A recent article claimed house flippers, not banks or subprime mortgages, caused the housing crisis. I completely disagree, and I will tell you exactly why in this article. Admittedly, I am biased, as I have fixed and flipped houses before, during, and after the housing crisis. Although I am biased, I can still provide many more relevant facts as to who caused the housing crisis. I don’t claim that investors did not have a part in it, but the numbers do not lie when it comes to who had the biggest impact on the number of foreclosures in the United States. The article in question does not even properly describe what a house flipper is.
Why and how did the article claim that house flippers caused the housing crisis?
Here is a link to the article:
The article claims that there is a misconception that poor people and greedy banks caused the housing crisis. The article goes on to use the percentage of investor loans that were foreclosed on compared to subprime loans that were foreclosed on to “prove” house flippers were to blame. The article also discusses how people with higher credit scores borrowed more money and had higher default rates than those with lower credit scores. The article and the numbers they use are very confusing. Instead of looking at credit scores, it would be nice to simply see the number of foreclosures from investors versus owner occupants, but that data is hard to find. Here is one quote from the article:
“This would explain why, as the researchers put it, ‘the rise in mortgage delinquencies is virtually exclusively accounted for by real estate investors.’ The share of single-mortgage borrowers who couldn’t keep up on their loan payments barely budged between 2005 and 2008.”
I have found many statistics that contradict what this article is stating. I believe owner occupants and subprime mortgages had a huge part in the housing crisis and accounted for many more problems than investors did. I also think the article’s assumption that every investor is a flipper is simply wrong.
How did this article decide that house flippers were to blame?
The article cites two papers:
These two papers are an interesting read if not a bit difficult to get through. Neither paper concludes that house flippers were the cause of the housing crisis but rather that real estate investors had a larger part in the housing crisis than previously thought. This article seems to assume that every real estate investor is a house flipper. A real estate investor is routinely referred to as someone who has multiple loans in their name. While it is true that many investors caused a lot of problems during the mid 2000s, I think it is wrong to assume they were all flippers simply because they had multiple loans in their name. After all, many investors hold properties as rentals, and many home builders may be lumped into these numbers as well.
I did see why the article and papers shy away from using the total number of foreclosures for owner occupants and investors. The papers argue that many loans that were taken out as owner occupants were actually investors using owner-occupied loans for lower down payments and interest rates. This theory would make the total number of foreclosures between the two groups useless if enough investors were lying and pretending to be owner occupants. It is impossible to know how many investors lied about being owner occupants, but I am sure there were more than a few. I have no idea what impact that had on the number of foreclosures. However, to assume that house flippers solely caused the problems based on inexact data does not make sense to me.
What kind of numbers are available to determine who caused the housing crisis?
The article claims that subprime mortgage foreclosure rates did not change much during the housing crisis, which proves subprime owner occupant mortgages were not at fault. Here are some interesting facts about subprime mortgages before the housing crisis:
- Between 2004–2006, the share of subprime mortgages relative to total originations ranged from 18%–21% versus less than 10% in 2001–2003 and during 2007.
- In the third quarter of 2007, subprime ARMs making up only 6.8% of USA mortgages outstanding also accounted for 43% of the foreclosures which began during that quarter.
- By October 2007, approximately 16% of subprime adjustable rate mortgages (ARMs) were either 90-days delinquent or the lender had begun foreclosure proceedings, roughly triple the rate of 2005. By January 2008, the delinquency rate had risen to 21% and by May 2008 it was 25%.
Thank you to http://www.stat.unc.edu/faculty/cji/fys/2012/Subprime%20mortgage%20crisis.pdf for these stats. They would seem to show that the total number of subprime loans doubled right before the housing crisis compared to before and after the housing crash. While the percentage of subprime loans go into foreclosure may not have changed significantly, the total number of subprime loans going into foreclosure increased greatly due to more loans being originated. ARMs also played a huge role in the number of foreclosures, and lenders used ARMs to get under-qualified borrowers a mortgage they could not afford.
Here are some more interesting statistics:
- In 2005, foreclosure rates for non-owner occupants exceeded those of owner occupants and remained higher throughout the sample period. For the years 2005–2007, foreclosure rates for non-owner occupants were 12.8 percent, 20.0 percent, and 17.4 percent respectively. During the same years, the foreclosure rates for owner
occupants were 12.3 percent, 18.7 percent, and 15.1 percent, respectively.
Thank you to: https://www.richmondfed.org/-/media/richmondfedorg/publications/research/economic_quarterly/2012/q2/pdf/robinson.pdf for those numbers. These stats would make it seem like investors did foreclose at a much higher rate than owner occupants. However, you have to remember that owner-occupant loans were taken out over investor loans at rate of 5-to-1at the peak of the pre-boom years. In most years, owner occupants take out loans at a much higher rate compared to investors. The total number of loans being foreclosed on is much more important than percentages because so many more owner occupants get loans than investors.
Were the real estate investors who were buying houses before the housing crash even flippers?
I already discussed why I think flippers should not be exclusively blamed for the housing crash and why not every real estate investor is a flipper. However, what about the people who bought houses assuming they would go up in value? Are they even flippers? I do not think someone who buys a house, plans to hold it for a year, and then sells it for a profit based on price appreciation is a flipper. I would define that real estate investor as a speculator. I flip from 10 to 30 houses per year and have already flipped 20 this year. I never buy a house thinking I will make money from appreciation. I make my money by getting a great deal or by making improvements to the house. I flipped before, during, and after the housing crisis using this strategy. I don’t think the article is talking about flippers at all. I think they’re talking about speculators.
Who was to blame for the housing crash?
The article assumes that most people blame those who borrowed money with subprime loans as the cause of the housing crash. I would completely disagree. Yes, they took out loans that were based on poor financial sense, but can you blame them? Most people do not know how a lender qualifies someone for a house. If a lender tells someone they can qualify for a $300,000 house, most people will look for a $300,000 house and not think about the actual financial implication of that loan. They will trust the lender to give them good advice. They will trust that the lender is not putting them in an ARM loan that will blow up in a year or two. I do not blame the borrowers; I blame the lenders. There were some investors and other people who did take advantage of loose lending guidelines to commit fraud and strategically default. The investors who committed fraud were not numerous enough to cause the entire housing crash, and they were not flippers for the most part but rather were builders or investors who were refinancing.
The article in question also uses the theory that there were many more real estate investors than previously thought because they pretended to be owner occupants. This could be true, but again, the banks’ loose lending guidelines let that take place. Lenders also provided investors low down payment options, which is what caused the huge increase in the number of loans to investors. Stated-income loans were also easy to get, and I know this from personal experience. Banks allowed investors to speculate on houses much easier than they could before or after the housing boom.
Real estate investors definitely played a part in the housing crash. More investors were getting loans, and a higher percentage of investors foreclosed on loans than before or after the housing boom and crash. There were still many more owner occupants getting loans and being foreclosed on. Assuming that every real estate investor is a house flipper is also incorrect. I do not even think it is correct to assume that every investor speculating on housing prices was a flipper. A much more accurate title and conclusion for this article would have been real estate investors played a bigger part in the housing crash than previously believed, but that is not nearly as catchy of a title.