Advice to Homeowners: Walk Away

Regarding "strategic mortgage defaults:" Yes Yes Yes! These are a good solution to a big problem (and yes, I live in an area where we would see significant short-term repercussions, but that's okay). Here's a comment that I recently posted to a Motley Fool article, which featured outspoken UA professor Brent White (http://bit.ly/cazvPT):

As a college student, I spent multiple semesters compiling research on the economic value of bankruptcy. Most notably, the research pointed to the fact that allowing a financial reset button to investors has almost always helped spur future economic growth. In fact, it is usually the risk-takers who most help the market grow, and then it is the risk takers who most often require a bailout of sorts when hard times hit the economy.

Combine this with the knowledge that commercial investors are almost universally
considered unwise if they fail to renegotiate or default on expensive loans (and often have default clauses in their contracts to accommodate such decisions). Like those commercial loans, a home loan is a collateralized debt instrument -- and some states, like Arizona, wisely protect homeowners from undue recourse after the collateral has been converted to the lender's ownership. This means no risk to one's credit score for turning over the keys to a money trap. [Ummm, I think I covered this elsewhere, but please disregard my comment that there is no risk to your credit score.  That's not what I meant to write.]

So blame the banks. When they put forth 80-100% of the values that their misguided appraisers projected on bad investments, they made much poorer decisions than the homeowners who submitted the remainder. So from an both an economic and ethical perspective, why should we insist that there be a false moral obligation on the part of the downtrodden homeowner to help the bank that refuses to renegotiate a bad loan.

Read more of Professor White's argument about "efficient breach" and non-deficiency in last weekend's local paper: http://bit.ly/9CIHoK.

Follow-Up: I recently posted the following to azcentral's brief opinion piece on this subject (http://bit.ly/cEX05W), which I think helps to illuminate the many facets of this debate and my views on the subject.  And, by the way, the story's comments are some of the most intellectually stimulating that I have yet seen on azcentral.com.

@animadvert4: The harm is already being done on a massive scale, through unfortunate and often unavoidable mortgage defaults.  Good luck effectively pointing the finger at all the borrowers "causing" your diminished home value; better yet, good luck identifying a legitimate baseline appraisal for your home in an established neighborhood, where many homes sold for less than today's prices in not too distant memory. [Note: This commenter alleged that purposeful defaults constituted tort damage to neighboring homeowners.  While this is a compelling concept, it is a failing argument on many levels, certainly including the suggestion of recourse that I strongly doubt to be applicable in any practical sense.]

Another important note: Financial institutions constituted the single largest moneyed political lobby for the ten years that precipitated our burst real estate bubble (and this transcended political lines, although spending tended to favor Republicans who were in power).  This spending effected policy like Bush's poorly conceived home ownership plan as well as his misguided policy on student loans, Congress's bankruptcy "reform," and several other [policies] designed to increase the fees collected by banks in recent years.

Not only should the banks carry greater blame for this crisis than individual borrowers, but they should be credited with failing to understand the greater ramifications of their greed.  Or maybe a better question would be whether they did in fact misjudge the outcomes of this cycle.  While most of the large banks guaranteed themselves a federal backstop for their errors, they have also strategically built up a foundation for a very profitable recovery.

Why aren't we more concerned about the fact that the American public is guilted into taking the least advantageous path to financial salvation, when we regularly expect that more savvy corporate interests will do otherwise?  I'm quite grateful for provisions like the "efficient breach" law, which I consider tantamount to bankruptcy protection in its ability to provide efficient recovery for failed investors in a down economy.  While one could argue the potential that people will unjustly take advantage of such "clean slate" provisions like bankruptcy, research has consistently proven that this is not the case.  Instead, for every wave of debt forgiveness among individuals (like personal bankruptcy), there have been greater than proportionate increases in overall wealth, i.e. economic recovery. [While I can't readily cite sources, there is plenty of evidence that defends this position.  If not for a crashed hard drive a few years back, I'd be able to draw from sources used in my previously mentioned academic paper.  But if you so wish, I think you can find it in the UA library.]

