Perceptual Wealth

Much of financial news of recent note has typically been about how much money has been sucked into a black hole. People bemoan the falling value of their 'nest egg' real estate; stocks hopped onboard a time machine and revisited the Nineties; California real estate is already in the Nineties, and seems to have a hankering to see some disco. There's a distinct possibility that some financial sharkskin suits might be spotted in the near future, and we wouldn't rule out a resurgence of the Zoot suit.

But what, really, has been lost? In our examples, and indeed in general, money hasn't actually gone down a black hole: all that has changed is the hypothetical price tag on a given investment. Nothing changed physically about the houses in California (usually); the same can be said for stocks. One day they were value X, and the next they were value Y... the bad news: Y was less than X.

Such fluctuations are normal in a market's valuation of a given 'thing,' and are to be expected. Just because 'the market' says a certain Californian condo appraised at $450,000 doesn't necessarily mean someone will actually buy the place. The condo is worth what someone will pay, and not a cent more. Trouble sets in when people confuse a market valuation with 'money in the bank,' and spend $400,000 as if they had already sold the condo.

We suppose it's all well and good to do this when the market is forever going up... but surprise! No market is immune to the inevitable downturn, and now the average Californian real estate speculator is 'under water' (i.e. owe more than their properties are worth). They're saying they've lost money, but have they really? They didn't sell their property, but yet they spent like they had a big pile of cold, hard cash. They thought they were wealthy, but clearly weren't... so what did they have?

Perceptual wealth, dear Reader; the perception of wealth, without actually being wealthy. These real estate speculators (a.k.a 'homeowners') truly believed they were wealthy, and so they spent and lived as if they were wealthy, but in the end what made their 'wealth' wasn't real. It was an opinion, a valuation; it was what someone said the investment was worth. Writ large, the real estate bubble more resembles a confidence scheme, but it all began with someone feeling wealthy because they bought a condo in California.