In one of Adam’s posts on housing Myron says

Every person who buys a home is making an investment. Period. It is also the largest investment most people make in their lifetime. The “dream of home ownership” should more accurately be “the dream of using leverage (OPM)”.

I think there is quite a bit of truth to this. I think we are getting to a point where the high social cost of leverage is being appreciated. However, I still think there is wide spread underestimation of the low private cost. Your creditors can’t get blood out of a turnip and you can’t end up with less than nothing. Thus, your losses when using Other People’s Money are inherently limited.

This means virtually all borrowers have an incentive to overborrow. This in turn is why risk evaluation is one the key functions of banks. It is also why collateral values are of systemic importance.  Higher collateral values effectively put blood in to the turnip and reduce the distance between lender and borrower optimums. Falling collateral values do just the opposite.

When home prices go down the world really has suffered a structural change. There is now more distance between what is in the borrowers interest and what is in the lenders interest. This distance acts as a tax on the market for loanable funds.

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