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> anyone pushing such reform would be obliterating the average Joe's net worth. Only in a purely illusory sense. Suppose you have all your net worth tied up in

> anyone pushing such reform would be obliterating the average Joe's net worth. Only in a purely illusory sense. Suppose you have all your net worth tied up in a house. If your house magically vanished, you'd have nothing but your job. The price of houses falls to $500 and you potentially go bankrupt. Then, you buy a house for $500. You, personally, are now better off than you were before. Some examples: --- 1. You have $200,000 of equity in a $700,000 house. After the price drop, your net worth in dollars has improved by $300,000. Your net worth in "stuff" has risen dramatically; you kept your job, and now you have 100% of a house instead of having 30% of a house. 2. You have $700,000 of equity in a $700,000 house. After the price drop, your net worth in dollars is down by $699,500. Your net worth in stuff is unchanged. Assuming you always need to live in a house, this will never have any negative impact on you. You retain the option to live in the house you have (which leaves your life unchanged), and you also retain the option to sell your house and use the proceeds to buy another house (and this option looks a lot better than it used to; given the crash in prices, you can probably afford a much nicer house). 3. You have $200,000 of equity in a $700,000 house. You also have $15,000 of "equity" (resale value) in a car that you owe no money on and bought for $50,000. After the price crash, you lose your house and your car, and then you buy another house for $500. Replacing your car will cost you $50,000. You are in a similar position to the guy in example (1), but $50,000 poorer. So now we ask: was it better to be $500,000 in the hole on your house before, or to be $50,000 in the hole on your car now? --- There isn't a way for the average Joe not to come out ahead. There is a way for someone else to lose out on the price crash: if you had more than one house before, you lost everything on the houses you weren't living in. But that's got nothing to do with the average Joe.

fc417fc802 10mo ago
That is an excellent way of putting it. However I fear that it will be nigh impossible to convince the average Joe that the numbers going down was actually good for him.
- thaumasiotes 10mo ago
  > was actually good for him. In the past tense it should be easy to do. Since he is better off, and he has a good view of how he's doing personally, you don't really need to do much. The difficulty is in convincing him that it will be good for him, not that it was good for him. Compare congestion pricing in NYC, or self-service gas in Oregon.
snovv_crash 10mo ago
You would still need to pay the bank the full 700k even if it's only worth 300k now. This might mean that you still owe 400k on a 300k asset. In this way you can be underwater while still being a 30% owner.
- thaumasiotes 10mo ago
  But that option is obviously worse than declaring bankruptcy, which you can do. You can't be forced into remaining with your underwater house.
  - fc417fc802 10mo ago
    It does raise the point though that anyone who borrowed against his house to obtain other assets could be negatively affected by this turn of events. Also in the case of mass bankruptcy and mortgage failure of the lower middle class I guess there would be risk of bank failure as in 08? That said, I still think the hypothetical illustrates the overall situation quite well.
    - thaumasiotes 10mo ago
      > It does raise the point though that anyone who borrowed against his house to obtain other assets could be negatively affected by this turn of events. How? A drop in the price of houses means it becomes more difficult to exchange houses for non-houses. If you borrow against your house to obtain something else, and then the price of houses falls, you successfully timed the market. That's all upside for you. What do you think is the difference between example 3, the guy with a $500,000 mortgage on a $700,000 house, plus a $50,000 car, and example 3', the guy with a $450,000 mortgage and a $50,000 car loan on his house, plus a $50,000 car? Say I inherit a $700,000 house and, being the kind of guy I am, immediately mortgage it for $500,000. But I stop renting and move in to my new house. Also, I hire a bunch of call girls to live with me in my house. One year later, the price of my house drops to $100,000, and I turn it over to the bank. I started (the crash) with a $500,000 loan and no way to pay it back other than selling my house. At this point, the faster I realize what's happened and sell my house, the more money I'll be left with. (If I sell immediately, I'll get $200,000!) The longer I postpone selling, the worse off I'll become. (Though since I can live in the house, this trades off against what I would spend on rent.) I've also spent $500,000 on entertainment and one year's rent. Mostly entertainment. Is this a harm that was dealt to me by the fall in the price of my house? When the price falls, this forces me to sell the house, locking in a profit of... $500,000. (Which I've already spent.) It could have been $700,000, in theory. This $200k difference in profit vs potential profit can be seen as an effect of the price crash. But that's pretty good for an event that notionally took $600,000 out of the value of my house. Borrowing against the house helped me. If you want to talk about a negative effect on someone, walk me through the accounting. +-------------+-----------+---------+---------+-------------+-----------+----------------+---------+ | event | my equity | my cash | my debt | bank equity | bank cash | bank held debt | hookers | +-------------+-----------+---------+---------+-------------+-----------+----------------+---------+ | baseline | 0 | 0 | 0 | 0 | 0 | 0 | 0 | +-------------+-----------+---------+---------+-------------+-----------+----------------+---------+ | inherit | 700k | 0 | 0 | 0 | 0 | 0 | 0 | +-------------+-----------+---------+---------+-------------+-----------+----------------+---------+ | mortgage | 700k | 500k | -500k | 0 | -500k | 500k | 0 | +-------------+-----------+---------+---------+-------------+-----------+----------------+---------+ | party | 700k | 0 | -500k | 0 | -500k | 500k | 500k | +-------------+-----------+---------+---------+-------------+-----------+----------------+---------+ | price crash | 100k | 0 | -500k | 0 | -500k | 500k | 500k | +-------------+-----------+---------+---------+-------------+-----------+----------------+---------+ | bankruptcy | 0 | 0 | 0 | 100k | -500k | 0 | 500k | +-------------+-----------+---------+---------+-------------+-----------+----------------+---------+ At the beginning of this process, I was short $700,000 for a house that I needed but didn't have. Before the price crash, I had "200k equity"† in that very house, leaving me $500,000 short of a house. After the price crash, I was deeply underwater on the house. Without bankruptcy, I was still $500,000 short of my house, but only $100,000 short of some other house. And then, after the bankruptcy, I was $100,000 short of a house. 1. What is the harm that I suffered from the price crash? 2. If the "hookers" column had some other label, would that change the harm that I suffered from the price crash? † You might note that this is accounted as 700k equity in the table. The table is correct, but that's not how we talk about it. There is probably an error in my earlier comment related to this.

