December 14th, 2011
Econintersect: A new report from the Federal Reserve Bank of New York shows that speculators played a larger role than originally thought in building the housing bubble. An article by the Associated Press at MSNBC.com says the Fed report found that low-down-payment, subprime loans to buyers who bought multiple houses occurred far more often than had been previously recognized. The effects were most egregious in the states of Nevada, California, Arizona and Florida, but the same was seen in many other markets as well.
From the AP article:
More than a third of all U.S. home mortgages granted in 2006 went to people who already owned at least one house, according to the report. In Arizona, California, Florida and Nevada, where average home prices more than doubled from 2000 to 2006, investors made up nearly half of all mortgage-backed purchases during the housing bubble. Buyers owning three or more properties represented the fastest-growing segment of homeowners during that time.
"This may have allowed the bubble to inflate further, which caused millions of owner-occupants to pay more if they wanted to buy a home for their family," the researchers noted.
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.
The result was that millions of ordinary homeowners who were simply trying to put a roof over their head found that a crashing, over-heated market put them in negative equity positions just when the rest of their economic lives were also crumbling. Of course, many ordinary homeowners got caught up in the housing price boom mania as well, and some took on more house and debt than they should have. But the house flipping speculators made the boom and bust cycle much worse.
Source: MSNBC, Associated Press