Tuesday, December 13, 2011

The Role of Speculators in the Housing Bubble

I've been pointing this out for several years (as have many others) but even the lamestream media are now admitting it.  This December 12, 2011 Associated Press story in the Washington Post tells us something that is not surprising:
Researchers with the Federal Reserve Bank of New York found that investors who used low-down-payment, subprime credit to purchase multiple residential properties helped inflate home prices and are largely to blame for the recession. The researchers said their findings focused on an “undocumented” dimension of the housing market crisis that had been previously overlooked as officials focused on how to contain the financial crisis, not what caused it.

...
Investors defaulted in large numbers after home values began to drop in 2006. They accounted for more than 25 percent of seriously delinquent mortgage balances nationwide, and more than a third in Arizona, California, Florida, and Nevada from 2007 to 2009.

As a result, millions of homeowners saw their home values decline so that they were worth less than the original purchase price. Foreclosures skyrocketed as people couldn’t or refused to pay their underwater mortgages. Residential construction also languished, putting hundreds of construction workers in the hardest-hit states out of work.
Here in Idaho, there were realtors renting buses to take California investors around, some of whom were buying 30-40 houses purely on speculation that they would continue to rise in value--not even trying to rent them out.  It was very short-term thinking, with disastrous results for everyone.  So why were they doing it?  As the article points out, quoting from the head of the Las Vegas real estate trade group:
Paul Bell, president of the real estate association, said amateur investors were behind the soaring home values seen during the first half of the last decade, but noted those buyers were simply taking advantage of how easy it was to buy homes at the time because of questionable lending practices and government pressure on banks to promote home ownership.
“There was blame to go around for everybody,” Bell said.

3 comments:

w said...

I flew to HP Roseville (SAC) often during the 2005-2007 period and there were often one or more folks from CA (usually cocky young guys in their later twenties/early thirties) boasting to anyone who would listen, and especially if it was an attractive young female they were talking to, that they were on their way to/or from buying up houses in the Treasure Valley to make a killing in the property market and would be filthy rich in no time....

There were also some of our fellow Boise HP engineers spending their free time getting their realtor licenses during that time trying to get in on the action as it were...

Even some doctors and dentists, etc got into the game locally to build up their net worth...

Get rich quick schemes are just too tempting for many (I confess I was thinking about doing it as well in '06 & '07 but fortunately never had the time with my deliverable schedule in the MFP lab).

During that time I remember also often hearing on the radio investment programs guys calling in that were under 40 boasting that they were millionaires and already retired because of cashing in on the speculation bubble. Of course that makes everyone want to get in, but by that time the bubble was deflating or ready to pop....

Finally the shows like "Flip This House" were even trying to get Boise Realtors to work on TV episodes to promote how hot the Valley was (one Eagle realtor that runs a blog mentions it). Not sure if any episodes were ever made but the word was definitely out about the Valley as the next big thing for a time....

I guess if you could only get one ~1K sq. ft. ranch made in the 1950's on a postage stamp for $400K-$500K in CA (on average) or you could get 3 or more houses in Ada/Canyon for that much (though by the time I bought in '06 finding a sub $200K house in Ada was very hard (unless it was tiny and run-down) it was easy to see why many of the speculators came up here....

Of course once there were no more out of staters to buy up the houses and you had to actually sell the house to someone living here that is making at best a mid 30K range salary and since they can't afford to pay $300K for a house the bottom had to fall out as it did....

Will the values ever come back without CA people retiring and coming up here to live????

patrokov said...

Of course without the Fed money expansion, reduced underwriting standards at FNMA, and artificially low interest rates, the speculators wouldn't have gotten very far. It's easy to blame speculators because they are the most visible symptom.

w said...

No question there is plenty of blame to go around including those foolish enough to buy a house to live in during 2006 which is when I did so I have a share in the blame....