ERICOPOLY

There you go. A house sells for $100 million in Los Altos Hills, CA: http://www.sfgate.com/cgi-bin/blogs/ontheblock/detail?entry_id=86119 I grew up in Los Altos Hills!

I think it makes more sense to look at the S&P by sector. GE trades at 1.8x book. AAPL trades at 5.9x book. (and a lot of that is cash) The reason why I think it makes more sense is that the weighting of software (just as an example) was relatively quite low in Graham's day versus today. What does the apples-to-apples comparison look like?

This ratio very recently surpassed all of these highs except for the go-go late 1990s How can it be higher today than in 2007?

Actually, in Nevada if you go through a short sale the lenders have 6 years to file against you. But they only have 6 months to go after you if you walk away. http://www.lasvegasrealestatehome.com/blog/las-vegas-homeowners-who-strategically-default-about-to-see-stiff-penalties.html In other words... some states do not allow lenders to pursue deficiency judgements from strategic defaulters. Nevada allows up to six months for the first loan... six years for secondary loans for homeowners who signed loan documents prior to 10/01/2009. For Nevada Short Sales - Up to Six Years to pursue a deficiency judgement for homeowners who signed loan documents prior to 10/01/2009. This currently Encourages Las Vegas Homeowners to Strategically Default and not even attempt to work with their servicer and do a Nevada short sale. Studies show that homeowners who do a short sale, have a higher dollar amount returned to the investors that own the loan then foreclosures. See my report on Loan Servicer Time Frames to Perform a Short Sale that was performed by Deutsche Bank.

Or they feel that the transformation will not be upheld by the court. However, I like your version better. You had another theory that banks were refusing to settle putback claims because it would threaten their insolvency argument in the transformation case -- if so, we may get some news this quarter on settlements of putbacks with the banks that withdrew from the lawsuit.

Nevada is also recourse -- I believe it is also among the three with the highest strategic defaulters. Or at least it was until October 2009. http://nogglelaw.com/2008/09/nevada-prohibits-deficiency-judgments-on-foreclosed-homes-for-loans-made-after-october-1-2009/ Nevada has significantly changed the law of foreclosure by prohibiting lenders from suing borrowers on residential mortgages for deficiency judgments on mortgages made on or after October 1, 2009. Prior to the change Nevada was a full recourse state meaning that any mortgage lender could sue any mortgage borrower for a deficiency judgment regardless of the type of property. The lender has six months from the date of the trustee’s sale to file a law suite to collect the deficiency. The new law is not retroactive. All mortgages dating prior to October 1, 2009 continue as full recourse mortgages.

Florida is in the top 3 states for "strategic" defaulters -- aka: jingle mail. Florida does not have non-recourse loans -- they are full-recourse in Florida.

I found this paragraph in the 2/25/2008 letter to shareholders. I think it shines a very positive light on the character of Jay Brown (CEO). A do-gooder: In a move to level the playing field in terms of the cost of capital, we will escalate our efforts to campaign vigorously against the ability of U.S. financial guarantors to reinsure U.S. domestic financial guarantee transactions with foreign affiliates without paying U.S. corporate tax rates. As more money comes into existing and new competitors' public finance business, the discrepancy this loophole allows becomes even more pronounced. In a competitive and open market to provide all American public entities with access to the capital markets, it makes no sense to allow foreign competitors with U.S. domiciled operations to operate without paying their fair share of U.S. taxes. After nine years of trying to use mainly logic to make this argument to those who can affect this change, we have decided to enlist help and thus will earmark a minimum of $1 million this year to support the Coalition for a Domestic Insurance Industry. We are prepared to pay more if that proves insufficient! I've been against this loophole for years, and discussed it in my first investor conference in 1999. I still don't look good in Bermuda shorts but we will eventually have to move the company if the U.S. tax code is not modified.

Okay, let's see something positive from your scenario: Doubling up should at least lead to fewer defaults for the roof that everyone is crammed under. Let's say homes aren't built at a higher pace for the next few years. The people who will have the "Room for Rent" ads in the paper are the ones who need the money the most, and they'll get the tenants they sorely need. Thus, perhaps the distressed sales dry up faster than the pessimists think. You rent the room for $300 a month. That's a 10% raise over the $36,000 per year you earn in your job. And you don't report it on your taxes (you probably should, but people in distress will just keep it under the table).

