Researchers at the Federal Reserve Bank of New York have been diligently looking for who and what caused the housing bubble. After much consideration, the Fed economists find that investors who already owned a home but were buying for speculative purposes caused home prices to skyrocket.
The Washington Post reports,
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.
And, “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.
So forget about cheap interest rates, expanded loan programs from Fannie and Freddie to put everyone in their own home, and Wall Street’s embracing of mortgage securitization. Nope, it was those darn flippers.
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Yeah, just look at this guilty mug. Guilty!
I used to love that show when I was a kid. Don’t blame it on him, he only helped people. Say it ain’t so. It’s not his fault!
But flippers would only invest if they thought the endeavor would be profitable; i.e., if the expected returns on the renovations exceed their cost. There’s no denying that improving houses’ amenities and appearance would increase their cost, but to assume that this alone can create upward pressure on housing prices is ludicrous.
Maybe if the cheap credit flowing into the housing market hadn’t been available, house flipping wouldn’t have continued to be profitable far after its usefulness as a quality-improving tool. Once more we see the Fed claim that a symptom of monetary policy is the cause of a crisis: incredible.
And where or how did the speculators obtain money at cheap enough prices to speculate on said homes? Keep digging boys, you’ll find the source of the cheap money eventually.
This conclusion of this report is analogous to a Fire Marshall telling a victim of a house fire that their house was burned down by fire.
Look at the screen, look at those evil speculators. But don’t look behind the curtain. There is nothing to see here but the trillions of dollars created by the Fed funneled into housing via large banking institutions.
So you could buy a house for $300K, then put $25K into it, and sell it later that year for $400K, BUT you weren’t supposed to do that even if everyone else was and the bank was calling you daily asking you to do it. You just shouldn’t do it, because it’s greedy or wrong or something. I mean why do you want easy money anyway?
Always the thermometer and never the fever.
It was the evil speculators!
ISn’t it annoying how many times we hear this basic “altruistic” bashing of “greed” or “selfishness”? Rand’s explicit praise doesn’t make it always easy for free-market apologists either (please check this one on Rand: http://www.elephantjournal.com/2011/11/stephen-colbert-suggests-a-few-new-yoga-poses-inspired-by-lululemons-promotion-of-ayn-rand/)…
“Selfishness” thus ends up being the explanation of the street for (all) the crisis. In fact we are not so far from the truth I believe, but unfortunately the explanation lacks some psychological depth. The real psychotic disease – which would probably reconciliate all truth-seekers – is called ego-centrism, not selfishness.
Let me just quote wikipedia authors: “In psychology, Egocentrism is defined as:
the incomplete differentiation of the self and the world, including other people,
the tendency to perceive, understand and interpret the world in terms of the self, and
being over preoccupied with ones own internal world.”
whereas greed and selfishness is a merely subjective and therefore more a manipulative concept (cf “excessive concern”) as Wiki authors put it:
“Selfishness (or self-serving) denotes an excessive or exclusive concern with oneself, and as such it exceeds mere self interest or self concern. In so far as a decision maker knowingly burdens or harms others for personal gain, the decision is selfish. “
I don’t take kindly to being called a free-market “apologist” because a free-market is much akin to a state of nature, whereas interventionism is active disruption by coercing market actors, hence the burden of proof (in a sane world) would be on interventionist’s heads and not on my own.
here’s the report: http://www.newyorkfed.org/research/staff_reports/sr514.html (link to 55 p pdf)
here’s the NY Fed blog summary: http://libertystreeteconomics.newyorkfed.org/2011/12/flip-this-house-investor-speculation-and-the-housing-bubble.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+LibertyStreetEconomics+%28Liberty+Street+Economics%29
Once again the speculators ruined communism for the rest of us.
I personally know a speculator who invested heavily during the highest period of “flipping”. The speculator is exactly what the word means. He or she buys a house or condo, which is 90% of the time already in foreclosure, negotiates a deal with the bank or mortgage company (who is always most anxious to get rid of the property), invests their own money and time in the repairs and/or remodeling and sells hopefully at a decent profit. Some banks will offer creative financing with a short time span on the loan during the remodeling construction. It seems to me that the culprits were most likely the banks who made the loan to the person who went into foreclosure in the first place. Maybe there were just not enough speculator/flippers around to soak up all the debris left after the banks collected all the up front “closing costs” and a few years of up front interest from the first mortgage holder. Maybe the speculators were just unable to soak up all those property bad loans that were made initially and that profits were already taken by banks.
Katharine Harrison
Yes, if the Fed/Fannie/Freddie had made its all-too-easy money available only to the 60% of the market who bought houses to actually live in, and had not granted its easy-credit to the 40% of the borrowers who were speculators, then the inflationary effects of this artificial credit expansion would have been, oh, something like 40% less severe. Or 40% slower, maybe.
But it still would have happened.
But then, we also have to assume that if the government turned off the tap to the 40% of borrowers who comprise the evil speculator class, then speculators would simply have found another way to get a hold of the easy Fannie/Freddie money. They would have moved in (or pretended to) and speculated serially. Or they would have used shills to borrow the money. Or they would have just lied about not owning another property, by putting their true residence into some kind of corporation or trust.
