Fed Study Blames Flippers For Housing Mess

A non-partisan study commissioned by the New York Federal Reserve Bank sheds new light on the home mortgage catastrophe that cratered the economy and spawned a government bailout of the banking industry.

Although the study has attracted scant media attention, the blockbuster report casts serious doubt on conventional wisdom about the cause of the housing market collapse.

Until the Fed released its data December 5, it was widely acknowledged both in the media and in Washington that Wall Street's shenanigans were largely responsible for the worst financial crisis in 80 years. While bankers are certainly not blameless, the report fingers housing speculators as the chief culprit.

The exhaustive study ordered by the New York Fed is entitled, "Flip This House: Investor Speculation and the Housing Bubble."  Using unique data, the authors of the report found that speculators played a "previously unrecognized, but very important role" in the destruction of the housing market.

In analyzing volumes of data, the report documented how investors helped push up real estate prices during the period from 2004 through 2006.  When prices plummeted in 2006, millions of mortgage holders defaulted, contributing to the steep downward trend in prices and property values.

Real estate speculation is not a new phenomenon.  However, the difference this time was that policies in Washington encouraged lax lending standards that fueled the growth of sub-prime mortgages. This enabled even credit-challenged borrowers to load up on risky debt.

The report spells out how speculators acquired properties with little or no down payment with the purpose of selling quickly to reap a capital gain.   This practice, called "flipping," was aided and abetted by mortgage companies that parcelled out loans without traditional due diligence.

These unscrupulous speculators began acquiring multiple homes in a mad race to maximize their profits.  The New York Fed's study shows that 35 percent of borrowers who purchased new homes in 2006 owned two or more properties.

In the four states with the worst default rates, speculation was rampant.  The Fed data reveals that 45 percent of borrowers who purchased homes in Arizona, California, Florida and Nevada in 2007 owned two or more homes.

Looking back decades, the study found that the share of housing sales by multiple property owners has never been as high as it was during the period from 2006 to 2007.  This helps explain why defaults soared when  borrowers saddled with expensive debt were unable to quickly unload their homes.  

This speculative buying spree also contributed heavily to spiraling housing prices by reducing the available inventory of properties.  In addition, excessive borrowing helped drive up interest rates for all prospective home buyers, including those with no interest in flipping their investment. 

While some have conceded speculation contributed to the housing mess, it was seen as only a minor cause.  Wall Street shouldered most of the blame because it repackaged the mortgages and sold the assets to investors.  However, if the underlying mortgages had been solid, there would have been no housing crisis and no need for a bailout.

That fact has been lost on the Obama Administration and the media. They prefer to lay the blame at the feet of Wall Street because it plays better with voters, while turning a blind eye to the role of greedy individual investors who gamed the system.

That's the reason the mainstream media has ignored the New York Fed study.  The findings get in the way of the media's narrative to make Wall Street the scapegoat for wrecking the economy.