When house prices collapse, no real wealth is lost; there is no loss of economic capacity or functionality. This is very different to the effect of, say, an earthquake, or crushing viable used cars, which actually destroy real resources and are not zero sum. Of course, the creation of real wealth – by creating a new service or building a house, say, is also not zero sum. But a change in the price of houses is neither wealth creation nor destruction; it is a re-pricing of houses relative to everything else.

When house prices climb, homeowners wind up with the ability to convert their homes into a greater amount of other types of real resources (food, for example, or air travel), and non-homeowners need more other resources to trade for a home. When they fall, the reverse happens. Claims on resources shift between homeowners and non-homeowners, but the resources are not themselves created or destroyed. It”s economically zero sum to society, even if, in dollar terms, it”s not.

Turning to spending effects, people who sell their homes at lower prices in the future will spend less afterward, yes, but those who buy the same homes from them at lower prices will subsequently spend more than they would have if they were paying off a more expensive home (truly zero sum, even in dollar terms). People who don”t sell their homes, but experience a loss of paper wealth, may also spend less as they try to rebuild their “savings,” but those who have not yet bought homes will be able to spend more, as they will not need to save as much in anticipation of buying a home (again zero sum, even in dollar terms). Future consumption of real resources has shifted between homeowners and non-homeowners, but it”s zero sum; no real resources have been created or lost.

What about lenders? To the extent that a lender, rather than a homeowner, put money into the property, the homeowner”s loss becomes the lender”s loss. So instead of the change in house prices becoming a real wealth transfer between homeowners and non-homeowners, it becomes a real wealth transfer between lenders and non-homeowners.

Now, I recognize that there are frictions, and that sudden shifts in people”s relative real wealth requires a period of adaptation, during which time some real opportunities will be lost. But that”s got to be pretty second-order compared to the “loss of wealth” we”ve all been hearing so much about.

Thanks for the discussion!

Let”s stipulate that the government has a role in enforcing contracts and punishing fraud. Beyond that, it”s not remotely clear it has any useful or even legitimate role in providing financing for home buyers.

Indeed, it”s arguable that taxing third parties to provide government guarantees that reduce the mortgage costs for home buyers, is neither desirable, nor equitable. It”s government support of rent-seeking by homeowners and lenders, yes, but hardly good public policy.