What Happens if We’re Wrong?

by Peter L. Bernstein – NYT

IN 1995, home prices in the United States rose by 1.7 percent. They kept climbing over the next 10 years at an accelerating rate. The climax was in 2005, when the increase was 15.7 percent, putting home prices at more than double their 1995 level. Except for the early years after World War II and during the great inflation of the 1970s, home prices in the United States had never doubled in the short space of 10 years.

This amazing development could not have occurred without one widely held assumption: that home prices could only go up. If more people had recognized that, as in the past, home prices could also go down, buying a home would have appeared much riskier. Few, if any, lenders would have issued mortgages with minuscule down payments, and there would have been no outbreak of liars’ loans or complex financial paper bought by institutions as a matter of faith in questionable triple-A ratings. The banking system would not be in such a mess and the world economy would be on sounder footing.

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About Peter L. Bernstein

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