People do it because they have to (I hope lol). You're right. It's just... what comes first, the chicken or the egg. A man formerly employed in construction is standing in a line in a government office waiting for unemployment relief. He is chatting with others in line. Oh what did you do? Well I was a realtor. And you? I was a mortgage underwriter. You? I delivered materials to job sites. You? I worked at Shaw, before they laid me off in the building bust. You? I was a building inspector. This doesn't even begin to mention all the people who spend less just because they are scared by all the "For Sale" signs growing like weeds in their community. A good deal of those people are going to have the same incomes as before, some even have raises, but they feel like they need to prepare for the never ending decline of the economy, so they save instead of spend. Is there any study done on what percentage of the unemployed are victims of the falloff in construction? The worm is going to turn... then you are going to have job growth. Job growth leads to home sales. People who find new jobs from construction of new homes... those people in turn will put demand on more new homes. It feeds on itself going forward, just as it has fed on itself in reverse. Some of the worst places in the country in real estate are where the employment picture depended the heaviest on construction during the boom. Somewhere I saw it written that each housing unit constructed creates 3 jobs. I don't know if that's 3 full time jobs for the whole year, or just for part of the year while the house is being built. But if construction is 1,000,000 units below equilibrium, it stands to reason that we're talking about 3,000,000 jobs. That would be 38% of the total number of jobs lost in this recession -- and they are highly likely to come roaring back at some point. That "roaring back" part, even if it happens slowly, will just be a parade of relief-bringing newspaper headlines. A bright spot: my 7 yr 4.75% I/O mortgage reset to 3% this month. Now I pay 37% less interest (for however long this lasts).

The baby boomers will want to buy new construction when they downsize -- they don't want to be renovating and/or fixing. That's Del Webb's argument (a PulteGroup subsidiary).

In the past 3 years I think we've worked off about 2,500,000 housing units -- this I think exceeds the amount of oversupply created during the building boom. So if construction takes years still to recover, then wow... what a party it is going to be when employment come back. Curious, how many jobs are currently missing because of the lack of building? Here is the building data (and boy is 2011 off to a slow start): http://www.nahb.org/generic.aspx?genericContentID=554 I believe it's about 1.5m housing units created annually at equilibrium -- about 1.2m from new household formation and 300k destroyed. Only about 400k new households were formed last year: living at home with Mom or renting a room in the back of a house is going to get old, but it must be good for the banks to have that extra cash flow going to the existing mortgages. So yes, it's a macro thing. When will people get jobs? And when they do if they can't make a 20% down payment, they will want to rent. That will put pressure on rents -- perhaps investors will buy houses and rent them out to them.

It stands to reason that the volume of new homes built will need to triple. So there should be opportunity to be found there. Some of the builders (like Lennar) have figured out how to make money on the current low volumes, and some (like PulteGroup) have figured out how to turn the corner. Now we're looking at an almost certain tripling of home building activity -- likely in a few years. You can't keep building at 300k volumes -- it will create a housing shortage. I have been reading some of the CC transcripts for PulteGroup and they say the distressed lot opportunities in good locations are now gone. So that inventory is clearing is how I understand it, and PulteGroup has 147,000 lots in it's possession (31% are developed).

You are right. The price of existing houses will become competitive relative to the price of new ones (when supply of existing homes is absorbed). Meanwhile, we'll just say for now that the houses are overpriced based on historical levels -- never mind what they cost to build.

I find it interesting that Ireland, with a 12.5% corporate rate, has so much unemployment: http://www.usatoday.com/money/world/2010-06-02-irelandunemployment_N.htm

Regarding the focus on how the house might not appreciate if interest rates go up. It seems like this argument ignores the cash flow benefits from the fixed imputed rent that will accrue to the homeowner "when" market rents soar from all this predicted inflation. It's like we're back to ignoring cash flow again and only thinking of appreciation. I am at least relishing a little bit of irony here :)

Buffett is investing in Mitek, ACME, Johns Mansville, and Shaw. So he is basically investing in a home building recovery. Which is why the homebuilding stocks came to my mind.

Found the quote from Buffett's 2010 letter to shareholders: A housing recovery will probably begin within a year or so. In any event, it is certain to occur at some point. Consequently: (1) At MiTek, we have made, or committed to, five bolt-on acquisitions during the past eleven months; (2) At Acme, we just recently acquired the leading manufacturer of brick in Alabama for $50 million; (3) Johns Manville is building a $55 million roofing membrane plant in Ohio, to be completed next year; and (4) Shaw will spend $200 million in 2011 on plant and equipment, all of it situated in America. These businesses entered the recession strong and will exit it stronger. At Berkshire, our time horizon is forever.

