Wednesday, May 3, 2017

Housing: Part 224 - Follow up on House Flipping

Here is a post at the New York Fed about investor buying with some annual data.  Investor buying did begin to grow somewhat in 2003 and 2004, picked up more in 2005, at the height of the boom, and then was at its strongest in 2006 and 2007.

Here is a chart from the post.

This shows a little bit of an uptick in investor buying earlier than an uptick in google searches for "house flipping" showed up in the previous post.  But, even here, investor buying is a lagging factor.  Here are home prices in Contagion cities during the same time frame (annual, end of period levels).

Prices had generally peaked basically at the end of 2005.  But, the peak times for investor buying were 2006-2008.  Keep in mind that homeownership peaked in 2004, by 2005 first time homebuyers were in pretty steep decline, and by 2007, the ownership rate in general was declining sharply.  It makes sense that investor buying would come in as a result of that.  You're going to live somewhere, and someone has to own it.

Now, it is true that a lot of money was flowing out of the Closed Access cities, and the table was set in the Contagion cities for a speculative bubble - large inflow of migrants, some who were renters and some with large windfalls from sales of Closed Access real estate.  There were clearly short term fluctuations in Contagion markets that were volatile.  You could even call them a "bubble".  They have a completely different signature from the Closed Access markets.

And, while I would defend the social value of owner-occupier loans with low down payments as a way to broaden financial access to ownership, there isn't such an argument for low down payment investor buying.  Regardless of how much these loans pushed up prices in 2004 and 2005, they were clearly poised to increase volatility downward as the markets collapsed.  It seems reasonable that we should not have institutions that are set up to encourage this sort of borrowing.  (On the other hand, what happens in 2006 if this investor market isn't there to support housing markets where the owner-occupier market is collapsing.  They probably increased volatility and defaults in 2007 and 2008, but they were probably stabilizing markets in 2006.)

But, all that being said, the investor market looks like a market that was growing to replace a collapsing owner-occupier market.  By 2005, according to American Housing Survey data, there was both an increase in existing owners shifting to renting and a decrease in existing renters shifting to owning.  Of course investors will have to fill the gap there.

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