You're talking about imaginary money. Had they only owned the place where they lived, there is no profit or loss that matters.

You obviously don't own a home. There absolutely are financial implications for the value of your home dropping after you buy it.

A) An already illiquid asset is more illiquid. Not only do you need to find someone willing to buy it, you either need to pay to sell it, or find someone willing to pay above market.

B) Decreased access to capital. HELOCs are one of the few ways the middle class has to access six figures of credit easily and cheaply, and this is eliminated when banks won't go above 60-80% LTV but you live in a house with $x with a mortgage balance of 1.5x.

Regarding A, do banks ever make "margin calls" when homes drop in value? I mean, force people to sell even though those people have an income and are making mortgage payments? (If so, why, when the mortgage income, if it continues, is worth more than what they can get from the foreclosure?)

I can't speak for every situation, but I know that my mortgage doesn't include any terms like that. The bank could foreclose and sell the property only if I stopped making mortgage payments.

I think that what you're describing would be termed a "technical default", and would require a clause called an "affirmative covenant".