This market is a little nuts

[kortopates]

Most folks buy planes the same way they buy lake houses.  With a loan.  The economy is slowing and interest rates are rising.  Next year is a cash buyers market.  

I don’t know about that. I couldn’t imagine buying a toy with a loan. What I’ve observed is folks buying their plane as a part of their business are more likely to use a loan and depreciate it, but not those of us that can’t claim any business use. As such interest rates won’t matter much.


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[Hank]

8 hours ago, kortopates said:

I don’t know about that. I couldn’t imagine buying a toy with a loan. What I’ve observed is folks buying their plane as a part of their business are more likely to use a loan and depreciate it, but not those of us that can’t claim any business use. As such interest rates won’t matter much.

Don't know many people who bought their planes through a business. I'd imagine thst fewer paid cash. Like most, I bought my Mooney with a loan, paid off long ago. And yes, interest rates were an important consideration, just as when I bought my home.

[KB4]

On 8/4/2022 at 6:27 PM, thinwing said:

most modern upto date J

In world is 205J.  

[M20F]

9 hours ago, kortopates said:

I don’t know about that. I couldn’t imagine buying a toy with a loan. What I’ve observed is folks buying their plane as a part of their business are more likely to use a loan and depreciate it, but not those of us that can’t claim any business use. As such interest rates won’t matter much.


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I bought mine on a 2.9% 20 year note from Wings Credit Union.  

[carusoam]

Some people pay cash for their toys… easier with an M20C than an LB…

that much cash is often busy doing something else…

Re-Financing a house can get better rates… and terms…

Aopa has in the past… made financing a plane through a major bank seamless…

Trying to refinance a plane at a local regional bank… they asked what type of plane… Lear or Gulfstream…?

 

with Mike’s Wings Credit 2.9% for 20 years…  it makes sense to refi the plane… to buy a new house!!!   

pp thoughts only…

Best regards,

-a-

 

[FlyingDude]

15 hours ago, kortopates said:

I couldn’t imagine buying a toy with a loan.

I can name so many friends, acquaintances and relatives who have bought boats, cabins and more-than-what-they-need cars ... all on loan...

[carusoam]

On 8/7/2022 at 4:21 PM, FlyingDude said:

I can name so many friends, acquaintances and relatives who have bought boats, cabins and more-than-what-they-need cars ... all on loan...

This is exactly the discussion going on by central bankers lately…

Nothing wrong with what so many friends have done….

 

But the collective side affects are more buyers than sellers…. Leading to inflation….

 

Central bankers raise interest rates to keep the weaker hands from buying so much stuff….

 

Where trouble lurks…. And it is not as common today… when your house is mortgaged with a variable rate mortgage…. The monthly cost starts sliding up quarterly….

There is an autocatalytic disaster as rents and mortgages increase…. People start selling the toys… as more people sell, prices drop precipitously…  yet they still owe the monthly loan amount or take a beating on the sale of the toy…

 

So… this is called a recession….

The US central bankers think… or say… they can see a soft landing coming….  Stopping inflation without falling into recession…

We will know how well the central bankers have done by watching the unemployment numbers…

 

If unemployment continues down at the steady rate… this is fantastic…. (No matter how you measure unemployment…)

If it increases… remember unemployed people can’t afford toys, homes, and other things….

rewind the tape… visit 2008 again…. Homes stopped selling, and everything related stopped working until the banks were getting crushed…

 

The fed reserve meets again this week…. Let’s listen to see how well they are doing…

Avoid variable interest loans, unemployment, and other hardships…

 

If the soft landing isn’t possible… things will get much tougher…

Thank getting through Covid…. Feeding people was a great priority…

and please leave out the politics….

 

Threads get shut down quickly when politics gets perceived….

Best regards,

-a-

[ArtVandelay]

I can name so many friends, acquaintances and relatives who have bought boats, cabins and more-than-what-they-need cars ... all on loan...

Guilty, but I paid them off as quickly as possible. In other words, I could afford it.

[Jim Peace]

I could see using a loan if you can’t get the funds together quickly enough so as to not lose the plane. But to finance a depreciating liability long term no matter what the interest rate is a bit nuts. 

[Seymour]

27 minutes ago, Jim Peace said:

But to finance a depreciating liability long term no matter what the interest rate is a bit nuts. 

Is taking a 2.25% fixed mortgage against a paid off home to purchase a toy that depreciates at 2% per year during 4% inflationary period nuts? 

 (guilty.)

[Pinecone]

Do used planes actually depreciate?

And remember, with a loan, you pay it off with inflated dollars.

Each person's situation is different and what is right for them is also different.

I am not sure many people buy $1,000,000 airplanes for cash.  Maybe a C is bought cash.

Personally, I think ARM are CRAZY.  In 2008, many people were flipping houses in a year or two, so an ARM was nice.  But with the buyers stopped buying, they were stuck with over priced homes with crazily increasing interest rates.

