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> Interestingly, their customers are also often levered. A homeowner who has just made their 20% down payment is levered 5:1. Isn't that only if the homeowner
by jefftk 4y ago
> Interestingly, their customers are also often levered. A homeowner who has just made their 20% down payment is levered 5:1.
Isn't that only if the homeowner has no other equity or liabilities? Which is especially tricky when talking about people who, if we valued them like we value corporations, have equity in the form of the net present value of their future earnings.
- Ilverin 4y agoWell the bank can't get your future earnings or other assets if you default, but they can get the house. So if the house is worth zero dollars (never true) then you are 5 to 1 leveraged.
- JumpCrisscross 4y ago> if the house is worth zero dollars (never true) There are numerous real-life scenarios where a house is worth zero dollars.
- selectodude 4y agoThe land itself is worth about 35-50 percent of the house depending on location. So there are never situations where the value of the house is worth zero.
- JumpCrisscross 4y ago> land itself is worth about 35-50 percent of the house depending on location This is not always true. (Trivially: your land is declared a superfund site. Less trivially: fire sale.) > there are never situations where the value of the house is worth zero I guess a decade and a half is all it takes to forget.
- kgwgk 4y agoThe cost of getting rid of the house - or other liabilities - is sometimes higher than the value of the land itself. There are situations of zero and even negative value.
- Ekaros 4y agoIt is entirely possible for land that house stand on being nearly valueless. Think of really rural or low demand area. And on other hand house it self being expensive to take down. Maybe containing mold or asbestos.
- paxys 4y agoThere are numerous scenarios where the house is worth less than zero dollars. For example when there's a large overdue tax bill attached to the property.
- NovemberWhiskey 4y agoOr it's in extremely bad repair and will need to be torn down before you can rebuild on the land. If you look at listings for land, a surprising number of them are actually listings for "houses not fit for human habitation".
- jefftk 4y agoI see: it is true, from the bank's perspective, in the specific case of mortgages, because they're no-recourse
- JumpCrisscross 4y ago> in the specific case of mortgages, because they're no-recourse This varies jurisdiction to jurisdiction. And it isn't really germane to the question of quantifying one's leverage, which is a going-concern analysis.
- jefftk 4y ago> going-concern analysis But then don't we need to get into evaluating future earnings?
- JumpCrisscross 4y ago> don't we need to get into evaluating future earnings? Yes, many flow leverage ratios look at this, e.g. interest to Ebit.
- jefftk 4y agoThat's just a bit of a funny thing to do with a homeowner, no?
- JumpCrisscross 4y ago> bit of a funny thing to do with a homeowner, no? This is why mortgage lenders test your debt burden and interest cost against income.
- skybrian 4y agoYes, he’s simplifying by assuming the home owner’s other assets and liabilities are small enough that they can be ignored. And also, there are different ways to do valuation. The “book value” of equity according to accounting is just (assets - liabilities) and doesn’t include the company’s own future earnings. That’s what’s discussed in the article. Stock is also referred to as equity and its market value is whatever the market believes a company is worth and presumably does include future earnings according to whatever crystal ball it uses. In this case we assume a house (valued at its purchase price) is the only asset. I get 4:1 though, assuming debt:equity. It’s simple math, but definitions can be tricky and the article would be a whole lot clearer if he showed his work.