Mish's Global Economic Trend Analysis Message Board

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Strategies & Market Trends : Mish's Global Economic Trend Analysis

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To: mishedlo who wrote (6153)	5/11/2004 8:42:52 PM
From: Elroy Jetson	Read Replies (3) of 116555

You suggest a 50% decline in the value of Home Builders assets is unduly large. Looking back to 1991, a 50% decline in the value of home builders assets seriously understates the damage. The shareholder equity of virtually every builder in 1991 was hugely negative. How long each company was able to hold out against filing bankruptcy depended entirely upon when their loans became due. Message 20117306 If you look at the balance sheet of a home builder, their assets consist of three primary assets: 1.) a small amount of cash; 2.) land in various stages of development; 3.) mortgages on homes they have previously sold. During a downturn the raw land can be sold for 15% to 35% of it's value at the peak of the building cycle. The value of mortgages, which often represent 100% financing, decline as interest rates rise and also take substantial losses as homes are taken back in foreclosure. Home builders have few assets other than land and mortgages. What makes you believe this downturn will be different from 1991?

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