Sunday, January 10, 2010

The Twin Real Estate Meltdowns

There is a narrative – especially prevalent in Utah – that the residential real estate bubble and collapse was the result of misguided policies to encourage people who could not afford homes to buy them anyway.

I think this entire narrative is correct, but I think it is overstated.

The reasons are summarized by Megan McArdle in her blog post that links to her article entitled “Capitalist Fools” in The Atlantic:

Yet we can't blame this on predatory lenders tricking the unsophisticated into unwise loans, because these were basically all professionals.  Nor can we argue that banks were willing to write toxic loans because they were just going to sell the garbage off to investors; a much smaller percentage of commercial mortgages were securitized (though that percentage did increase as the bubble inflated).  And we certainly cannot blame them because they "should have known better" than their borrowers, who usually had more experience than the banks in pricing commercial real estate.

Then there’s this graphic from Paul Krugman:

Click through the above link if you need to (I’m not sure the whole graphic will show).

I have a one caveat and one implication.

The caveat is that the commercial real estate bubble is lagging behind the residential real estate bubble (because outlying subdivisions get built before the neighboring strip malls): if it doesn’t pan out the way that residential real estate has, then the collapse is a different thing than the bubble itself (and will need a different explanation).

My implication is that I’ve played down in class the view that low interest rates were a cause of problems. But … this is exactly the sort of common finding across different markets we’d expect to see if interest rates were a major problem.

No comments:

Post a Comment