A warning on "easy lending on housing" · Transcript · BuffettMungerGPT

WarrenIt's obvious that the easy lending on houses causes more houses to be built and causes housing prices to be higher probably in the new field. Eventually, of course, if you construct enough new anything, you can have a countervailing effect. If you built way too many houses, you'd eventually cause a price decline. I'll give you a fanciful illustration. Let's just assume that Omaha had a totally constant population. No one was allowed to leave, no one was entered birth rate equal death rate, all of that sort of thing. So the population was constant, and nobody could build any more houses. We just passed a city ordinance to that effect. But every year, everybody sold their house to their neighbor. So first year, everybody sold their $100,000 house to their neighbor, and they both switched houses, and that was fine. And then the next year they agreed we were going to do it at $150,000. And you can say, well, how could that be? Well, we would all go to Freddie or Fannie and get our mortgages guaranteed for a larger amount. And somebody in New York or Tokyo or someplace would buy the Freddie or Fannie paper. And we'd have an influx of $50,000 per household. We'd all have the same number of houses. We'd all be living one house to a family. And we'd have marked up our houses. And we'd now have a bigger mortgage, but we'd have $50,000 more of income that year just to service. a little higher mortgage. And we do the same thing the following year for $200,000 and so on. Now that would be very transparent and people might catch on to the fact there was something funny going on in Omaha. But you can have an accidental aggregation of behavior that somewhat leads to the same effect. And if you keep marking up something, and in the process, the payment for the marked up price comes from someone else who feels they are bearing no risk because they've they've got the government guarantee in between, the money can just flood in and everybody feels very happy for a long time. And we don't have anything like the fanciful thing I've set forth in terms of Omaha. But we have certain aspects of that, I think, going on in the economy.