Now if you take the case of a house that a couple bought three years ago for 450,000 from those same owners, or from a new home builder, someone got that $450,000. The owners or builder may have paid off loans, paid the realtor, paid the construction workers, etc., but they received that cash at settlement. Again, no wealth disappeared.
The only money that simply disappeared was the wealth on paper that existed from inflated assessments/appraisals for homes that could have been sold, but were not sold, at the height of the market.
I feel bad for the people who had to buy at the top of the market because of a transfer. But as for all the paper gains that evaporated, it's a case of easy come easy go. And anyone who bought Lincoln Navigators and Corvettes and fancy dinners out with home equity loans, well, it is hard to fell much sympathy beyond a certain level I would give anyone in a bad spot.
Your cool analysis is no match for panic and fearmongering.
If the banks loaned someone $100,000 to buy a house and the buyers defaulted, the bank gets the house. If the house is now only worth $50,000, the bank takes a $50,000 loss. That's compounded by the fact that banks can loan out certain multiples of their actual assets. They do this by borrowing from other banks or the Fed. If too many loans default, they soon owe more money on their loans than they have in assets. That's why bank failures are predicted to rise even more this year than last, and also why the US government has an interest in keeping housing prices high. They don't want to have to spend half a trillion dollars of your money to prop up the banks that made these bad loans.
Money disappears. It’s gone and nobody has it stashed away somewhere.
The paper wealth that disappeared is not causing the problem. The problem is the securities based on the income streams from mortgages. Despite the name "Asset Backed Security", there is no asset backing, just a promise to pay income from the mortgages. Those securities are now worth 10 or 20 cents on the dollar. The other 80 or 90 cents has disappeared. You might wonder how such a devaluation take place when default rates are only about 10% on subprime loans and the underlying real estate has dropped less than 10% on average. The answer is, basically, fraud. See http://www.freerepublic.com/focus/f-news/1967845/posts