[Jim Peace]

1 hour ago, Seymour said:

Is taking a 2.25% fixed mortgage against a paid off home to purchase a toy that depreciates at 2% per year during 4% inflationary period nuts? 

 (guilty.)

You don’t know what the inflation actually is until after the fact. So it is a bit of a gamble. Low risk with the low interest rate but a gamble none the less. 
 

everyone’s case is different but I would not personally mess with a paid off home for a toy.  Maybe if I were in my 30’s but I am to old now. 

[FlyingDude]

Yeah, switching from variable rates to fixed rates was one thing that US has learned during the 2007 crisis.  It seems like a bunch of other countries still continue to do that, namely UK, Sweden, New Zealand.  They are at a greater risk, because even if they keep their jobs, their mortgage payments are more unaffordable.  Whereas in US, your other expenses are growing, but your mortgage is not.

Furthermore, prior to the crisis, it was normal to be paying interest only, nothing towards the capital.  That's a ponzi scheme that relies on an expanding economy and sector.  Of course, I realized that back in 2005 when I heard that "many people in US only pay interest on their homes".  I mentioned that to some random person from NYC finance world whom I happened to encounter at a personal get-together in 2006, and I told him that US economy will pop, not do "soft landing" or "deflate".  I was immediately put down in my place for being a lowly engineer nerd who doesn't understand how the "market" works.  You know, the market "creates" jobs, the market "destroys" wealth, and the market "always grows in the long term"; just the way God gives providence and takes away stuff to test you and everything happens for a reason because God "has a plan".  I guess I just don't have too much faith in the market god...  Sinner as charged.

Our planes used to cost 50k$ back in the 60s.  That's today's 300k.  Whereas, a new plane costs 900+$ nowadays.  That means, it's 3x less affordable.  That keeps the demand for older planes high.  Our planes have appreciated in real terms (above inflation) during covid, because more people wanted a plane.  So, I don't think that their values are diminishing (maybe not you Acclaim or Bravo guys,  maybe that's more for us pre-J guys).  Maybe they will become scrap metal when they will be deemed un-green.  Dunno.

 

[EricJ]

4 hours ago, Pinecone said:

Do used planes actually depreciate?

Many/most airports have collections of derelicts that haven't flown for many years.   Most would be financially underwater even as project airplanes if somebody got them for free to rehabilitate.    I suspect at least some of them had loans on them when they got parked.

So, yes, airplanes can depreciate.   Significantly. 

[Hank]

5 hours ago, Jim Peace said:

But to finance a depreciating liability long term no matter what the interest rate is a bit nuts. 

And there goes the entire automobile industry, and a significant piece of the furniture and appliance industries . . . . . Some car ads now extend terms to 84 months [7 years to pay off a car!!].

[M20F]

5 hours ago, Jim Peace said:

I could see using a loan if you can’t get the funds together quickly enough so as to not lose the plane. But to finance a depreciating liability long term no matter what the interest rate is a bit nuts. 

Why would I take cash I can earn 5%+ on and use it to buy a plane that I can borrow at 3% on?  I certainly agree that one should not over leverage but one shouldn’t pay cash for everything either. 

[Pinecone]

30 minutes ago, EricJ said:

Many/most airports have collections of derelicts that haven't flown for many years.   Most would be financially underwater even as project airplanes if somebody got them for free to rehabilitate.    I suspect at least some of them had loans on them when they got parked.

So, yes, airplanes can depreciate.   Significantly. 

DUH.

I was not talking about abandoned airplanes.  Anything abandoned tends to lose value.

I mean an active, maintained airplane.  I know there are short term ups and down in value, but longer term, due to inflation and lack of new inexpensive planes keeps that at least at the same price.

 

[EricJ]

11 minutes ago, Pinecone said:

DUH.

I was not talking about abandoned airplanes.  Anything abandoned tends to lose value.

I mean an active, maintained airplane.  I know there are short term ups and down in value, but longer term, due to inflation and lack of new inexpensive planes keeps that at least at the same price.

 

It's a continuum.    If equipment is not continuously modernized, e.g., the avionics package held constant for twenty years, then it may lose value.   The cost of keeping sufficient upgrades to maintain an increasing purchase price may exceed the increase in purchase price.    Is that depreciation?   It's certainly not ROI.

[LANCECASPER]

6 hours ago, M20F said:

Why would I take cash I can earn 5%+ on and use it to buy a plane that I can borrow at 3% on?  I certainly agree that one should not over leverage but one shouldn’t pay cash for everything either. 

Because things happen. People get sick, lose jobs, have accidents, the economy changes, etc, etc, etc. We are no smarter today than the people who lost everything in a crash nearly 100 years ago. In the past few years gaining 5% wasn't possible in an  insured financial instrument. The bank can't come and take something that's paid for.

