It Ain’t “Wealth” If It’s Just On Paper

I’m a little confused by the first two paragraphs of this article.

More than $23.6 billion in California housing wealth will evaporate if real estate prices continue to decline and foreclosures on subprime home loans soar, according to a new congressional report that indicates the fallout from the national mortgage crisis is worsening.

In addition, over the next two years, the state will lose nearly $111 million in tax revenue from the forecast repossession of 191,000 homes and the spillover effect on neighboring property values, said the study, released Thursday by the Senate Joint Economic Committee.

How, exactly, does something evaporate that doesn’t exist? The “wealth” that’s being lost isn’t actual money. It’s a projected value based on what folks think other folks might pay for a piece of real estate. That doesn’t mean that anyone will pay that amount. One of the biggest reasons we have this alleged crisis is because smart people are deciding not to pay a bazillion dollars for a house and plenty of folks who sucked up a shady mortgage hoping to bank a quick six figures are learning that the real value of a house isn’t what you think it is. It’s what people are willing to pay for it.

What’s evaporating isn’t real wealth but the illusions of too many greedy or gullible homebuyers who got snookered into believing that they could reap all the rewards of a shifty mortgage before all the bad parts of that mortgage came down on them.

By the way, this whole scenario shuold look familiar. It’s almost exactly what happened when the “dot com bubble” burst in 1999 and 2000. There were a lot of gilded fantasies and far too little applications of common sense. When the fantasies met economic reality, the bubble burst. You would have thought that we would have remembered that, since it wasn’t even ten years ago that it happened. More the fools, we.

(via memeorandum)

No related posts.

Category: The Economy and Your Money