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Scenario B and A are more similar than you acknowledge. Both are fueled by low cost capital driving prices to unsustainable levels. Scenario B will be a problem

by cudgy 5y ago

Scenario B and A are more similar than you acknowledge. Both are fueled by low cost capital driving prices to unsustainable levels. Scenario B will be a problem too if/when interest rates rise and companies have insufficient cash flow from rents to pay the new debt service. In fact, scenario B may result in a deeper crash, since selling will be swift and by many actors at the same time since they are using similar valuation models. Scenario A was predominately driven by actual homeowners whom are more reluctant to sell in a down market.

PaulDavisThe1st 5y ago
> companies have insufficient cash flow from rents to pay the new debt service. If they are pouring their own capital into purchases, why would there be any debt? Are the entities (companies) in scenario B actually borrowing money?
- brewdad 5y ago
  Given the current interest rate market, I think it's safe to assume they are borrowing money to purchase homes. They aren't taking out individual mortgages but I would be shocked to learn that they aren't borrowing millions through other forms of financing and then paying "cash" for homes.
  - PaulDavisThe1st 5y ago
    I had the impression that this was happening because they had excess cash and nowhere particularly interesting to put it. Why would you borrow if you have cash sitting around and expectations of a good-to-crazy rate of return?
    - dlp211 5y ago
      Why use your own money when you can use other people's money? Apple, MSFT, Google, etc. All these companies have massive piles of cash on hand yet continue to finance operations. Irrespective of that, I agree that even if Zillow fails here, it doesn't bode well for the future of the RE market.
  - cudgy 5y ago
    Also not leveraging purchases would be considered financial management malpractice unfortunately and likely result in a hostile takeover of the company or at the least a change in management. This is a major reason companies get into trouble with debt during times of increased interest rates; proper unwinding of debt and sale of assets near the top is key when playing with leverage.

by cudgy 5y ago

PaulDavisThe1st 5y ago

> companies have insufficient cash flow from rents to pay the new debt service. If they are pouring their own capital into purchases, why would there be any debt? Are the entities (companies) in scenario B actually borrowing money?

brewdad 5y ago
Given the current interest rate market, I think it's safe to assume they are borrowing money to purchase homes. They aren't taking out individual mortgages but I would be shocked to learn that they aren't borrowing millions through other forms of financing and then paying "cash" for homes.
- PaulDavisThe1st 5y ago
  I had the impression that this was happening because they had excess cash and nowhere particularly interesting to put it. Why would you borrow if you have cash sitting around and expectations of a good-to-crazy rate of return?
  - dlp211 5y ago
    Why use your own money when you can use other people's money? Apple, MSFT, Google, etc. All these companies have massive piles of cash on hand yet continue to finance operations. Irrespective of that, I agree that even if Zillow fails here, it doesn't bode well for the future of the RE market.
- cudgy 5y ago
  Also not leveraging purchases would be considered financial management malpractice unfortunately and likely result in a hostile takeover of the company or at the least a change in management. This is a major reason companies get into trouble with debt during times of increased interest rates; proper unwinding of debt and sale of assets near the top is key when playing with leverage.