Where did the money go?

[izmirian]

I've been hoping recently that someone would write a good article providing statistics on where the money in the current sub-prime lending crisis actually went. Clearly the banks ended up with a lot more defaults on their loans than they were expecting and it seems like an obvious question to wonder who actually ended up with that money. In the

Comments

[firstfrost]

Though doesn't a lot of it start with falling values? If I buy a house for $500,000, and two years later it's worth $400,000, where did the extra $100,000 of house go?

[izmirian]

I'm not sure that the change in house value explains what I want to know. Ignoring changes due to remodeling or improving a house, the house is just an item with a price based on what people are willing to pay. If you buy it for $500,000 one day and sell it for $400,000 the next day, you lost $100,000 and the two people you traded with gained $100,000 between them. But if you took out a loan for $500,000 to buy the house and then defaulted on the loan, leaving the bank to sell it for $400,000, then $100,000 was transferred from the bank to the next and previous house owners. In practice the $100,000 that the bank lost ends up coming from its customers in lower interest rates, or more immediately if the bank goes under.

[fxz]

"...the two people you traded with gained $100,000..."

Not sure that works right. Let me try two different examples. First, I buy a computer for $2,000. 5 years later it's worth $200. Doesn't mean that HP or the person who buys it from me "gained" on the transaction. Now that's a bit special, because that depreciation is predictable and accounted for. Second, suppose I have someone build me a bunch of payphones and then right afterwards, someone invents the cellphone and makes them worthless. What happens to the money I paid for them?

Not saying the housing analogy is exactly like either, only showing that value isn't conserved in a strict, local way.

[izmirian]

That's true, though it seems that the faster the price changes (relative to some time constant for that type of product) the more likely it is that someone lost money by buying it at too high a price, versus the underlying utility of the object actually changing. For houses, their utility certainly decreases over a period of decades, but when you see large price swings over the course of one or two years it probably has very little to do with changes in the underlying utility of the house.

[bakedweasels]

I think it'd be hard to aggregate statistics like that, but you certainly could take a few examples and show those: a new house, an occupied house, a refinance. I think substantial amounts of money passed through the hands of the mortgage originators to their employees, and lots got recycled into the economy by refinancings, and of course realtors took larger cuts of everything with prices being higher. I think you can look back at the realtor/homebuilder/mortgage originator sectors as a % of the economy over the last 10 years and get a very good sense of who was getting paid.

[izmirian]

I think it's probably true that although the percentage cut for the people in the realtor/mortgage industry is relatively small, there was a lot of turnover in houses in the past few years so the industry got to take that cut many times. Plus the percentage cut probably grew when it looked like everyone had lots of money to spare.

Certainly homeowners who simply traded one house for another didn't end up making money from the inflated housing values, unless they were trading down. There probably are a moderate number of people who sold property near the peak and they certainly aren't complaining now :-)