Early on I financed my first few airplanes. I haven't done that in over 25 years. If I don't have the money I don't buy it. That has saved me from buying on impulse. If after the strong desire of an emotional motivation to buy it still exists and I still want it, then I work hard toward that goal and buy it when I have the money. If I don't have to have something I always get a better deal than when emotion controls the buying process.

[M20F]

25 minutes ago, LANCECASPER said:

Because things happen. People get sick, lose jobs, have accidents, the economy changes, etc, etc, etc. We are no smarter today than the people who lost everything in a crash nearly 100 years ago. In the past few years gaining 5% wasn't possible in an  insured financial instrument. The bank can't come and take something that's paid for.

Early on I financed my first few airplanes. I haven't done that in over 25 years. If I don't have the money I don't buy it. That has saved me from buying on impulse. If after the strong desire of an emotional motivation to buy it still exists and I still want it, then I work hard toward that goal and buy it when I have the money. If I don't have to have something I always get a better deal than when emotion controls the buying process.

Hence my comment one should not over leverage.  I get credit/capital is not understood by some, others as you point out impulse buy or cannot make rational decisions when it comes to money and thus borrowing responsibly is not something they can do. 
 
I point out early in the thread I like the type of people you point out because they do over leverage and when the economy turns it creates opportunity.  I take all the cash I have because I responsibly borrowed at life time low interest rates and I buy their things for dimes on the dollar.  In the interim I have enjoyed a decade plus of that cash earning money to the point that over my 20yr note my investment returns will pay for the plane and the interest with money left over.  

[LANCECASPER]

1 hour ago, M20F said:

Hence my comment one should not over leverage.  I get credit/capital is not understood by some, others as you point out impulse buy or cannot make rational decisions when it comes to money and thus borrowing responsibly is not something they can do. 
 
I point out early in the thread I like the type of people you point out because they do over leverage and when the economy turns it creates opportunity.  I take all the cash I have because I responsibly borrowed at life time low interest rates and I buy their things for dimes on the dollar.  In the interim I have enjoyed a decade plus of that cash earning money to the point that over my 20yr note my investment returns will pay for the plane and the interest with money left over.  

I was simply answering a question to which, I thought, you were looking for an answer: Why would I take cash I can earn 5%+ on and use it to buy a plane that I can borrow at 3% on?  

If what you are doing is working for you, then stick with it. I've done it both ways: 1) taken on debt, and then been motivated to work hard to pay it off, which I did and later 2) Work hard, save it up and pay cash and remain debt free. I found, for me, I liked the second one better.

[carusoam]

We were creeping up on the Roaring 20s… version II…

Then Covid hit…

The fed reserve dropped interest below net zero…. To keep the strangeness of huge unemployment from becoming a starvation disaster….

The good news… we didn’t starve and most of us lived long enough to get vaccinated…. Small businesses struggled, many found ways to survive….

The bad news… the result is inflation….

Next steps… fed reserve has a dual mandate…. They adjust interest rates to keep unemployment low, and inflation in check….

So far… interest rates are still lower than when my parents bought their house in 1960s….

unemployment is still high and heading back down… more interest rate hikes are expected….

Talking heads on TV claim the markets are sensitive to this interest hike thing…. And say the markets may be going lower through the seasonal low period…. End of October….

 

So….

A lot sounds a bunch like the 1920s…. Only we missed the roaring part…. Bummer!

No fuel crisis yet….

Banks are much better capitalized in the US post 2008….

Risk has been lowered as we proved that houses don’t always go up in value…

Rumor has it…. There is still a pilot shortage and a mechanic shortage….  
 

Everyone has different priorities…

Some Mooney buyers….

1) Don’t have a spouse yet…

2) Don’t have a house yet…

3) Don’t have kids yet…

4) Don’t have a business yet…

5) Don’t have day care bills yet…

6) Don’t have college bills yet…

7) Don’t have retirement paid for yet…

8) Don’t have a box and a plot paid for yet…

9) Don’t have a spare stack of cash yet…

10) Don’t have a ticket for the lottery yet…

Everybody has to figure out when to pull the trigger…. 
 

Don’t wait to long to buy the right forever plane…

Best regards,

-a-

[MikeOH]

16 hours ago, Seymour said:

Is taking a 2.25% fixed mortgage against a paid off home to purchase a toy that depreciates at 2% per year during 4% inflationary period nuts? 

 (guilty.)

The question I ask myself in that situation is a bit different: Should I risk losing my home to buy a toy?  The fancy interest rate/depreciation/inflation assumption math isn't part of my 'equation'

[carusoam]

Some say…

1) You can sleep in a plane…

2) You can’t fly a house….

Know your priorities…

-a-

[Cruiser]

most businesses are built on other people's money. Leveraging assets is good if you are attempting to earn a profit from doing so. 
Toys are a different matter, over the years, paying cash has resulted in thousands of dollars of interest I kept in MY pocket that allowed for more/better purchases down the road.