Four years after the housing bust, researchers at the Federal Reserve Bank of New York are putting some of the blame on real estate speculators, saying they played a key role in blowing up the housing bubble that eventually popped, causing home prices to tumble nationwide.
In a report titled “Flip This House: Investor Speculation and the Housing Bubble,” four researchers claim borrowers who owned multiple homes for investment purposes played a key role in running up national home values right before the 2007 housing meltdown.
In fact, the report found a third of U.S. home purchase lending in 2006 was issued to borrowers who already owned property. In California, Florida, Arizona and Nevada, investors made up 45% of the 2006 transactions, suggesting the deep pain in these markets was rooted in excessive levels of real estate speculation.
“In 2006, Arizona, California, Florida, and Nevada investors owning three or more properties were responsible for nearly 20% of originations, almost triple their share in 2000,” the study said.
The report describes these investors as over-leveraged borrowers, consuming large doses of non-prime debt with high interest rates and low-down payments to fuel their appetites for quick acquisitions that could be flipped for profit.
What these investors created was an insidious cycle, where their excessive buys pushed prices higher for all buyers. When the bust came, these overleveraged house flippers escaped by abandoning their second liens, while innocent homeowners ended up underwater on their mortgages.
The report – which was filed by Andrew Haughwout, Donghoon Lee, Joseph Tracy and Wilbert van der Klaauw with the New York Fed Bank – puts the blame mostly on speculators operating in the 2004-to-2006 time span.
The authors of the report claim many of the investors may have falsely stated an intention to live in the homes while applying for cheap credit.
Either way, the report’s authors see a need for housing policy to address the issue of excessive leverage and speculation to curtail similar trends in the future.
“In the 2000s, securitized nonprime credit emerged to allow leverage to increase, with effects that extended far beyond this sector, including spillovers from defaulted mortgages to the value of other properties. Effective regulation of speculative borrowing, like what is being attempted in China today, may be needed to prevent this kind of crisis from recurring,” the report concluded.