Our economic system has historically seen the greatest benefit from rewarding risk takers, for they are the ones who most contribute to economic growth.  So why now are we seeing such a reversal of sentiment, now that our economy could most use such relief?

When Will This All Turn Around?

The pundits are all over the place, but it seems that there is some sort of optimistic consensus that the economy will start to look better by sometime next year. Kiplinger's has an index for such a prediction: http://kiplinger.com/businessresource/recovery. And while I think this is a great traditional (and thus conservative) tool for monitoring lagging indicators, I'd argue for a newer approach. Otherwise, we are completely discounting the fact that we may find a truly transformative path toward economic recovery.

I'm more interested in reevaluating our methodology in looking for leading indicators than measuring our lagging ones, in order to better reflect changing values. There was a great article on fool.com about the historical performance of large cap stocks (http://www.fool.com/retirement/general/2009/06/23/its-already-worse-than-the-depression.aspx). On the one hand, the article's observation begs the question of a bottom in the market--even though I predict another year of poor lagging results--but it also raises the possibility of a new kind of growth.

What if we the entrepreneurial class decide to overturn traditional economics by bringing forth an era of immense economic growth coupled with deleveraging. Not only do I believe that we need this for the long term, I also think it's possible with a short-term focus on old school yankee ingenuity. And I think that Gen X is uniquely capable to take on such an ambitious goal. What choice do we really have? More on this later.... including a tie-in to why this should especially concern those of us in the western U.S.

The Truth About Changing Hotel Revenue Models

Here's a great story from Michael Schindler, themed "Things I’d Prefer Not to Hear Anymore." In it, he discusses the whining that is all too prolific in our industry right now. Following is a reprint of my comment on his blog:

I feel the same way as Michael about our industry's currently sorry state. To his final point in this story about being a cheerleader, I would take his comments a little further to the acerbic side by saying "shut up and work through the tough times." Our industry is reeling right now from an era of all talk and cheap money. This meant that no one had to do much in the last few years aside from managing their time to process all the business transactions. Now, deals are tough to come by--as they should be in an efficient market (where efficiency is tied to parity on upward and downward forces in the economy). We should each focus on succeeding rather than pegging the date that the market makes it okay to do so again. That means working with what we've got.

Also, I often wonder why hotels aren't getting more creative in their reaction to the once again dynamic nature of our business. I have made a couple of recent trips to Las Vegas, where I frequently gamble at MGM properties in my spare time (low dollar amounts, I promise). While I regularly receive deals for $49 or $69 room nights, which are far below "acceptable rates," I know that these are offered at huge discounts to their simultaneously advertised rates. Thus, the hotel is using a classic marketing strategy to segment pricing based on overall customer value. Some people are indeed paying $200 per night, while I'm only paying $50; also, I'm making up for my room discount by dining out, attending shows, and gambling. A good marketing analyst is likely tracking these numbers to ensure that their strategy is working.

While this financial model is different from the limited service world where I operate, it's really not too different in its approach to the market. Hotel operators need to leverage their relationships with revenue sources and influencers to look for opportunities for quality promotions. Here in sunny Arizona, for instance, I would consider tapping into the cheap rates at golf courses and other currently struggling businesses to promote stay-and-play packages. Given all of the automated marketing and property management tools available, it doesn't take too much effort to try. And if you fail in one area (or marginally succeed), then simply move on to another idea. Remeber, if you fail to capitalize on such opportunities, I bet that the bigger players (Hotwire, Priceline, etc.) will happily do this with or without you.

In a nutshell....

I think this pretty well describes the world we've been in for the last year or so. Great stuff. The sad part is that when everyone goes through the motions, deals tend to get done. Now things are changing so that you have to put up the money in order to demonstrate the justification for everyone doing the work.

Vegas Is Making a Comeback. Yeah, Baby.

Well...... maybe not so fast. But it's encouraging to know that they get it. Vegas is driven by the leisure travel industry, focusing on gaming, parties, shows, and hospitality in general. This we know.

