Speculative real estate investors in states like California, who already owned residential properties and took out mortgages to purchase new properties, were responsible in no small measure for the housing bubble and the consequent foreclosure crisis. New research by the Federal Reserve Bank of New York points to the underappreciated role of real estate investors who took advantage of easily available credit to buy residential properties. The role of these speculative real estate investors had not been probed adequately until now.
In states like California, these investors formed a substantial portion of lending activity, and their actions helped push residential property prices up. At one point, the number of these investors was as high as 45%. Between 2004 and 2006, these real estate investors formed a large chunk of mortgage purchases, inflating prices for those who wished to buy homes to live in with their families. As a result, owner-occupants ended up having to spend more to buy residential properties. However, investors were able to benefit from the availability of low and no-down payment mortgages to pick up houses even with these inflated prices.
When house prices began to drop in 2006, many of those speculative investors were also the first to default. Every California foreclosure lawyer knows that owner-occupants are less likely to walk away from a house and apply for a foreclosure, compared to real estate investors who don't live on the property.
The large number of investor mortgage defaults contributed to plummeting housing prices, and vast numbers of foreclosures in California. Many owner occupants found that their homes were worth less than the purchase price, and when the economy tanked, many were unable to meet mortgage payments. This at least partly contributed to the massive foreclosure crisis that affected states like California, Arizona and Nevada the most.
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