Blame for the housing crisis of recent years has mostly been directed at subprime mortgages, over-eager lenders and home buyers purchasing properties they ultimately could not afford.
But a new report asserts that significant blame must be shared by investors who speculated on properties they intended to “flip” — buy and sell quickly at a profit — rather than live in.
On the website of the Federal Reserve Bank of New York, four co-authors write that they “present new findings from our recent New York Fed study that uses 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 previously unrecognized but very important role” in the housing crisis.
According to that study, more than a third of all home purchase lending in the United States at the peak of the housing boom in 2006 was made to people who already owned at least one house.
In the four states where housing prices have had the biggest downturn — California, Florida, Nevada and Arizona — the investor share was nearly half, 45 percent.
In those four states, investors owning three or more properties accounted for nearly 20 percent of all mortgage originations, nearly triple their share in 2000. Overall, investors’ share of home purchases roughly doubled between 2000 and 2006.
And in the years following the bursting of the housing bubble, investors were responsible for more than a third of delinquent balances in the four states.
The authors point out that because “flippers” did not plan to own the properties they bought for very long, they were most interested in loans with small down payments and were therefore willing to accept mortgages with higher interest rates.
“Investors were far more likely than owner-occupants to use nonprime credit to make their purchases,” the authors observe.
But when housing prices began to tumble and flippers could no longer recoup their investment, they were saddled with high interest loans they could not afford to pay. Many simply walked away from their properties, allowing them to go into foreclosure and adding to the supply of vacant homes on the glutted market.
“We conclude that investors were much more important in the housing boom and bust during the 2000s than previously thought,” the authors conclude.
Referring to new regulations in China limiting the number of homes an individual can own, intended to rein in soaring housing prices in major cities, the authors add: “Effective regulation of speculative borrowing, like what is being attempted in China today, may be needed to prevent this kind of crisis from recurring.” http://news.newsmax.com/?Z6I6asS7.eAEuriLvwRWDjJSDXrktJR1Z