“Housing experts advise on market comparables/values and whether you qualify for a mortgage and terms, but are silent on what should be your most important financial question: Is this home purchase (with this mortgage) likely to be a good investment for me? After our national housing bubble/bust, it seems wrong that no one: not your Realtor, not your mortgage lender, and not your appraiser (Consumer Financial Protection Bureau where are you?) even attempts to answer this question…
…and yet you pay these experts, either directly or indirectly (in the purchase price of the home) thousands of dollars. Why is this? Partly, because the answer to the question can only be an “educated guess”, due to the significant uncertainty regarding the future value of the home and other future cash flows (see the Uber valuation article below). These experts don’t want to spend time modeling and explaining to you multiple scenarios and assumptions, and even more importantly, they don’t want to be wrong or have any legal liability. That is true, but it’s no excuse. How can you buy a home (with a mortgage)…one of the most important financial decisions you will ever make in your life….unless you have the future cash flow data that gives you confidence that you are likely making a sound investment? I guarantee you that the institutional investors, who bought single family homes during the downturn, wouldn’t have bought them without this type of cash flow analysis. Why should you? And it’s not reasonable to expect you to do this analysis yourself (especially when you are paying these housing /mortgage experts thousands of dollars to represent you). Prudent mortgage underwriters should need to determine for themselves whether you are making a wise investment (or at least have a strong opinion on future real estate values), because if you aren’t then your likelihood of mortgage default increases substantially. This is especially the case with regard to low-down payment/high-LTV, non-recourse mortgages (and was the case for homes bought with high-LTV mortgages during the housing bubble years). Ironically though, FHA and private mortgage insurance has distorted this rational mortgage underwriting process; essentially divorcing the future direction of the single family real estate market (and other future cash flows) from the lender’s underwriting decision. Also, we all know that the Realtor and mortgage lender only get paid if you buy the home (not dissimilar to the rating agencies being paid by the debt issuer)!!! I find it disturbing that after this unprecedented housing/mortgage crisis, this important issue has yet to be frankly discussed, let alone addressed.”, Mike Perry, former Chairman and CEO, IndyMac Bank
Why Uber Might Well Be Worth $18 Billion
Lucy Nicholson/Reuters The Uber smartphone app connects drivers with passengers.
It was described as “nuts,” “insane” and “idiocy.”
When Uber, the limousine and taxi-fetching app company, was valued on Friday at $18.2 billion, a collective groan could be heard across the Internet. It is hard to believe a four-year-old company that exists on an iPhone could be worth more than Alcoa, Tiffany or Whole Foods. (It’s bigger than Hertz Global Holdings and Avis Budget, too.)
Uber’s valuation “should mark a nadir in tech insanity: not only has the last sane person in the Valley left and switched out the lights, but someone probably paid him at least a billion dollars to do it,” James Ball of The Guardian asserted.
But here’s another way to think about Uber’s whopping valuation: It is still too low.
At a time when the word Internet is increasingly followed by the word “bubble,” it may be heresy to suggest that a darling of Silicon Valley could be properly valued, much less undervalued. But in the case of Uber, it may be true.
Think about the basic math. There are a lot of numbers floating around about the global revenue for taxis, but here are the basics: In the United States, the taxi business generates $11 billion annually, according to IBISWorld.
In big cities like New York and London, The Financial Times reports that the average person spends $238 a year on taxis. If you extrapolate that Uber could one day control a quarter of the current global taxi market, the investment would turn out to be a home run. The business is currently in 128 cities in 37 countries and says it is doubling its revenue every six months. (TechCrunch reported Uber’s revenue last year was $213 million on more than $1 billion of bookings; Uber takes a 20 percent cut of all driver’s receipts.)
If Uber were to take just half of the taxi market in the United States — and nowhere else — it would generate more than $1 billion in revenue a year.
But perhaps what’s most interesting about Uber is that it isn’t just targeting the current taxi market; it is seeking to expand the market.
In cities where Uber is operating, the business is clearly tapping new customers — people who didn’t take taxis or limousines before, or at least not nearly as frequently. The ease of pressing a button on your mobile phone and having a car magically appear can quickly become addictive. (I know this well; I have the bills to prove it.)
What’s more, Uber doesn’t own the limousines or cars. So far, its biggest costs are simply providing the technology that powers the network of cars as well as marketing and support costs for drivers, which means it is a very high-margin business. Because it is still private, we don’t know the hard numbers.
It’s all anecdotal evidence, but ask an Uber driver what they did before they started driving and many will tell you they were unemployed or working part-time jobs. According to Uber, the company says “at our current rate, Uber is responsible for directly creating 20,000 new jobs per month and powering billions in economic impact in cities around the world.”
More impressive, these new jobs are not low-wage: In New York, the company says a driver for UberX, its lower-tier car service, is making more than $90,000 annually. A yellow cabdriver is estimated to make about $30,000. This doesn’t mean that all taxi drivers are persuaded of Uber’s benefits; Some are seeking a nationwide union, in part because of competition from Uber.
And then there is the prospect that Uber isn’t really a taxi or limousine company at all. Some say it is just the beginning of a much larger global delivery service. The company’s chief executive, Travis Kalanick, has talked about Uber as an extensive software platform for shipping and logistics. It’s doubtful that Mr. Kalanick will be taking on FedEx or UPS anytime soon, but in New York, he’s already introduced a messenger service using the Uber app.
“Uber is creating a digital mesh — a power grid which goes within the metropolitan areas,” is how Shervin Pishevar, an early Uber investor, described the company last year. “After you have that power grid running, in everyone’s pockets, there’s lots of possibility of what you could build like a platform. Uber is incorporated in the empire-building phase.”
So far, Uber doesn’t have much competition and it appears that there is a bit of a winner-takes-all business model for companies in this category. The company competes, ostensibly, against rivals like Lyft and Hailo, but there’s a network effect to these businesses: The more people download the app, the more drivers sign up, and it quickly becomes a self-reinforcing cycle. That is pushing the competition out because rivals invariably have an imbalance of customers and cars.
Of course, the prospect of regulation remains a potential cloud that won’t likely lift for some time. In London, taxi drivers are protesting the invasion of Uber drivers and in cities like Paris, regulators have sought to make it difficult for the business to gain traction for fear it will upend the incumbent business.
So far, in New York, oddly enough, Uber’s accession hasn’t had a huge impact on the value of medallions. Toward the end of 2013, individual medallions were averaging more than $1 million, about double what they were in 2008. In Boston, medallion prices have gone up, not down.
If you’re still scratching your head about Uber’s valuation, consider the “smart money” that plowed $1.2 billion into the company before its recent valuation, only 10 months after it was valued at only $3.5 billion: Fidelity Investments, BlackRock, Kleiner Perkins Caufield & Byers, Google Ventures, Menlo Ventures and Wellington Management and Summit Partners.
Virtually all of them have made a small fortune on their recent investments and have turned out to be long-term, not short-term, investors, who are betting on the value of Uber rising.
Last month, Semil Shah, the writer and investor, tweeted: “Uber could most certainly go public yesterday — but why would they want to? No incentive. $100B potential company.”
Maybe Uber will turn out to be a bust. It is possible. Or maybe not. Either way it will be a fun ride.
Andrew Ross Sorkin is the editor at large of DealBook.