Investor Speculation and the Housing Bubble

December 16, 2011

The recent financial crisis -- the worst in 80 years -- had its origins in the enormous increase and subsequent collapse in housing prices during the 2000s.  The New York Federal Reserve has taken advantage of unique data to suggest that real estate "investors" -- borrowers who use financial leverage in the form of mortgage credit to purchase multiple residential properties -- played a very important role in the housing downturn by defaulting in large numbers.

  • Investor shares of home purchases roughly doubled between 2000 and 2006.
  • At the peak of the boom in 2006, over a third of all U.S. home purchase lending was made to people who already owned at least one house.
  • In 2007-2009, investors were responsible for more than a quarter of seriously delinquent mortgage balances nationwide.

The effects of investors on the housing bubble are even more pronounced in those states that faced the harshest effects of the bubble.  Arizona, California, Florida and Nevada had the most severe housing downturns, and they also had some of the highest activity of home investors.

  • While investors were responsible for one third of all home purchases nationwide in 2006, this number is approximately 45 percent in these four states.
  • Furthermore, investors with three or more properties constituted 20 percent, which is triple their share from 2000.
  • In the years following the bubble burst, investors were responsible for more than a third of delinquent balances in Arizona, California, Florida and Nevada.

The impact of investors on the housing market can be understood by taking a closer look at their basic strategy.  By "flipping" a house, an investor attempts to buy it and sell it as quickly as possible while maximizing profit.  Because they have little intention of holding onto or living in the house in the long term, they often accepted high interest rates on mortgages in order to minimize down payments.  However, when the housing market dried up and investors were no longer able to clear houses, they were left with unforeseen interest payments that were too high to be kept up with.  This caused a disproportionate number of investors to become delinquent and for their flipping to contribute strongly to the housing crisis.

Source: Andrew Haughwout et al., "'Flip This House': Investor Speculation and the Housing Bubble," New York Federal Reserve, December 5, 2011.

For text:

http://libertystreeteconomics.newyorkfed.org/2011/12/flip-this-house-investor-speculation-and-the-housing-bubble.html

 

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