Came across this article, that talks about the phony wealth of 11 trillion dollars that dissapeared in the crash so far:
http://finance.yahoo.com/news/Where-All-That-Money-nytimes-173741017.html?x=0&sec=topStories&pos=7&asset=&ccode=
People often have difficulty to understand where the money goes when the stock market collapses, and when housing market collapses. For example, when DOW is at 14,000 Mary looks at her stock protfolio that is worth at 140,000 dollars. She assumes she has that much money.
The problem is that she does not have that money. She will only have the money when she sells at DOW 14,000.
Similarly, when a bank gives out a home equity loan, they look at comparable home values to decide what a single home is worth. They then give out a loan based on that number.
What is the problem with this? The problem is that these valuations maybe correct when done in small scale. But at aggregate, when an entire population decides to sell their stocks, or homes at that price, they won't get such price. Price will decline.
That is why stocks are a bubble and home prices have not bottomed.
Home prices have not bottomed because so many people who have managed to get into a house can't keep up with the house payments even at the teaser rate. The next wave will hit this summer. It will make the last disaster look tame.
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