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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (7336)	6/1/2004 12:38:59 PM
From: Elroy Jetson	Respond to of 116555

You can see Splotto inadvertently explains how easily home builders enter into bankruptcy during real estate down-turns. We have previously noted that publicly traded home builders (Centex, Kafman & Broad etc) have assets of $1 million or more per employee, of which $700k to $900k is purchased with debt and the balance with shareholder equity. Blotto points out that "Of the $375k final cost, the raw land is (33/375) 8.8% of the total. Now let's say you over bid the farm by 50% (a very high number). Your raw land now goes to $49,500 or (49.5/391.5) 12.6%." Message 20183127 So if home prices decline by 12.6%, the residual land value of the raw-land portion of the home builder's balance sheet becomes worthless. In reality, the residual land value actually retains 5% to 15% of it's former value because many are willing to speculate on the future at that price level. The home builder sees their $1 million in assets per employee decline in value to $150k. The relatively un-leveraged home builder has $700k in debt per employee secured by $150k in assets. The situation would be far worse if builders did not control most of their land through option agreements. With debts five times their assets, they simply let these options expire worthless. Not all of the home builder's assets are raw land. A portion of the $1 million per employee is used office furniture and equiptment. Some home builders even hold a portfolio of mortgages on homes they have sold. The bottom line is still the same though. The home builder is insolvent as soon as their debt payment comes due.

To: mishedlo who wrote (7336)	6/1/2004 2:13:35 PM
From: AugustWest	Read Replies (1) \| Respond to of 116555

Thanks That is shedding more light on the subject But reading down towards the lower portion of his post, and already knowing a builder is content with 10-12% profits... Let's now look back at the effect of land costs at the end. Of the $375k final cost, the raw land is (33/375) 8.8% of the total. Now let's say you over bid the farm by 50% (a very high number). You raw land now goes to $49,500 or (49.5/391.5) 12.6%. So if you pay a full 50% over the real value of the land you are only cutting out 3.8% from your profit and that assumes your projection is wrong and that the houses don't appreciate between the time you tie it up and finally sell the house. Okay, assuming the worst case he mentions, first problem I see is if my profit margins are cut from 10-12% to 6.8-8.8% That is going to affect the bottomline profits considerable. Secondly, he is assuming a 50% overpayment for the property Yet in the post I initially responded to they were talking about paying 300% over appraised prices and(in the other instance) 46% over last year's prices. So if the mrkt just remains flat for 3 years Than he's jacked his miscalculations to 100% annually. Or double the margin of error figure he used to afford a cushion. Perhaps though money will continue to fall from helicopters. I see Elroy has posted on this also And I am going to read his post too and see if it dummies me up any WRT to the options thing Sploto mentions. Of course, something inside me is shouting I have this all wrong and how I can even come to the numbers I'm using is in itself telling and scary at the same time. Methinks I should just keep smiling pretty and rely on my good looks to carry me through<GGG>