1) Imagine you own 10 houses outright. Congratulations, you're worth $5 million dollars! You want to spend some of that on a boat, but it's not liquid fungible money, so you can't, not without some intermediary steps that inject liquidity into your situation. You're basically solvent, no bank owns a claim on you.
2) Now, imagine you "own" 10 houses, only they each have a $500,000 mortgage. You are worth negative $5 million. But it's okay! You rent them out, and generate enough revenue to pay the mortgages. Again, you're solvent.
3) Repeat #2, only without the rent revenue. You're insolvent.
This doesn't mean insolvency & illiquidity can't coexist, but one is not an extreme form, nor does it necessitate, the other. You can be insolvent but very liquid. You can be illiquid but solvent. You can be insolvent and illiquid (which is basically #3 above)
Yes, I understand that it's possible to be illiquid but solvent. I understand the concept of not being able to buy things with the house directly so you have to get a loan. I understand that those terms have different definitions.
My point was that, when the illiquidity is sufficiently advanced -- when you the actual ability to sell is far enough into the future, and the possibility of making a sale is increasingly dubious -- then those judgments of how much it's "worth" become likewise dubious, and the venture is more reasonably characterized as insolvent, because the unwillingness of others to buy means the property doesn't have a value that supports its status as sufficient collateral.
Also, in your example, assuming (which was the thing I was conditionally disputing) that the real estate really is worth the $5 million, you'd be worth $0, not negative $5 million.
You're right, I'm wrong, it's a debt that counts against you, but also an asset that counts for you, cancelling each other out (assuming market value of the home == mortgage amount)
1) Imagine you own 10 houses outright. Congratulations, you're worth $5 million dollars! You want to spend some of that on a boat, but it's not liquid fungible money, so you can't, not without some intermediary steps that inject liquidity into your situation. You're basically solvent, no bank owns a claim on you.
2) Now, imagine you "own" 10 houses, only they each have a $500,000 mortgage. You are worth negative $5 million. But it's okay! You rent them out, and generate enough revenue to pay the mortgages. Again, you're solvent.
3) Repeat #2, only without the rent revenue. You're insolvent.
This doesn't mean insolvency & illiquidity can't coexist, but one is not an extreme form, nor does it necessitate, the other. You can be insolvent but very liquid. You can be illiquid but solvent. You can be insolvent and illiquid (which is basically #3 above)