Message from Charles Aulds

If houses had to be purchased with cash (instead of credit), housing prices wouldn't be so grossly inflated. The whole housing boom is a huge bubble, everyone thinks they're making money, taking out their equity (in their opinion "earned" income) and spending it, when, in reality, everyone is spending borrowed money. Even the original owner of this house, who owned it outright, when he sold ... the money he received was borrowed money …

Suppose I own a house free and clear (I do). Let's say that house is worth $100,000. Buddy borrows that entire amount and buys my house for the asking price. Now Buddy owns the same real-world asset that I had, but unlike me, Buddy has a liability to match. Ok, consider: I had $100,000 equity in my house, but poor Buddy has zero. So, whenever I spend some of the cash I got for selling my house, I'm really spending Buddy's credit. I'm spending money he borrowed and is obligated to repay. Thank you, Buddy.

But what if Buddy sells the house? Let's say he sells it to Tina for $120,000, for a quick $10,000 in increased equity. Tina goes out and borrows $120,000 to buy the house. Bill can spend his $10,000 profit [his equity in the home], because it's real money. But is it, really? Actually, it's Tina's credit that Buddy has in the bank. Then Dave buys the house from Tina for $135,000. Eric buys it from him for even more. Frank buys it from Eric and so on, and so on, each buyer spending the credit of the last seller.

At each step in this chain of transactions, one person sells the house for a profit, and presumably spends a part of that profit which contributes to the economy. That means the economy is improving, right?

All the buyers of this house, all of whom borrowed something to buy the house (myself, included … remember, I was the initial seller) are spending their "profits". In reality, though, they are spending the credit of the buyers. Though I have never borrowed a single dollar, I'm spending borrowed money.

There's a perverse element in the whole thing. The asset being traded hasn't changed. We're all buying or selling the same damned house. Why, then, is there so much more borrowed money? So much increased debt load that people are carrying? Something just doesn't look right about it. But this process didn't just happen to the old Aulds house … it's happening to every house in the country!

Consider: what is happening is a new form of inflation: It's inflating the price of an asset (in this case, my house), using easy credit and debt, into something much greater than its actual value.

But … why should Charles Aulds care? He sold at a good time! Whoopee for him! Let someone else deal with making a mortgage payment. Not my problem, right? ( or is it? )

___

Charles

[ Actually … I haven't sold my house. And I won't. At least not to make a profit. — C.Aulds ]