But what if the travel industry in Sin City were to consider the current state of the economy in its pleas for increased travel. According to this article, they are: http://www.hotelworldnetwork.com/lasvegas. It will be interesting to see how this all shakes out--whether I'll just keep receiving the same "stay two free nights" promotions in my email or perhaps something a little more alluring. The fact remains that the great bulk of weekend business in Las Vegas comes from California and Arizona, and that's because a car-load of wild and crazy guys can get there from either location on little more than a tank of gas.

So if most of the recent travel news is correct, in noting that Americans increasingly see travel as a right rather than a luxury, then Vegas is still potentially a good deal for a short trip in the Southwestern U.S. They just need to tone down the decadence and the bling, and explain to me why I am doing my wallet and psyche a favor by going there rather than elsewhere.

Here are a few less predictable reasons the Las Vegas CVB should recommend that you Angelenos and Phoenicians consider Vegas for your next trip:

• A car load of people is a greener way to travel than by plane (better yet, take the Greyhound or train, or don't and say you did).
• Car trips with friends are a much better way to pass the time if you are jobless and bored.
• You don't have a gambling problem, but how can you ignore the possibility of rescuing your 401(k) in one night.
• Has the economy got you feeling down and out? There's probably not a more distracting place on earth for most adults than Vegas.
• You can finally enjoy some of the city's more exclusive offerings in peace, now that the crowds are smaller.
  

Final note: The sooner this market turns around, the easier it will be to get some of MY PROJECTS off the ground in LV, and they are undoubtedly value oriented. I don't understand why the banks don't get this.

Okay, Final Final Note: I truly don't care much for Vegas, although this blog entry (and perhaps the time of night) has convinced me otherwise. Seriously, when my wife and I go together and catch a nice dinner and show, it's really a fun place. We may have to schedule another trip soon....

The Economics of Solar

A friend of mine recently posted to facebook a great article about the issue of centralized large-scale solar generation versus broadly distributed small-scale units (such as roof-top units on our homes). But what about a middle road that combines both of the above as well as a niche between the two? And what about the hangups we have about each of these solutions. In the end, the debate won't be about whether or not to go solar, but how.

Thanks to technological improvements and improved production, we've already cleared most perceived hurdles of large scale solar--and we may be well along the way for smaller models too. The issue of intermittent power is mitigated both by built-in system redundancy using legacy generation equipment and the fact that solar cells generate throughout peak daytime power usage (and throughout the night via other related technologies). Likewise, transmission lines are already being improved--although we have to ask ourselves how many more power lines are acceptable across the landscape in order to appropriately bolster the grid. The biggest tech hurdle, according to some sources, is cheap battery storage, which would make most of the other issues moot.

The primary concern still comes down to simple economics. This is why power company APS recently announced intermittent generating stations using natural gas rather than solar--they could get a quicker return on their investment. Similarly, most homeowners opt not to install solar panels because they wouldn't dare make an investment in their homes that offers no immediate benefit and takes as many as ten years to pay for itself. We just aren't concerned enough to put that kind of money on the line. And yet, the utilities are making big investments on solar all of a sudden (including APS). I'd argue that it's entirely due to recent federal and state policy changes that affect the economics of large-scale solar.

The federal tax incentives apply to individuals and to corporations alike, offering a 30% tax credit for any qualified investment in renewable energy. So why are corporations and well-backed speculators the only ones going after these dollars? It's because they just hit payday, given a solid investment model that allows them to amortize their expenses by up to 30 years with little operational costs, obtain inexpensive financing, and then get an immediate bump to their first-year revenues with the help of a tax credit. The financial model is great for them, but not necessarily for individual homeowners looking to offset their electric bills.

