Wealth destruction 1 | Finance & Capital Markets | Khan Academy

Let's get rich on how property foaming Let's see if it leads to loss. The most noteworthy part is the loss of wealth in the case of who is the only remedy loss distribution is the definition between. Suddenly create wealth It is not possible. Some of your ideas can be invested and so on. about, but this, is the subject of the next video. Let's say we are covered in the first year Toll Brothers is building a new building and they build five houses. Let's take a picture of these 5 houses. First house, second house, third house, fourth and fifth houses. Let's say it's a normal one to buy a house was the environment. It could be 1995. For discussion, for example, 1995. Although I want an abstract example let's call it the first year. In 1995, these people to get home Sees 5 new families.

$ 100,000 payment for each. Suitable loans, no CDO and mortgage is not a supported bond market. Basically these people are 20% lower has a good credit rate. Immediately It gets $ 20,000 in capital and $ 80,000 in debt. This is my code, E – capital We have protection, lending more every year home prices because it gets easier and easier rises and people ignore the risk they spread. And let's say we are in 2005. Although it is an abstract example, it is the second year. In 2005, all of a sudden access to finance.

People who have a house do not want to sell their house because they believe that prices are very fast rises, it is also a matter of time become a millionaire at the expense of property prices and perhaps agree to sell the house. There are many sources of funding and everyone borrows Let's say the original homeowners have a cheaper one should move to the ground or have children like this should go to schools, they just they want to "shrink". They decide to sell their house. Everyone is in debt because there is so much demand can buy, give the highest offer to the house but he who knows is either in a hurry, or very cautious. But for some reason, I will not touch on it. Let's say they pay $ 1 million for a house. No money, $ 1 million loan, subprime loans, negative depreciation, 0 credits rating, etc. They pay $ 1 million.

This is the purchase price of the house. We can say that their capital is zero. And of course, this guy is great. He has, perhaps, in the last 10 years from 1995 to 2005 earned more capital than he did, even if he did not the only thing was the interest payment of the $ 80,000 debt. This man has $ 20,000 and now has $ 1 million and pays $ 80,000, so the money is $ 920,000 + becomes the previous $ 20,000. He moved to Costa Rica for $ 940,000 and live like kings. But I heard there too was a very expensive place. So, what happens in the coverage? These people did not sell their homes. They are able to offer a high interest rate home they didn't find one.

Nothing happened, the money did not change, but up to the houses sold for them is beautiful. Maybe it's better. In other words, their houses are worth $ 1 million. Our $ 1 million paper fortune in this form we can say there is. Only 1 operation. This is actually a 5 house circle, this It can be up to 500 houses. A man gives more money to the house and that happens The people around them are also in their homes thinks it's price. And suddenly someone on a cheap loan for something When you give more money, everyone thinks it's theirs He has a fortune of $ 900,000, at least in this example.

Never 9 times in 1 year property prices you don't see an increase, but in this example as well see a double increase as it is is not uncommon. After all, this is their national wealth. But these people do not want to sell. First, they love their children's homes and think that wow my house for 10 years It went up from $ 100,000 to $ 1mln, 10 more years It will also be valued at $ 10 million. Why should I sell; They don't think that's who they are with 10 evi 10mln-a alar? They're just– well, that's another thing I will shoot a video, let's not waste time. But they can still make money. They can say financial advisers keeping so much capital at home says it is inefficient. How much capital? And if they had $ 20,000 from the beginning even if they do not create capital, they pay their mortgages now has $ 900,000.

These people, their financial advisers your brothers and sisters and friends will say that it is yours The report is inefficient, why this capital don't you take it and put it to work? They will say that this is a good idea. I will also take out a home loan. Let's say this person goes to the bank. And the bank – well, give you a loan of $ 500,000 I will give, but you will also pay 8%.

This is also a bank. The bank thinks it's great. Because this debt is not an unprotected debt. It is as if a person is insolvent and bankrupt bank nothing from here will not be able to get. This debt is protected by the house. That is, the bank says that someone for any reason, If he does not pay $ 500,000 the house is taken. Their house is $ 1 million. Why do I think $ 1mln? Because the house in the area was sold for 1 million and Unfortunately, this kind of house evaluated.

People can say that around Another house that was sold for $ 1mln, Even very similar, because it can also make 1mln is a better home So the banker thinks it's great. This is better than buying a security. 8% is better, maybe more valuable papers will give 3% or 4%. If they can't pay it, it's more than debt I will own the asset and auction it easily I can get $ 500,000 by doing. The bank's risk managers are getting something good they think they are doing. And probably by dividing them into parts sold to other people and all were rated as triple A. What will happen now? Let's say in a parallel world in 2005 credit turnover is at its peak. It was a year with the lowest loans. Unemployed people get loans of $ 1mln and big along with the inability to pay probable debts to pay even at a lower interest rate they are not able. Thus, as a result of such failures maturity is difficult and this person gives the house back to the bank.

The bank organizes the auction and the house Is $ 300,000. But now these people have How to make $ 500,000? Their intention is taking this home loan one way was to suppress the business. How do I invest better than repairing a house can you do We know that home is the best investment. Unfortunately, most of the $ 500,000 granite-marble, additional bathroom-toilet, wooden floors, etc. suppressed. They wanted to do a little good for themselves and went on vacation. So everyone was put in their homes. Because they thought it was the value of my house will increase. In addition, against relatives and neighbors I will have an excellent life. Without thinking about my income I will live. About demand-oriented investments I have a video, it's $ 500,000 I can say that it is not a real investment. This is an assumption, because with it life is more it is not efficient; it is the general economic situation does not improve and is not an investment.

This will make your home more attractive to another person a payment made in order to show can be. You have not built a factory or a new one that you have not invested in technology make you rich, your lifestyle I'm investing in something that will improve a little did you It will be auctioned for $ 300,000, maybe For 2006.

Now, all of a sudden on all the home equity Let's say people who take loans they all did. They say I'm paying $ 500,000 in debt. In fact I owed $ 500,000 + principal $ 80,000 to the assets I sold for $ 300,000 by paying I owe $ 580,000. What do you think they will do? As far as I can see, our time is up I will continue in the next video..

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