The rubes weren’t the only ones caught by the property bubble

From the Atlantic: Cheap money makes us stoopid.

One of the most persistent narratives of the recent crisis portrays a nation of unsophisticated home buyers led astray by greedy bankers. Supposedly those bankers were willing to write risky loans because they intended to pass them on to some unwary investor. But this explanation falters in the face of a legion of failing commercial deals. Prospective landlords had all the expertise they should have needed to put a fair price on properties—and the majority of lenders who were originating loans for their own portfolios had ample incentive to perform careful due diligence.

The best explanation for the calamity that has overtaken us may simply be that cheap money makes us all stupid. The massive inflows of international capital, which Ben Bernanke has called the “global savings glut,” poured into our loan markets, driving interest rates lower—and, since most real estate is purchased with borrowed funds, pushing up the price of property in both the commercial and residential sectors. Rising prices, in turn, disguised any potential problems with the borrowers, because if they ran into cash-flow problems, they could always refinance, or sell. Everyone was getting bad signals from the market, and outlandish purchases looked almost rational.

2 Comments

  1. That’s a big part of it. Back in the “stoopid ol’ days,” my wife was offered $1M with no down in real estate loans for the rental business we have. [Note: NO WAY did our personal and business situation justify that....] I am blessed with a spouse with her head screwed on straight, and we only bought the four houses that cash flowed properly and fit into what was a rational budget for us.

    Since then, however, we’ve been liquidating our rentals because we’re tired of the hassles, but good management and being able to do most of the handyman stuff myself are making that work to the positive as well, which will leave some for forex once we get it all gone — taxes paid out of it, and all but our small personal home mortgage paid off, that is.

    We can’t leave out of the blame the government tinkering, especially the CRA, with all the gov’t guns pointed at the head of the banks if they didn’t make the stoopid loans to people who shouldna had ‘em. “Do it or else…but if it goes bad, we’ll extract shortfall from the taxpayers to cover the stoopid.” Why wouldn’t the bankers accept such a deal?

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