This was an extreme in the belief of the housing market never going down. We know all these stories from Mr. Lewis’s book and the movie that followed. Why did the incentives eventually change, despite the evidence that could be seen long before?
Incentives did broadly change. Bank CEOs went from wondering how much money they were making, to whether or not they would survive. Investors went from being as long real estate as they had ever been on borrowed money, to walking away from homes at record levels and sending housing into a depression. To put into the words of a contrarian investor, incentives pivoted from greed to fear.
Cole Smead, CFA, is president of Smead Capital Management.