A new paper from Atif Mian and Amir Sufi offers some insights on the role of speculative home buying in the housing boom.
Credit supply expansion fuels housing speculation, generating a boom and bust in house prices. U.S. zip codes more exposed to the 2003 acceleration of the private label mortgage securitization (PLS) market witnessed a sudden and large increase in mortgage originations and house prices from 2003 to 2006, followed by a collapse in house prices from 2006 to 2010. During the boom, cities with higher PLS-market exposure were more likely to see a large increase in house prices despite substantial new construction; these cities experienced a severe bust after 2006. Most of the marginal home-buyers brought into the housing market by the acceleration of the PLS market were short-term buyers or “flippers.” These marginal buyers had lower credit scores and higher ex post default rates. Speculation by such home-buyers contributed to a large rise in transaction volume from 2003 to 2006, and helped trigger the mortgage default crisis in 2007.
The private label mortgage market, made up of non-core deposit financing lenders (NCLs) was found to have a greater influence in areas with fewer deposit-taking institutions, or lower deposits within these institutions. This makes “deposit-poor” areas more reliant on outside financing from NCLs.
Another interesting finding of the paper is how hard “flippers” were hit during the crisis.
This study highlights a particularly dubious aspect of the U.S. mortgage system. It’s one thing to funnel subsidies to homeowners and their lenders because of the supposed benefits of homeownership. But there’s no conceivable justification for funneling subsidies to people using housing as a speculative investment.
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