>>what's wrong with falling prices??<<
Depends on who you are. If you own a house, and you expect to sell it and make a profit, falling real estate prices are not a good thing for you. But if you don't own a house, and want to buy one, it's a good thing.
Same thing for any asset class - closely held businesses, shares of stocks, commodities.
Let's assume you are a farmer. You bought an acre of land that is ideal for growing wheat, with the expectation that wheat will fetch $3/bushel. The land yields 60 bushels an acre. After you pay for fertilizer, herbicide, lime, fungicide, machinery and machinery upkeep and repair, labor, operating capital and interest, you're clearing maybe $30/acre/year. If you took out a mortgage to buy the land, it had better be less than $30/acre/year or you'll go broke.
What happens if the price of wheat drops to $2.50/bushel?
And if you throw in the towel, and default, and the bank forecloses and sells the land at auction, but the price of the land went down, what happens to the bank? How many losses can it eat before it's insolvent? |