fc417fc802 10mo ago

That is an excellent way of putting it. However I fear that it will be nigh impossible to convince the average Joe that the numbers going down was actually good for him.

thaumasiotes 10mo ago
> was actually good for him. In the past tense it should be easy to do. Since he is better off, and he has a good view of how he's doing personally, you don't really need to do much. The difficulty is in convincing him that it will be good for him, not that it was good for him. Compare congestion pricing in NYC, or self-service gas in Oregon.

snovv_crash 10mo ago

You would still need to pay the bank the full 700k even if it's only worth 300k now. This might mean that you still owe 400k on a 300k asset. In this way you can be underwater while still being a 30% owner.

thaumasiotes 10mo ago
But that option is obviously worse than declaring bankruptcy, which you can do. You can't be forced into remaining with your underwater house.
- fc417fc802 10mo ago
  It does raise the point though that anyone who borrowed against his house to obtain other assets could be negatively affected by this turn of events. Also in the case of mass bankruptcy and mortgage failure of the lower middle class I guess there would be risk of bank failure as in 08? That said, I still think the hypothetical illustrates the overall situation quite well.
  - thaumasiotes 10mo ago
    > It does raise the point though that anyone who borrowed against his house to obtain other assets could be negatively affected by this turn of events. How? A drop in the price of houses means it becomes more difficult to exchange houses for non-houses. If you borrow against your house to obtain something else, and then the price of houses falls, you successfully timed the market. That's all upside for you. What do you think is the difference between example 3, the guy with a $500,000 mortgage on a $700,000 house, plus a $50,000 car, and example 3', the guy with a $450,000 mortgage and a $50,000 car loan on his house, plus a $50,000 car? Say I inherit a $700,000 house and, being the kind of guy I am, immediately mortgage it for $500,000. But I stop renting and move in to my new house. Also, I hire a bunch of call girls to live with me in my house. One year later, the price of my house drops to $100,000, and I turn it over to the bank. I started (the crash) with a $500,000 loan and no way to pay it back other than selling my house. At this point, the faster I realize what's happened and sell my house, the more money I'll be left with. (If I sell immediately, I'll get $200,000!) The longer I postpone selling, the worse off I'll become. (Though since I can live in the house, this trades off against what I would spend on rent.) I've also spent $500,000 on entertainment and one year's rent. Mostly entertainment. Is this a harm that was dealt to me by the fall in the price of my house? When the price falls, this forces me to sell the house, locking in a profit of... $500,000. (Which I've already spent.) It could have been $700,000, in theory. This $200k difference in profit vs potential profit can be seen as an effect of the price crash. But that's pretty good for an event that notionally took $600,000 out of the value of my house. Borrowing against the house helped me. If you want to talk about a negative effect on someone, walk me through the accounting. +-------------+-----------+---------+---------+-------------+-----------+----------------+---------+ | event | my equity | my cash | my debt | bank equity | bank cash | bank held debt | hookers | +-------------+-----------+---------+---------+-------------+-----------+----------------+---------+ | baseline | 0 | 0 | 0 | 0 | 0 | 0 | 0 | +-------------+-----------+---------+---------+-------------+-----------+----------------+---------+ | inherit | 700k | 0 | 0 | 0 | 0 | 0 | 0 | +-------------+-----------+---------+---------+-------------+-----------+----------------+---------+ | mortgage | 700k | 500k | -500k | 0 | -500k | 500k | 0 | +-------------+-----------+---------+---------+-------------+-----------+----------------+---------+ | party | 700k | 0 | -500k | 0 | -500k | 500k | 500k | +-------------+-----------+---------+---------+-------------+-----------+----------------+---------+ | price crash | 100k | 0 | -500k | 0 | -500k | 500k | 500k | +-------------+-----------+---------+---------+-------------+-----------+----------------+---------+ | bankruptcy | 0 | 0 | 0 | 100k | -500k | 0 | 500k | +-------------+-----------+---------+---------+-------------+-----------+----------------+---------+ At the beginning of this process, I was short $700,000 for a house that I needed but didn't have. Before the price crash, I had "200k equity"† in that very house, leaving me $500,000 short of a house. After the price crash, I was deeply underwater on the house. Without bankruptcy, I was still $500,000 short of my house, but only $100,000 short of some other house. And then, after the bankruptcy, I was $100,000 short of a house. 1. What is the harm that I suffered from the price crash? 2. If the "hookers" column had some other label, would that change the harm that I suffered from the price crash? † You might note that this is accounted as 700k equity in the table. The table is correct, but that's not how we talk about it. There is probably an error in my earlier comment related to this.