Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: Hawkmoon who wrote (87839)	9/1/2007 7:05:27 PM
From: The Vet	Read Replies (1) \| Respond to of 306849

Hawkmoon you made some good points on money creation and I agree with your statements "If you contract to purchase a $500K home and take out a loan to finance it with no money down, you've just created $500K in money supply, which then is transferred as material, wages, and profit to those people who built your home." However I find it harder to relate the destruction argument "If you default, then money is destroyed (normally the amount between the the mortgage value, and the price for which the home is resold in foreclosure." As I see it, the original $500K that went to the builders et al and any principle and interest you may have paid is still out there in circulation regardless of whether you default or not. So what money has been destroyed? Sure, the bank or current owner of your defaulted debt instrument has lost some of the value in that note, but as the house will always have some value his loss should be less than the initial amount of money created. The bank has lost some potential future interest income but as that was due on newly created money in the first place it isn't really "lost" it simply won't have to be created in the future.

To: Hawkmoon who wrote (87839)	9/5/2007 11:28:13 AM
From: GraceZ	Respond to of 306849

However, everytime debt is created, money is ALSO created. That's how money supply works. Residential home mortgages (1-4 units) between 2000-2005 grew by over 4 trillion, the money supply grew by 3.5 trillion in that same period (M3). MBS were sold abroad so not only did mortgage lending suck up the money created here but savings from abroad as well. In the same period the total market value of the residential housing market went from 9 trillion to about 15 trillion (according to Shiller's chart which shows about a 75% change in prices between 2000-2005). People who received RE windfalls tended to use that money for ever higher priced RE. Prior to 2005 a very small percentage did what my husband and I did, which was sell our RE investments and put the funds into other types of investment assets. I wasn't, by any stretch, stating that money wasn't created when house prices rose and mortgage balances grew, but that anything created tended to flow right back into housing as home prices rose ever higher. The money created by expanding the mortgage debt never flowed out into other sectors of the economy and still hasn't. RE bucks have had a tendency to remain RE bucks and clearly other savings were swept up into RE as well. When home prices decline or stagnate we'll start to see money flow out of RE into other assets as investors seek higher returns elsewhere.