"Why are these people living under a bridge?" "Because housing is too cheap."

[Kurt_and_Hunter]

Imagine if people were buying and selling marbles. The marble market goes crazy then busts, all in a day.

You have ten marbles that were worth $10 at noon. By 1 PM they are down to $5. This is a catastrophe for you.

Now, say you sell the marbles for $5 and go for a walk.

When you get back at 3 PM you still have $5 in your pocket. The price of ten marbles has dropped to $2. You buy back your ten marbles and now have the same marbles you started with plus $3.

Did you have a god day or a bad day?

Since dollars are a lot more useful than marbles it was a bad day. $10 would have been waaaaay better than $3. You still have ten marbles but they're just marbles. It's not like you can eat them.

But say that you absolutely MUST have ten marbles in order to breathe. In that case you did well... you got what you need to live plus $3 from nowhere, except for that two-hour period when you had no marbles. You would have died. D'oh!

Imagine if the housing market collapsed efficiently.

Your $500,000-mortgaged house drops to $400,000. Catastrophe. But if the housing market was super-efficient you could sell and go sit in your car for a while and then buy your house back for even less than you sold it for.

I was thinking about this watching a story about mortgage squatters. If the whole process ran out quickly then everyone who had ever written a mortgage would be ruined but, after a hypothetical game of musical chairs, everyone could be back in their same house at an "affordable" level.

In practice the economic collapse sparked by wiping out pretty much every financial institution in the world in a day would mean almost nothing was "affordable" since you wouldn't have a job, stock portfolio, etc.. Maybe you would ultimately buy back your old house with canned food and ammunition.

But it's still an intriguing scenario. Is the problem that houses are too cheap? No, because people actually USE houses to live in. In the abstract cheap houses should be a good thing... fewer homeless.

But today's cheap houses will lead to a big homeless population. "Why are these people living under a bridge?" "Because housing is too cheap."

The problem is that people owe more than their houses are worth. If you sold your $500,000 house for $400,000 you would have $400,000 to buy a new house and could buy a house precisely as nice as the one you just sold. (A $400,000 house.)

But actually you "sold" your $500,000 house (with a $450,000 mortgage) for $400,000 by writing the bank a check for $50,000 which was all your money. So now you are out of the housing market.

Just an irony of the situation.