Quote:
Originally Posted by Doctor Who
Okay john. I'll explain it and be brief.  When the bank takes a house, it will get rid of it at almost any price. Banks don't want to own the real estate. They don't "loan to own". By the time they have foreclosed and sold the house, they have lost a minimum of 20% of the original value. (That's why they like to see 20% down so the buyer losses, not the bank...see how that works?) So it's called a fire sale. When your neighbors house sells for less than they paid for it, the value of your house goes down as well. Now, one foreclosure in your town isn't going to bring down the values in the whole town. But 50 or 500 will and thousands devastate the market. The problem was that a lot of people stopped paying their mortgages. It snowballed into what we have today. Derivatives have nothing to do with the value of homes. People buying and selling the homes determine the value. Banks, insurance companies and investment companies have nothing to do with that. They only facilitate a purchase that has already been agreed upon.
Yup, capital is created. Go to business school. They'll show you how.
Shouldn't you have asked how you yourself will pay for it? And to that I will defer back to my previous statement. |
I'm familiar with the phenomena, but at least where I live most of these are brought up by bargain hunters, who quickly "flip" the properties for prevailing market value (one of the few honest uses of this practice) and the overall market stays the same. If there are a lot of foreclosures in an area at one time the market might fall temporarily but it should rebound fairly quickly as all the foreclosures are sold and then resold again.
The derivatives created a bubble, the prices of the homes were bid up out of all relationship to their real value because noone ever intended to pay for it anyway, but just to cash out after the rise in prices made them a profit. They, essentially, were financing the home's future increase in equity and were caught when it stopped increasing and in fact, fell. You can see, however, that this is a consequence not a cause because the price must fall BEFORE this tactic will not work. Falling prices will exacerbate this, yes, but the prices must still start to fall first.
Are you talking about how banks "create" capital by loaning out money they don't actually have on deposit? They're actually creating debt, the capital only really comes into being when someone pays it back.