Okay, dumb question probably. Are real estate markets collapsing really that bad for Joe shmoe who wants to buy a house? I get it's bad for people who currently have mortgages because they're paying way more than their property is currently worth, but what about people who don't have property yet and are looking to buy?
Explanation for dumb people.
You borrow $200,000 to buy a house. The house is worth $250,000. The house itself is collateral for a loan. The bank now has a debt note that says "IOU $200,000," and this IOU is considered worth the number printed on it because it's backed by a house worth more than the IOU. Meaning if the borrower defaults, the bank gets the house, and that's worth a lot, so it's considered fully collateralized. If the bank needs some fast cash, for example, to pay their tax bill, they can sell that note. So the note is on their books as an asset worth $200,000 (although it goes down as the borrower pays it off).
Let's say there's a crippling housing crash. Oh shit, now that loan is only backed by a house worth $100,000! FUCK. I can't sell the debt note for $200,000, because if the borrower defaults, I can't get his $250K house. I get a $100K house. Now it's too risky. I can't get my $200K cash right now to pay my tax bill!
I'm ignoring all the regulations that kick in. But that's the fundamental problem. A borrower's debt is the lender's asset. If there is a massive revaluation of the collateral underlying those debt notes, then the debt notes themselves become worth less. Maybe a lot less. And now you have all kinds of banks, businesses, and other entities that wake up and find themselves a lot poorer than they thought.
Same thing will happen if NVIDIA stock eats shit, btw.