A question (Devil's advocacy): How will things look when the dumb money follows suit (if this is what the smart money is doing)? http://www.berkshirehathaway.com/letters/2010ltr.pdf Last year – in the face of widespread pessimism about our economy – we demonstrated our enthusiasm for capital investment at Berkshire by spending $6 billion on property and equipment. Of this amount, $5.4 billion – or 90% of the total – was spent in the United States. Certainly our businesses will expand abroad in the future, but an overwhelming part of their future investments will be at home. In 2011, we will set a new record for capital spending – $8 billion – and spend all of the $2 billion increase in the United States.

http://finance.fortune.cnn.com/2011/03/28/real-estate-its-time-to-buy-again/?source=yahoo_quote Home-building stocks still near the bottom, like PHM for example. I know a lot of you think housing is going to drop another 20% or something, but Buffett has stated that he thinks recovery will start to happen in 2011 and he is spending money in his businesses to prepare for it. In Northern Virginia, Chris Bratz, an engineer, and his wife, Amy DiElsi, a publicist, are planning to leave their rental apartment and become homeowners for the first time. The main reason? Buying has simply become a far better deal than renting. "The market got completely inflated, then it crashed, so prices are coming back to where they should be," says Chris. As the couple have watched prices fall, they have also watched the rent on their apartment spiral upward, reaching $2,700 a month. They calculate that they should be able to purchase a townhouse for between $400,000 and $500,000 and pay less per month for a mortgage. Wheaton reckons that we'll see a flow of around 1 million foreclosures a year, at a fairly even pace, from now through 2013. That figure is frequently cited as evidence that the market is doomed for years in most foreclosure markets. Not so. The reason is that the vast bulk of those units, probably over 600,000, according to Gleb Nechayev, an economist with real estate firm CB Richard Ellis (CBG), are being converted to rentals either by investors or their current owners. Those properties are finding plenty of renters, since the rental market is still extremely strong across the country. Remember, the millions who lost their homes to foreclosure still need somewhere to live. This guy is funny: Castleman claims that this recovery will look like all the others: It will bring a severe shortage of housing. He invokes the livestock business to explain. "It takes three years between the time a bull mates with a cow and when you get a calf ready for market," he says. "That's how it is in housing too. We'll get a big surge in demand and the drywall companies will take a long time to ramp up, and it will take years to get new lots approved. Buyers will show up looking for a house in a subdivision, and all the houses will be sold. The builders will tell them it will take six months to deliver a house." But those folks, says Castleman, will be set on buying a place. "And they'll want it so bad they'll bid the prices up!"

the majority of Citi's deferred tax assets only applies to US-based profits, which suits them fine... IIRC analysts model $4-5B use of DTA annually. Upside would, again, depends on positive surprise to the turnaround of their US businesses. Congratulations on owning these options - I'm guessing you bought them early. I have been holding C since last January at about $3.30. But I actually bought those $2.50 strike last week in my RothIRA. They have little volatility premium... it's a bit like leveraging on cheap margin (with no margin call risk). As of this writing the account is levered 1.1x. I bought the 2012 calls because I paid very little premium compared to the 2013 calls, and in 2012 they'll start the dividend. I can trade out of it if we get another nice spike. I already did trade out of C calls in that account earlier this year. It's where I trade my C calls -- no tax. I love RothIRAs so much -- hands off my money.

My C options are $2.50 strike. I figure the odds are high that at this point the tangible book value will support the stock, and today it trades at roughly tangible book value. It only needs to hobble along at slightly more than 10% growth rates of tangible book to get me 20+% returns. Tangible book will be easy to grow because they have those NOLs. If the stock dips below tangible book, there's a long way to go down to $2.50. Worst case, the options expire worthless and I just buy more at $2.50 strike waiting for the recovery.

You're right, it's just the prior year (that's an option -- if you can't estimate the current year, you can just use the prior year's tax as the estimate).

That is interesting, thanks. It's funny because I've been looking at the 5% unemployment rate all throughout their lost decades and thinking... why can't we get ourselves some of that misery?

Make sure you double check anything I said with a real tax person. I am not trained in taxes in any way. There might be some sort of exception in how Roth conversions affect estimated taxes.