How Did We Get Into Such a Big Mess Anyway?

This week David Leonhardt wrote a really excellent explanation of how the relatively miniscule segment of the mortgage industry known as sub-prime lending has managed to turn our entire economy on its ear.

“It really started in 1998, when large numbers of people decided that real estate, which still hadn’t recovered from the early 1990s slump, had become a bargain. At the same time, Wall Street was making it easier for buyers to get loans. It was transforming the mortgage business from a local one, centered around banks, to a global one, in which investors from almost anywhere could pool money to lend.”

Of course we all know what happened next. Too many people received too many loans that they couldn’t repay. Which leaves us in our current dilemma:

“So firms are now hoarding cash instead of lending it, until they understand how bad the housing crash will become and how exposed to it they are.”

“The conservatism has gone so far that it’s affecting many solid would-be borrowers, which, in turn, is hurting the broader economy and aggravating Wall Streets fears.”

But fear not, there is at least one optimistic voice in the roaring den.

“The best way to overcome fear is to look at the long run. The typical homebuyer keeps a home for 10 years or more, so there is time for those who bought in 2005 and 2006 to weather the current decline in prices. Those who bought at the top are unlikely to see any windfalls from house appreciation, but they will not necessarily suffer from buyers’ remorse. Owning a home has its advantages: the deduction on mortgage interest is substantial and too much of a sacred cow to ever be repealed, and there is a certain security and satisfaction to owning your own home.”

And that’s exactly what we’ve been saying all along. When the stock market hits a blip no one comes out saying that as a rule, it’s smarter to bury your money in the back yard than to invest it. They recognize that these things rise and fall and suggest the best ways to make money or at least not lose your shirt while waiting out the downturn. The same is true for real estate. Right now is not a good time to sell if you don’t have to, but it’s a good time to buy if you can.

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