Interesting view and great data crunching. But I am amazed how one can write a long article purportedly about the causes of the 07/08 crisis without ever mentioning credit quality. By my impression, the prevailing view is that the crisis was caused by poor credit quality of some home buyers (I remember the term NINJA borrowers - no income, no job or assets). This was masked away in complex financial products (CDOs,...) that made it hard for buyers like banks to assess individual borrower quality and instead had them rely on (flawed) valuation models by rating agencies. The high ratings for these products allowed the market for them to balloon from a niche to a gigantic size that made it systemically important. When the first cracks started showing, worries about borrowers' credit quality turned into worries about banks' credit quality, leading to bank-run-like situations in the money markets, and ultimately the failure of banks like Lehman Brothers and others.
The article seems to start from a misleading claim, one that misses a crucial part of the picture, and that is much easier to refute than the full story. The data is still super interesting to see.
> caused by poor credit quality of some home buyers
Small detail but the wording here implies a causation, that it was the home buyers who were the makers of the crisis.
Whereas we now have ample evidence that it was the real estate companies and mortgage lenders who when faced with free money, became predatorial of people who had no capacity or understanding of the financials of becoming a home owner.
We can always argue that these were adults who have taken their decisions but again many of these people were promised pie in the sky and they believed it.
I don't disagree and think you're absolutely right for pointing this out, but I wouldn't claim (not that you did) that the bucket of those that were ill equipped to understand the financial responsibilities of owning a home is composed mostly of individuals with poor credit score that were taken advantage of by predatory actors.
Of course there were many (if not most) individuals that were unfortunately taken advantage of in this manner. But anecdotally and for what it's worth, all of the people I know impacted by the crisis were educated, financially savvy and secure individuals.
For them it wasn't a matter of owning a house or being homeless, no reason to lie on a mortgage application just to have a roof over their heads. They had good incomes and credit history. They could be approved without having to inflate applications or go with the ARM-heavy options. Instead they chose the interest-only, deluxe option.
I recall having conversations with many of these individuals about how they could afford these amazing places (along with the new convertible BMW) and how they tried to convince me that the interest-only option combined with increasing equity and the historical trend of property prices, yada... was a wise financial decision. How property is an investment, and they plan to eventually use their equity to buy more property. So on and so on. I can't remember all of the details bc it didn't really seem to make sense and sounded way too risky and optimistic.
What I do remember is being completely crushed hearing and seeing all of this and knowing I was priced out of the market unless I took on a similarly risky position. I accepted the idea that I would never be able to afford a house.
I was even more upset when I saw the way that most of these individuals were "bailed out". Sure they lost their homes, but at least they weren't financially ruined.
They have since improved their credit-worthiness and seemingly made better financial decisions, but my point is financially healthy individuals who knew better contributed to this crisis as well. They knew that the income they put on the application was inflated. They knew that the interest rates could change in the future and only paying interest was risky. They knew that a smaller, less expensive house was good enough. They knew that also buying that luxury car was exposing them even more.
Yes, you're right, we should be careful with the wording here. I would also blame the system, where Physics PhDs were paid to put enough math in the product presentations to convince traders that the AAA ratings (for products with substantially higher returns than usual for such ratings) were justified. Of course, the resulting transactions earned all sides huge individual cash bonuses (large enough to allow them to achieve financial independence if they could keep the scheme rolling for just a few years, regardless of whether their employers would go bust), which may arguably have contributed to their willingness to turn a blind eye to common sense.
poisoning securitized assets with people who are bad credit risks definitely happened. no need to ascribe individual blame to the borrowers, the mortgage originators are licensed professionals.
At what point do you think individual adults should be responsible for their own decisions?
“No capacity or understanding of the financials” makes it sound like these fully grown functioning adults had a learning disability. These people had access to the internet, books, libraries, financial services, and more. If these people were ignorant of the true costs it was willful ignorance.
Defrauded home buyers? Come now. It isn't as if lenders were submitting fraudulent paperwork with fake rates and then sticking homebuyers with the "real" rate after the fact. Home buyers were willingly signing documents with plain English terms, and this was happening in the information age.
Mortgages work differently in the fastest-rising areas of the US than most anywhere else, in that a borrower can have no equity or negative equity in the home… and just hand back the keys.
In the UK this involves a complex and lengthy bankruptcy proceeding. Honestly I think the US way is objectively better, but it massively changes the outcomes of how long someone will stay in a home that’s become a bad investment.
The article is also looking at the wrong numbers for rents. How much rents have risen is far less relevant than how many rent starts there are over mortgage starts. The first statistic tells you how much people are having to pay to live, the second tells you if there’s really a shortage of homes or not.
Some countries have implemented additional taxes on non-primary homes since the crash, but to my knowledge they’re not particularly punitive. I think this tax really is the solution (e.g. 5% value of the home in landlord tax per year).
Over here in the UK this period is described as "the credit crunch"
The folk memory describes the cause as banks loaning money to people who patently couldn't afford it, mixing those loans up with mortgages that had passed sensible credit checks. They then homogenised shit mix loans as high quality bonds.
All was fine, until the foreclosing happened (repossessions), suddenly the bond repayments weren't as good, and pop, everyone started questioning how good their investments were.
sure it was triggered by the american housing market, but it wasn't really a bubble, it was large scale fraud, combined by hubris and a ratings system that was/is corrupt of crushingly incompetent
The article seems to start from a misleading claim, one that misses a crucial part of the picture, and that is much easier to refute than the full story. The data is still super interesting to see.