Investors seeking to "flip" homes for quick profits played a
significant role in driving up home prices during the housing
bubble and their subsequent collapse, economists at the New York
Federal Reserve have concluded.
Investors took advantage of the availability of subprime credit
to buy multiple properties with little or no money down, the
researchers found, driving up the price of real estate in general.
When prices fell, these investors began bailing out by defaulting
on their loans, accelerating the rate of decline and feeding the
"Optimistic investors - speculators - used low-down-payment,
nonprime credit to place highly leveraged bets on the housing
market, perhaps facilitated for some by reporting an intention to
live in the house," the report said. "Because they didn't have to
put much money at risk, these investors were able to continue to
buy housing even as prices rose further."
The report notes that economic models and conventional wisdom in
the mortgage business hold that investors will quickly default if
home prices enter a persistent fall, which is exactly what happened
beginning in 2006.
Investors tapped subprime credit
At the peak of the housing boom, over one-third of all home
purchase mortgages were made by people who already owned at least
one house, according to the report. That figure rose to 45 percent
in the four states where the boom-and-bust was most pronounced -
Arizona, California, Florida and Nevada.
Investors were also found to be considerably more likely to use
subprime credit than owner-occupants were, which the researchers
attributed to a desire to avoid tying up their money in down
payments. At the peak, some 25 percent of buyers with three or more
homes were using subprime credit, compared to 15 percent of owner
Higher defaults among buyers of multiple homes
Ironically, borrowers with multiple mortgages started out being
better credit risks and less likely to become seriously delinquent
on their loans prior to 2006, but made up a disproportionate share
of defaults once the downturn hit. From 2007-09, borrowers with
multiple mortgages accounted for more than one-fourth of all
seriously delinquent home loans nationally, and more than a third
of the total in the four main boom-and-bust states.
The report's authors say the results suggest that speculative
borrowing by investors played a greater role in the development of
the housing bubble and its subsequent collapse than had been
previously realized. The four authors, all economists with the New
York Federal Reserve, published their report this week.