Stock market bubble vs. Housing bubble...a lesson in LEVERAGE
If a person wanted to buy $500,000 worth of stock, how much money would they need???
- Answer: $250,000 if they were buying on MARGIN.
Margin in the stock market is 2:1. You want to buy 1.5 million worth of pets.com, then you need to come in with $750k of your OWN money. The investment houses do not hand out margin to everybody. They want to know that the investor has the ability to repay them in the event the investment drops.
So where am I going with this...
If you want to buy a $500,000 house, how much money would you have to put down???
- Answer: nada, zip, zero. You get the $500,000 house with ZERO risk!
- Answer 2: The bank would give you $15,000 and let you finance 103% of the value of your house!!!
How many brokerage houses would give you $500,000 to buy stocks...and throw in an extra 15k so you could buy a fancy computer in which to "trade" on??? Yeah, sound pretty eff'n stupid doesn't it.
So that means a bwr on stocks is at 50% margin, where a bwr on a house can be at 100% margin...or more.
You can buy a $1.5 million dollar property with ZERO money down...and STATE your income to do it.
DOES ANYBODY ELSE SEE HOW THIS COULD BECOME A PROBLEM?!?!?
I need to dig up the actual statistics again, but there is a rather large percentage of first time homebuyers using 100% leverage to purchase their home. Not to mention other borrowers that are doing it as well.
What happens in the stock market if your "investment" goes down and you are on margin??
-Answer: You get a Margin Call. You have to pay enough money to get it back to where you are at the 2:1 ratio. If you borrowed 250k to purchase 500k of stock...and the stock dropped to 400k. You would have to cut a check for 50k so that you would only be "borrowing" 200k on margin.
What happens if your $500,000 condo conversion takes a dive to 400k (I know that would NEVER happen...but lets just ASSUME it might)?? What happens??
We don't really need to answer it now...we will get to watch first hand what happens when tens of thousands of people bought property with 100% leverage...and they owe more than their property is worth.
All of that said, I'll leave you with a question:
How bad do you think the stock market bubble would have been, if we let people invest 100% on margin, AND they got to "state" their financial ability to repay the brokerage houses before doing so???