참여번역 : 어학사전

Wealth destruction 1발음듣기

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Let's do an example of how a housing bubble can lead to wealth destruction.발음듣기

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And I really just want to hit the point home that once wealth is destroyed, all legislation can do is redistribute who takes the losses.발음듣기

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That you can't create wealth, all of a sudden, out of legislation.발음듣기

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You can maybe create incentives for investment et cetera, et cetera, but we'll talk about that in a future video.발음듣기

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So let's say, in year one, I have a neighborhood and Toll Brothers goes out and builds a new development and they build five houses.발음듣기

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Let me draw those five houses.발음듣기

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House one, house two, house three, house four, and house five.발음듣기

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And let's say, that this was a normal home buying environment.발음듣기

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This could have been 1995.발음듣기

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Let's just say, for the sake of argument, this is 1995.발음듣기

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Although, I want this to be an abstract example, so we could call that year one.발음듣기

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But in 1995, these people find five new families that go buy the house.발음듣기

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They pay $100,000 each, for the houses.발음듣기

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These were conforming loans, there wasn't this whole CDO and mortgage-backed security market.발음듣기

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So essentially, these people have to put 20% down, and they had good credit scores, and all the rest.발음듣기

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So immediately, they have $20,000 equity and an $80,000 loan.발음듣기

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It's my code, E for equity.발음듣기

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Now, we have this whole securitization, lending becomes a lot easier, becomes easier and easier every year because housing prices go up, so people stop taking risk into consideration.발음듣기

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And let's say, we get to the year 2005.발음듣기

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This could be an abstract example, it could be year two.발음듣기

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In 2005, all of a sudden everyone is getting access to funding.발음듣기

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The people who have houses actually don't want to sell the houses because they're convinced that their housing prices are going up so fast, that it's only a matter of time before they're millionaires just with the housing wealth, and then they could maybe retire off of it.발음듣기

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But there's so much funding and anyone can get a loan.발음듣기

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And let's say, that these first homeowners, maybe they have to move, or maybe they just want to move to a cheaper location, or maybe their kids have gone to college, so they just want to downsize.발음듣기

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They decide to sell their house.발음듣기

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And because there's so much demand out there, anyone can get a loan, frankly, the person who's going to be able to give the highest bid on the house, is a person, to some degree, who's most reckless or most prudent.발음듣기

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And anyway, I won't go into that.발음듣기

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But let's say, they pay $1 million for the house.발음듣기

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They have no money down, $1 million loan, subprime, negative amortization, they had no credit rating, et cetera, et cetera.발음듣기

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They pay $1 million.발음듣기

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Now, that was the purchase price of the house.발음듣기

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And we could just say, that they have zero equity.발음듣기

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And of course, this guy's great now.발음듣기

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He probably did build equity over that ten years from 1995 to 2005, but even if he didn't, even if all he did was pay the interest on this $80,000 loan.발음듣기

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This guy, he had $20,000, now he gets $1,000,000, pays off the $80,000, so he essentially, gets $920,000 plus the $20,000 had before.발음듣기

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So he moves to Costa Rica with $940,000 and lives like a king.발음듣기

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Although, I've heard Costa Rica has also become expensive.발음듣기

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But anyway, what happens now in the neighborhood?발음듣기

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These people didn't sell their houses.발음듣기

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They didn't find some subprime individual that was willing to bid up the house.발음듣기

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Nothing happened, no money changes hands, but all of a sudden, these people say, well you know what, our houses are just as nice as this first house that sold.발음듣기

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Maybe it's even better.발음듣기

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So our houses are also worth $1 million.발음듣기

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So we all have this kind of you could say, paper wealth here of $1 million.발음듣기

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Just from one transaction.발음듣기

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And actually, this is a five house neighborhood, this could happen in a 500 house neighborhood.발음듣기

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You just to find one person to overpay for a house and then everyone in the neighborhood, all of a sudden, feels at their house is worth that much.발음듣기

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And just out of thin air, just by one person getting cheap credit and overpaying for something, everyone in the neighborhood thinks that they just got $900,000 of wealth, or at least in this example.발음듣기

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You never see a nine-fold increase in property prices but it wasn't crazy to see a two-fold increase in a year.발음듣기

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Well, we have seen nine-fold increases over ten years, it's the example here, it's actually not that crazy.발음듣기

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Anyway, that's all of their notional wealth.발음듣기

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But all these people don't want to sell.발음듣기

