A new report from researchers at the Federal Reserve Bank of New York focuses on the sharp run-up and subsequent collapse in housing prices during the 2000s.
It concludes that real estate investors who used mortgage credit to purchase multiple residential properties with the intent of flipping, or reselling them within a short period of time, played a larger role in fueling the housing bubble than previously recognized.
These investors, the Fed researchers say, helped push prices up during 2004-2006, but when prices began to head south, they defaulted in large numbers, which served to intensify the housing cycle’s downward leg.
Fed officials point out in their report that investors are more likely than owner-occupants to walk away from an underwater property. As such, lenders typically factor in that higher default risk by requiring larger down payments from buyers who acknowledge that they won’t be living in the house.
The expansion of the nonprime mortgage market during the 2000s, however, provided the perfect opportunity for optimistic investors to get low-down-payment credit, according to the report. “Buy-and-flip” investors, in particular, were able to make higher bids on houses, even if they had relatively little cash.