Let’s say that half of the speculators would have figured out how to do these workarounds. Which is conservative, since at the time of the frenzy, it was in the interests of the retail banks, Fannie/Freddie and the brokers and the realtors to find a way to keep the money flowing. Everyone wanted to keep it going.
So, if the government had cut off supplying speculators with easy credit, that 40% of the borrowing market would really have been reduced to maybe 20%. Which means that the bubble would have grown at 80% of the size and pace that we actually experienced.
But it still would have happened.
But then, we also have to consider that private non-Fannie/Freddie lenders would have still tried to service that 20% of the borrowing market that could not qualify for easy government money. After all, when the bubble is being inflated by the government, prices are still rising, which means that private lenders find that speculators are far more attractive and profitable than they otherwise would be. Even with a bubble growing at 80% of its potential rate, that’s a lot of bubble, and the private lenders would want to get in on it, even though the risk is higher doing it privately.
So, let’s say that half of the 20% of the speculator market having been cut off from government money, and instead gets serviced by private lenders who are riding the Fannie/Freddie bandwagon.
That leaves a bubble that would have grown at 90% of its actual size and rate.
So, if Fannie/Freddie had adopted a policy aimed at freezing out the eeeeeevil speculators, it would have resulted in roughly a 10% true reduction in speculation-induced bubble inflation.
Brilliant.
Research by the Federal Reserve of NY.
Like Frank’s analogy that the Fire Marshall telling the victim their house was burned by fire, it’s the arsonist doing the ‘investigation’.
The Real Estate Association president seems to get it, laying the blame on “…government pressure on banks…” and identifying investers (speculators) as key to improving neighborhoods in the aftermath.
Mortgage securitization is several decades old.
As with most things, there is a rational explanation.
Banks used to hold jumbo loans in their own portfolios. Basel capital requirements made it more profitable to securitize and sell the loans, retaining only the servicing fees.
When the Fed lowered interest rates to close to zero, fixed income investors (such as pension funds) had no safe harbor to invest in, (such as Treasury Instruments). So there was a ready market for AAA rated mortgage backed securities.
No need for any conspiracy theory to explain all this – just a natural consequence of Fed interest rate policy and bank regulation – a standard Austrian explanation is all that is required.
It’s obvious that the surge in housing prices came from a surge in demand, and speculators were certainly a portion of demand in the housing market. How big, I don’t know, but I don’t subscribe to a religion that requires me to outright dismiss any hypothesis that the free market produced an undesirable outcome.
Brandon,
I think you’re confusing a freed market with a manipulated/interventionist market, which is not free by any force of the imagination. It’s a market affected by politically expedient policies that distort and pervert market signals.
It’s interesting to me how often we want to condemn the nature of others (be it so-called greedy speculators or lazy welfare recipients) because of their response to these distorted economic signals.
It’s like blaming the dog for being fat because it eats. The dog is only fat because we feed it. In nature, it’s not fat. Resources are not easily accessible and the dog has to exert much energy to acquire them. The same is true in a freed market. There really is no excess to get fat. Resources are utilized efficiently.
Of course, unlike the dog, the overfeeding (loose money policies, fractional reserve banking, draconian business regulations, etc.) are having devastating effects on millions of people.
So Brandon, don’t hate the free market (it doesn’t exist) and don’t hate the poor, rich, or middle class for how they respond to distorted market signals…there is only one true enemy of the people…it’s called the State.
Demand means more than desire. Desires are infinite. Resources are finite.
Demand means desire plus the ability to pay for it plus the decision to forgo buying every other thing you might otherwise buy with your money.
There was a “surge in demand” for housing because the government’s financial cronies created the illusion that people had the ability to pay for more housing than they actually could. That’s what “artificially easy credit” means.
Increasing demand meant increasing prices. Consistently rising prices attracts speculators, who profit by knowing when to buy, hold, then sell.
And what do you mean by “undesirable outcome”? Who gives a damn what kind of “outcome” you desire? Really — why does it matter at all? What possible significance could your desired outcome possibly have? How is it remotely more important than the outcome that any other person on earth might desire instead?
Your attitude, that your desired outcome ought to matter somehow, is like saying “I’m not going to subscribe to this whole ‘stealing is wrong’ idea. What if not-stealing that Bentley I have my eye on is an undesirable outcome? What’s more undesirable than not-having such an awesome car for free?”
Is the fact that you achieve a “desirable outcome” (getting a Bentley you don’t have to pay for) really supposed to matter?
What about all the “desires” of all the people who would have liked to buy a house priced at $50,000 rather than $250,000? Because that’s what the government’s easy-credit system did — drove up prices, by several multiples.
They did the same thing to the price of college. Easy loans –> skyrocketing prices.
To the people who are the beneficiaries of this kind of government-sponsored largesse, I am sure that skyrocketing prices are seen as “desirable.” To the people who have to pay for them, it’s pretty safe to say the outcome is “undesirable.”
But, hey, stick to your radically independent philosophy there, Maverick. We wouldn’t want you to jump to any conclusions about what’s right and what’s wrong.
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