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One, they like their house, their kids are still there.발음듣기

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And they say, wow, in ten years my house went from $100,000 to $1 million and in another ten years, my house is going to go from $1 million to $10 million.발음듣기

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Why would I sell it; I can then retire off the house.발음듣기

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They don't think, who could buy a $10 million house in ten years.발음듣기

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The only people who could - well anyway, I'll do another video on that, I just don't want to run out of time.발음듣기

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But they can still monetize this.발음듣기

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They could say, well when I go to my financial planner, they said, oh, it's so inefficient for you to have all of that equity sitting in your house.발음듣기

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How much equity do they have?발음듣기

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They had $20,000 before and even if they didn't build any equity while they paid their mortgage, they now have another $900,000 of equity.발음듣기

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So these people, their financial planner, and their siblings, and their friends at work say, oh, your balance sheet is so inefficient, why don't you take some of that equity and invest it or put it to work.발음듣기

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So they say, that's a good idea.발음듣기

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I'll go get a home equity loan.발음듣기

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So let's say, this person goes to a bank.발음듣기

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A bank says, OK, sure, I'll give you a $500,000 home equity loan, and in exchange, get 8% interest on that loan.발음듣기

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So this is the bank.발음듣기

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And the bank thinks it got a great deal.발음듣기

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Because this $500,000 loan is not an unsecured loan.발음듣기

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It's not as if this person can't pay, they just file bankruptcy and there's nothing that the bank can get ahold of.발음듣기

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This home equity loan is secured by the house.발음듣기

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So the bank says, well if this person doesn't pay that $500,000 loan, if they default, for whatever reason, I get their house.발음듣기

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And their house is worth $1 million.발음듣기

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And why do I think it's $1 million?발음듣기

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Because a house in the neighborhood sold for $1 million and frankly, that's how, unfortunately, housing was assessed.발음듣기

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People would just say, oh, another house in this neighborhood sold for $1 million, this one must be worth $1 million because it's a very similar or maybe even a better house.발음듣기

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So this banker thinks they have a great deal.발음듣기

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This is better than buying treasuries.발음듣기

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I'm getting 8%, maybe treasuries are giving me 3% or 4%.발음듣기

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And if they default on it, I actually get an asset that's probably worth more than the loan amount, and I can auction that off and easily get my $500,000 back.발음듣기

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So the risk managers within the bank think they have a great deal.발음듣기

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And they probably sliced and diced these things and sold it to other people and got it rated as triple-A and all of that.발음듣기

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But what happens next?발음듣기

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Well let's say, 2005, in our imaginary universe was the peak of the credit cycle.발음듣기

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That was the year that credit was the loosest.발음듣기

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And as soon as some of these people who had no jobs and got these $1 million loans, they probably couldn't even pay the mortgage on their loan, not to speak of continuing it, or even pay the low rate on the original teaser loan.발음듣기

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So maybe, they start to default, credit starts getting tighter, and let's say, this guy actually gets foreclosed.발음듣기

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And so he gives the house back to the bank.발음듣기

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The bank auctions it off and let's say, when the bank auctions it off, it only gets $300,000 for the house.발음듣기

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And in the meantime, what did all of these people do with the $500,000 that they had?발음듣기

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Well their intention was to take these home equity loans and put that money to work, invest it in some way.발음듣기

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And they say, well what's a better investment than doing home improvements?발음듣기

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Because we all know a house is the best investment.발음듣기

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So unfortunately, a lot of that $500,000 it gets quote-unquote invested in granite countertops, two more bathrooms per house, hardwood floors, and you can imagine.발음듣기

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They wanted to treat themselves too, so they did a little vacation.발음듣기

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So it was invested quote-unquote in their house.발음듣기

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Because they said, oh well, this will increase the value of my house.발음듣기

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And oh, as a side benefit, I will really look good, relative to the neighbors and live it up.발음듣기

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I can live beyond, essentially, what my income would predict.발음듣기

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And I've done some videos on investment versus consumption, but I'd argue that this wasn't real investment, that $500,000.발음듣기

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That this was consumption because it's not making the world more productive in any way; it's not increasing the total economic pie for the world, so it's not investment.발음듣기

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It may be an investment if it somehow makes your asset more emotionally appealing to some greater fool to pay more for it.발음듣기

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You didn't build a factory or you didn't invent some new technology that will make all of us richer, you just poured some money into something that's going to make your lifestyle a little bit better, and maybe the next person who buys your house.발음듣기