A total of 580,000 debts and mortgaged assets In fact, I have to repay 500,000 plus the original 80,000 loan They will think that I have to repay the 500,000 loan You just spent some money in certain places Suppose they all did that Only sell 300,000 May be in 2006 Looking back, this house was sealed I will continue to explain in the next video I just realized it timed out again 300,000 won at auction Lifestyle has become better See now maybe these people have made that kind of investment Let you or the person who bought your house So what do you think they will do? Those who have applied for home equity loans Let me give an example Talk about how the real estate bubble destroys wealth What I really want to express is Once wealth is destroyed, what the law can do is Distribute losses among those who suffer You can't pass legislation Create wealth at once You can encourage investment etc.
We will discuss in a future video It is assumed that I have a neighbor in the first year The Thor brothers went out to seek new development They built 5 houses I draw these houses First room, second room, third room, fourth room, fifth room Hypothesis The buying environment during this period is relatively normal It was about 1995 For the sake of discussion, suppose this is 1995 I want to make this example more abstract So we call this the first year In 1995, some people discovered 5 new houses They want to buy these houses They have to pay 100,000 for each house These are all qualified loans and there were no mortgage bonds at that time And the mortgage securities market In fact, these people have to spend 20% of their funds They have good credit records and the rest is obtained through loans These people have 20,000 own funds and 80,000 loan funds I often use E to stand for own net capital (owner’s equity) Now we have securitized these Borrowing becomes very easy It's getting easier every year As real estate prices have been rising People feel that there is no risk Let’s assume that by 2005 If it is an abstract example, it can also be called the second year Suddenly everyone in 2005 Can get funding Actually those who own the property don’t want to sell it Because they are convinced that the price of houses will rise rapidly Own those properties and become a millionaire It's just a matter of time Then sell the property But there is a lot of money in the market, anyone can get a loan Assuming that these original homeowners They may have to move out of here Or want to move to a location where real estate prices are cheaper Or because their kids are going to college Therefore, the scale of housing assets must be reduced They decided to sell the house Because there is a strong demand for houses in the market Everyone can get a bank loan Frankly speaking, for the highest bidder of this house To some extent He is a reckless or reckless person Anyway, that’s it Or suppose they want to spend 1 million to buy this house They don't have their own funds.
1 million is all subprime loans They also have no credit rating for negative amortization mortgages and many more They paid 1 million The purchase price of this house is now 1 million We can say that its own funds are zero Of course this guy is awesome now He enriched his own equity (funds) in ten years But even if he didn't Even if he only pays the interest of the 80,000 yuan loan every year This guy paid 20,000 yuan and now he can get 1 million He actually got 920,000 to repay the 80,000 loan Plus the 20,000 previously invested Then he can now move to Costa Rica with 940,000 Live a life like a king Although I heard that the consumption level in Costa Rica has risen But anyway, see what happens to the neighbor next door? These people didn't sell their houses They did not encounter People with subprime mortgages buy houses at high prices Nothing happened, no cash in hand but immediately These people will say you know Our house is the same as the first house sold Maybe better than it So our house is also worth 1 million So our book wealth Here are 1 million Only based on a deal This happens when there are only 5 neighboring houses In fact, it may happen when there are 500 neighboring houses You only find that one person paid a high price for a house Then the owner who approached the house immediately Would think their house is worth that high price It's really out of thin air only because someone got cheap credit Then buy something and pay a little more money and then everyone who is near Think they also got 900,000 fortune At least in this example You can hardly see a nine-fold increase in property prices But it is not surprising that house prices have tripled in a year Well, we have seen a 9-fold increase in 10 years This is the case in the example, it's actually not crazy Anyway, this is just their nominal wealth All these people don’t want to sell their houses One they like their own house and their children are still here They would say wow ten years My house has appreciated from 100,000 to 1 million in 10 years My house is going to increase in value from 1 million to 10 million Why should I sell it now? I will sell it when I retire They didn't think Who will pay 10 million to buy their house in 10 years The only person who might buy – I'll do another video explanation I just don't want to waste time here But they can still monetize it They would say that when I go to the financial planner They will tell me oh you put all the equity (funds) It's too uneconomical to invest in your property How much money do they have? There were 20,000 in it before even though they didn’t fill up any funds Only pay the interest on the loan Now there is another 900,000 equity equity Then this group of people is their financial planner Brothers, sisters and friends at work will say Oh your balance sheet is too inefficient Why don't you take out part of the funds Invest or make it profitable At this moment they replied that it was a good idea I want to apply for a home equity loan Suppose this person goes to a bank The bank said it's okay I will give you a 500,000 home equity loan At the same time as the price I have to charge 8% interest This is the bank The bank thinks this is a good business Because the 500,000 loan is secured by a house It is different from unsecured loans Unsecured loans will make banks Get nothing when the borrower declares bankruptcy Home equity loans are secured by a house as a mortgage Therefore, the bank believes that if the borrower does not repay the 500,000 loan If he breaks the contract for whatever reason His house is mine The house is worth 1 million Why would I think it is worth 1 million? Because a house nearby sold for 1 million before Frankly speaking unfortunately This is how property valuation works Generally people would say Another house nearby sold for 1 million This house must be worth 1 million Because it's similar to that one or even better Then the bank will think they made a good deal This is much better than buying treasury bonds The interest rate for this business is 8%.
The yield on national debt is only 3% to 4%. And I can get the property if they default Its value may be higher than the loan amount Then I can put it up for auction and easily get back 500,000 So the risk manager of that bank also thinks This is indeed a good deal Then they might divide these loans into small pieces Sell to other people and rate these All are 3A grade But what happened next? We assume that in 2005 The imaginary world reached the peak of the credit cycle in 2005 This is the most loose credit this year Once those who got the 1 million loan No job They may not even pay the mortgage Not to mention continuing to pay interest Even the interest on the initial low-interest loan was paid Maybe they started to default and credit began to tighten Suppose these guys’ houses are sealed up He gave the house to the bank The bank then auctioned off the house.
Let’s assume When the bank was auctioning the house, it recovered 300,000 At the same time these people who hold 500,000 cash What did you do? Their purpose is to obtain funds through home equity loans Let these funds work for some kind of investment They will say there is nothing better than house renovation More investment value? Because we all know that housing investment is the best investment So unfortunately a large part of the 500,000 Are used to invest in granite countertops Each house has two more bathrooms with hardwood floors You can imagine They also want to be kind to themselves So I took a small vacation This is the so-called housing investment Because they said This will increase the value of their house At the same time as a side effect it seems It's good for neighbors too, so happy I can live in one In a house where my income cannot afford I have made a video about investment and consumption But the 500,000 investment here I don’t think it’s a real investment It’s just consumption because it’s not in any way It does not contribute to the economy to increase productivity in the world So this is not a real investment If a very dumb person is attracted to your house after the house is rebuilt Their willingness to pay a higher price may be considered an investment You did not invest in building a factory or research and develop new technologies Make us all richer