “glamour city,” Robert Shiller came up with the list(which includes SD) and the moniker, not me.

Borat, you proved my case. That’s a great picture of Santa caught napping. Hell, even Santa Claus wants to live here. (That was tasteless. But, that’s my bag, baby.)

sdrealtor, yeah, our problems are minor in comparison with Miami, with a condo inventory that’s going to be 10x that of SD over the next few years. I don’t know where all of the buyers are going to come from. Sure, there are a lot of well-heeled foreigners that want to live in a big US city near the beach… but that’s a lot of inventory.

[davelj]

Is it that citizens are stupid or is it that many citizens don’t care about this “tax increase”? I agree that maybe 25% of HOA money is spent on administration and other “friction” issues. But many people – like me – just don’t care. Is it that we’re stupid or is it that we’re willing to pay for the convenience of not having to think about these things? I outsource as many things as I possibly can in my life – food preparation, cleaning, the list goes on. And I pay a premium for these services. My time is too valuable to be spent on things like maintenance, mowing yards, cleaning pools, etc. etc. I pay the HOA to do these things. If they waste $100 or $200 a month, I couldn’t possibly care less. And apparently there are a lot of people that feel the same as I do. But perhaps we’re just stupid…

Regarding HOAs being constantly underfunded and the dues constantly increasing, I have one observation: Buildings – whether homes or condos – are depreciating assets. Whatever costs the average condo owner faces, the average home owner will face over time as well. It’s that simple. Walls must be painted, roofs fixed, carpet replaced, etc. But, as pointed out above, the average condo owner is willing to pay a little extra to have someone else deal with the problems. Different strokes for different folks.

[davelj]

Is it that citizens are stupid or is it that many citizens don’t care about this “tax increase”? I agree that maybe 25% of HOA money is spent on administration and other “friction” issues. But many people – like me – just don’t care. Is it that we’re stupid or is it that we’re willing to pay for the convenience of not having to think about these things? I outsource as many things as I possibly can in my life – food preparation, cleaning, the list goes on. And I pay a premium for these services. My time is too valuable to be spent on things like maintenance, mowing yards, cleaning pools, etc. etc. I pay the HOA to do these things. If they waste $100 or $200 a month, I couldn’t possibly care less. And apparently there are a lot of people that feel the same as I do. But perhaps we’re just stupid…

Regarding HOAs being constantly underfunded and the dues constantly increasing, I have one observation: Buildings – whether homes or condos – are depreciating assets. Whatever costs the average condo owner faces, the average home owner will face over time as well. It’s that simple. Walls must be painted, roofs fixed, carpet replaced, etc. But, as pointed out above, the average condo owner is willing to pay a little extra to have someone else deal with the problems. Different strokes for different folks.

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