Investors Played a Major Role in Today’s Housing Crisis
Posted on March 9, 2010
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What has been overlooked by many people is the key role that investors and speculators played in creating the foreclosure crisis that lead to the collapse.
A 2005 survey by the National Association of Realtors (NAR) found that “in 2004, 23% of the 7.7 million existing residences sold throughout the country were purchased as investments rather than to be owner-occupied.” This was up 22% from 2003. Later surveys have revealed that in the three peak years of the house price bubble, investors bought 28% of all existing homes sold in 2005, 22% of all those sold in 2006, and 22% of those sold in 2007. This means that during period between 2004 and 2007, roughly 7 million speculators bought existing residences as an investment, not to be lived in.
Speculative investing was mainly concentrated in 20 major metropolitan areas including Los Angeles, Phoenix, Chicago, New York, Miami, Las Vegas, and Orlando. According to monthly sales figures detailed on trulia.com, “In Chicago alone, an incredible 600,000 residences changed hands during the peak years of 2005-2007. The average price per-square-foot for homes sold in Chicago is now down 36% from the 2007 peak, again according to trulia.com. As a result, nearly all of these buyers are now underwater because the outstanding mortgage debt is actually greater than the value of the property.
Soaring home prices enabled many speculators to buy investment properties. The 2005 NAR survey had found that, “In 2004, 30% of investors pulled the equity out of their residences through refinancing or a home equity loan in order to purchase an investment property. Refinancing soared in the three peak-investing years between 200 and 2007 and Freddie Mac figures show that homeowners took out a total of $820 billion from their primary residences from refinancing during these those three years. Thus, it is safe to say that a sizeable percentage of these homeowners used a portion of this cash to purchase one or more investment properties during that 3-year period.
Although the overwhelming increase in foreclosures since 2007 has been well documented, it’s important to note that a major factor in the foreclosure crisis is the role of underwater investors who are defaulting on their mortgages in large numbers. In as early as August 2007, the Mortgage Bankers Association reported that” Investors accounted for 32% of all prime mortgage defaults in Nevada; 25% of defaults in Florida, 21% of defaults in California, and 16% for the nation overall. The real estate research firm, Applied Analysis, found that roughly 60% of all foreclosures in Las Vegas in 2007 were on residences owned by investors. Statistics revealed by other research groups stated that 60% of 15,000 foreclosure filings in New York City during 2007 were on two-to-four family houses and multi-family buildings owned by investors. The St. Petersburg Times ran a 2009 article which stated that 44% of the 11,967 residential properties foreclosed in 2007-2009 in Hillsborough County, Florida were owned by investors who didn’t live in these homes.
There is plenty of evidence that the likelihood of an investor defaulting on his/her mortgage depends upon just how far underwater their investment property is. The rising default rate clearly suggests that if home prices keep dropping, a continually-expanding percentage of the millions of investors who bought properties during the peak years between 2005 and 2007, will in fact default.
The important question, now, is whether or not home prices will continue to drop. We know that sales of foreclosed homes in 2008-2009 were a major factor behind the slide in prices, so will foreclosures begin to moderate at any time in the near term? Doubtless, the single most important factor in how likely a homeowner is to default is whether the home was purchased or the mortgage refinanced during those peak years between 2005 and 2007. The California Foreclosure Report, states that 91% of foreclosed homes in the state sold by banks in September 2009, had mortgages that were originated between January 2005 and December 2007.
Because home prices have declined sharply from their peak in every one of the 20 major metropolitan areas which experienced the most speculation, the vast majority of the roughly 5.2 million existing homes purchased by investors and speculators between 2005 and 2007 are now seriously underwater. Worse still, practically 100% of investment properties purchased in 2008, are underwater as well.
Current foreclosure filings are highly concentrated in the 20 major metropolitan areas which had the most speculation by investors between 2004 and 2007. About 53% of the 938,000 foreclosure filings announced by RealtyTrac, the company that keeps such statistics, during the third quarter of 2009, were recorded in these major metropolitan areas.
It’s not a pretty picture!