.... has come from one -- and only one -- cause.
The taking of leverage against an asset with unstable value.
Take as an example the ordinary single-family home. A median example in a given market purchased for no more than 30% of the median single-earner family income of the area, on a 30 year fixed mortgage rate with 20% down (5:1 leverage) is quite safe. Yes, it is levered at 5:1 at the outset but the following factors mitigate the leverage risk:
- The house is purchasable by a median single-earning family. If something goes seriously wrong it can be sold by the current owner to someone else in the area of similar economic means, thus the risk of a wipe-out in that case is low.
- The purchasing family, by posting up 20% of the price in cash, has demonstrated they can save over time. That is, their operating income as a family unit is reasonable compared against their operating expenses -- not just today but back a few years in the past as well. Nobody can foretell the future but the past is a decent indication of personal financial capacity and discipline among the adult participants (if two people are involved.)
- That same evidence of being able to save means they likely have the discipline to maintain the asset. All physical assets deteriorate without money being put in. A house is no exception; it needs to have its exterior (e.g. roof, windows, siding and similar), interior (e.g. flooring, fixtures, etc.) and mechanical (electrical, plumbing, HVAC, etc.) maintained and replaced on a reasonable schedule or it will turn into a broken pile of worthless sticks.
- If one of the adults is laid off, gets hurt or otherwise has their capacity diminished there is another. This is a further form of resilience. It might not be sufficient to keep the house but it is likely enough to remain above water long enough for point #1 to take care of preventing a disaster.
Now take that very same home and through "market forces" escalate the price so it is 50% of a median family income -- with two earners. Now the very same house is an extremely dangerous leveraged purchase even though it is the same house. It becomes very dangerous to purchase using leverage because now none of those factors is covered above and if anything goes wrong the house will wind up in foreclosure because not only can the original purchasers not afford it except under perfect conditions but if there is stress finding another person who can and will buy it at a clearing price that covers the leverage taken on will be extremely difficult because most people cannot do so with reasonable leverage.
In other words only another person willing to get way out ahead of their skis is a buyer at that sort of price.