To put the small-scale model in perspective, if I want to completely offset my electric bill, which averages about $100 per month, I would have to install a minimum 400 square foot system on my home in Phoenix, at a cost of about $33,000. With the available tax credits and rebates, it would be about $8,000 total (from this vendor). In order to bring the monthly expenses to a point where such an investment is attractive to me as the homeowner, I would need to finance that remaining $8,000 over the course of 8 years at 6% interest (or maybe less, if I assume that my monthly bills would otherwise increase due to inflation). Considering that the average American relocates every five to seven years, why would any such person want to take on that expense, except out of the goodness of their hearts or after settling down in a fully owned home?

If I am doing it because I feel green all of a sudden, I could opt instead to partner with a company that will pay for my solar panels and then either lease them back or sell the electricity to me (such as SolarCity or SunRun). This seems like a much more practical solution for that purpose, in my opinion; but again, it's a company that reaps the financial reward rather than me. Thus, I arrive at a stale mate between the two options and end up paralyzed in the decision process.

So then, where's the sweet spot for the rest of us? I would argue that it's somewhere between the capital-intensive mega projects and the individual ones. For my money, I would rather be in the middle of the transaction, offering customers the right to be green and offering patient investors a steady, reliable cash flow, by financing the installation of solar panels. But while I admit that SolarCity seems to be on the right track in this regard, I think the company that truly gets it is SunEdison. Rather than try to convince individual consumers to go green, SunEdison focuses its efforts on bigger consumers (like Whole Foods Market), who can leverage the publicity of adopting solar solutions rather than focusing solely on the cost savings. What a great deal for both parties involved!

So my prediction for the near future is that we will see huge utility-scale systems proliferate (due to economies of scale), as well as the smaller commercial applications. The only factor that could come into play to change my mind is if there's another policy change to incentivize consumers. I'd say that you could get me on board if you reduce my pay-back period to less than five years. Perhaps the scientists and industrialists will beat our policy-makers to reaching that goal. That would be a cause for celebration.

As a final thought, the one kink that I see in the large solar industry's armor is, ironically, the potential environmental cost. As we ponder the new found interest in developing massive solar fields throughout southwestern deserts, I can't help but wonder about habitat destruction and whether it has entered into the debate. Thankfully, it has in southern California. Will these environmental activists' claims be considered? Possibly, although we still don't have a firm grasp on how fragile semi-arid ecosystems actually are. So in California, it may be worth a betting that further research will be needed before approving such massive undertakings, which could slow the rapid growth of solar energy production. Or not.

Scottsdale's Luxury Resorts in Foreclosure? No!

http://www.azcentral.com/php-bin/clicktrack/email.php/8624274

That's the link to a story my friend Danny sent me, regarding the W Hotel in Scottsdale. While I think that this specific project was one of the good ones (and the building itself was quite well executed), it is illustrative of the problems we created in the past several years.

How much higher could the market possibly go? That's the question that many developers forgot to ask themselves, along with the whole question of underwriting based on assets with declining values, such as speculative real estate holdings.

Scottsdale and Paradise Valley were adding luxury and upscale hotels (or new renovations) like crazy, while at the same time nearby cities like Tempe and Phoenix were beginning to do the same. Part of what made Scottsdale so attractive in the recent past was its exclusive claim to luxury. But that benefit was obviously eroding as the competition for that segment was growing, as was supply, and the demand grew at a slightly slower rate.

Overall, this would appear safe to most investors until the real estate bubble is taken into account. The entire Phoenix market is disproportionately dependent on real estate, and especially all that new "wealth" in Scottsdale. To the developer in this environment, it's a double-edged sword: upward pressure on land costs and development costs, followed by a burst bubble at the end of the day; which impacts the ability to sell condos, prove net worth (on other real estate assets), and generate the expected cash flows on the hotel and restaurant(s).

This story will likely play out many more times in the near future, and in generally similar cases. And in the end, the winners will be those who either buy buildings like this one, at a huge discount, or those who build similarly strategic projects at a substantial discount. We all know who the losers will be--those who stayed speculative too long (who deserve no sympathy) and those who had solid projects that fell victim to a bad market, like this one. I just hope that the Triyar group will survive to move forward on some of their other great local projects when the market returns, and the rest of the development community learned how to better use debt in their businesses.