by thaumasiotes | 2026-01-08 09:27:17+00:00
> 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.