POP Go The Weasels
Robert Siegel told me (and plenty other people, and they weren't, I suppose, really his words, but some NPR staff writer's) yesterday that "to make a mortgage crisis, you've got to make a lot of risky loans to a lot of home buyers who are less than credit-worthy." I think that although risky lending has helped cause the current mortgage crisis, the above quotation is not true. Or, if risky lending is a necessary condition, it is at least not sufficient to explain our current crisis.
I wrote a post not long ago about economic bubbles that I think more closely reaches the heart of the matter. To make a mortgage crisis, what you really need is speculative buying. People have been buying homes over the last several years with the idea that the price of the home being bought will continue to rise, so that they may sell it (or get a cheap second mortgage for it, or otherwise accrue wealth on it) at a higher price down the road. Why would people be more interested in buying a product as the price goes higher, except by speculation? If hamburgers tomorrow all cost $50, burger inventories would fill up fast. This is the case of normal supply-and-demand pricing. Price naturally increases with demand (although I think this is more a flaw of human nature than most economists are comfortable letting on), and speculation means that demand starts increasing with price: a positive feedback loop. A bubble.
This loop can't go on forever, and all it takes to pop it are the first people on it who decide it's going to pop, so they hop off. At some point people realize the price has blown up way too high, and it's a mad dash to cash in that house at that highest price, because price and demand are both about to tumble. That's what's happening now (though not, local real estate agents assure me, in Austin).
So let's get back to Siegel's claim. I'm sure it is exacerbating our situation that many people were awarded loans that were too expensive for them to afford. (The story goes on to talk about a website that will, for a $55 fee, furnish pay stubs that "prove" the fee payer is a paid consultant to the website's company. The pay stub is then used to prove sufficient income for receiving a large loan. Many people doubtlessly pursued excessive loans, by any means necessary, on the speculation that as their house tripled in value, they would easily be able to pay off that loan. After all, as a friend of mine said to me a few months ago, the only risk-free investment is housing.) But the situation would still be bad even if everyone were able to pay off their mortgages. The trouble is they never intended to pay off their mortgages. Most of them intended to pass their mortgage off to somebody else at an inflated price.
And if the home buyer doesn't think about it too much, it's actually not morally disgusting. If he really thinks houses can do nothing but appreciate in value, then he isn't doing anybody a disservice by selling him a high-priced home. The new buyer can just sell it at yet a higher price down the road. Magical, isn't it?
In other news, the Turdlog is more than one year old. Twelve months of infallible information from a bespectacled scientist. Dear reader, you were wise to come here, and you leave even wiser.
I wrote a post not long ago about economic bubbles that I think more closely reaches the heart of the matter. To make a mortgage crisis, what you really need is speculative buying. People have been buying homes over the last several years with the idea that the price of the home being bought will continue to rise, so that they may sell it (or get a cheap second mortgage for it, or otherwise accrue wealth on it) at a higher price down the road. Why would people be more interested in buying a product as the price goes higher, except by speculation? If hamburgers tomorrow all cost $50, burger inventories would fill up fast. This is the case of normal supply-and-demand pricing. Price naturally increases with demand (although I think this is more a flaw of human nature than most economists are comfortable letting on), and speculation means that demand starts increasing with price: a positive feedback loop. A bubble.
This loop can't go on forever, and all it takes to pop it are the first people on it who decide it's going to pop, so they hop off. At some point people realize the price has blown up way too high, and it's a mad dash to cash in that house at that highest price, because price and demand are both about to tumble. That's what's happening now (though not, local real estate agents assure me, in Austin).
So let's get back to Siegel's claim. I'm sure it is exacerbating our situation that many people were awarded loans that were too expensive for them to afford. (The story goes on to talk about a website that will, for a $55 fee, furnish pay stubs that "prove" the fee payer is a paid consultant to the website's company. The pay stub is then used to prove sufficient income for receiving a large loan. Many people doubtlessly pursued excessive loans, by any means necessary, on the speculation that as their house tripled in value, they would easily be able to pay off that loan. After all, as a friend of mine said to me a few months ago, the only risk-free investment is housing.) But the situation would still be bad even if everyone were able to pay off their mortgages. The trouble is they never intended to pay off their mortgages. Most of them intended to pass their mortgage off to somebody else at an inflated price.
And if the home buyer doesn't think about it too much, it's actually not morally disgusting. If he really thinks houses can do nothing but appreciate in value, then he isn't doing anybody a disservice by selling him a high-priced home. The new buyer can just sell it at yet a higher price down the road. Magical, isn't it?
In other news, the Turdlog is more than one year old. Twelve months of infallible information from a bespectacled scientist. Dear reader, you were wise to come here, and you leave even wiser.
posted by john at
10:49 AM
1 Comments:
"to make a mortgage crisis, you've got to make a lot of risky loans to a lot of home buyers who are less than credit-worthy." That is true and one should not condemn the newsman for saying as such. That fact is necessary, and COULD be sufficient. There would be no mortgage problem if buyers could pay off their mortgages. Lenders should be checking to see if the borrowers can pay it. Borrowers also should not borrow something they cannot afford. So both are at fault. Your point is valid though, in that both sides are commonly overly optimistic to assume that home prices are going up. Many lenders and borrowers lend or borrow more than they really should because they assume they can just re-sell the house for more and pay off the mortgage. When prices don't go up, they're screwed. But you also have to think about the fact that much of the problem is in the "sub-prime" area. An assumption of mine is that that generally applies to those of low to medium income. I wouldn't think that people in that category would be buying "speculativly", so we're probably not talking all 2nd homes here. Maybe they just wanted to have their own home and actually weren't assuming the home price would go up (it wouldn't matter how much it went up if they wanted to stay there). So if they weren't assuming that prices were going up, then the housing bubble is not at fault. So maybe they just did their personal budget wrong or assumed they were going to get a raise but got fired instead. I've heard "there are 2 kinds of people in the U.S.: the rich and those about to be rich". Many assume that they're going to make it. So maybe the struggling wages Lenders assume that if they have to foreclose, they'll still turn out ok. There's also the factor of house price increase > wage increase as mentioned, which obviously leads to a larger % of people's income going into their homes. This is another factor that would cause more foreclosures as a result of the housing bubble (but not necessarily do to that bubble popping).
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