Saturday, September 2, 2017

Gwynn Guilford — House flippers triggered the US housing market crash, not poor subprime borrowers


A new explanation of the financial crisis arguing that the proximate cause was not sub-prime but flippers that caught when the music stopped, and the lenders that were funding them. The sub-prime borrowers were a knock-on effect of loose lending.
The grim tale of America’s “subprime mortgage crisis” delivers one of those stinging moral slaps that Americans seem to favor in their histories. Poor people were reckless and stupid, banks got greedy. Layer in some Wall Street dark arts, and there you have it: a global financial crisis.

Dark arts notwithstanding, that’s not what really happened, though.

Mounting evidence suggests that the notion that the 2007 crash happened because people with shoddy credit borrowed to buy houses they couldn’t afford is just plain wrong. The latest comes in a new NBER working paper arguing that it was wealthy or middle-class house-flipping speculators who blew up the bubble to cataclysmic proportions, and then wrecked local housing markets when they defaulted en masse.
Quartz
House flippers triggered the US housing market crash, not poor subprime borrowers
Gwynn Guilford

14 comments:

Noah Way said...

The "mortgage crisis" was a direct result of the housing bubble, which was a direct result of bank deregulation.

Banks - freed from restrictions on investment - pumped money into real estate, creating a huge bubble of oversupply. To get these properties off their books they gave loans to people who could never afford to purchase these properties, converting "liabilities" into "assets" and precipitating the mortgage crisis, in which they were bailed out by you-know-who.

Matt Franko said...

More unqualified metaphor here:

"house flippers" "music stopped" "housing bubble" "bailed out"

Matt Franko said...

Hey wait I thought is was "control fraud!" ???

Matt Franko said...

And here: "So when the housing market started tumbling and the economy soon followed, they were much more willing to default "

I thought the point these people were trying to make was that these people caused it in the first place now here they have it happening independently...

Which one is it????

Matt Franko said...

"Hey! These people caused the housing crash and let me tell you why!!! It's because They defaulted when housing already crashed that's why!!!!"

Whaaaaaaatttttt?!?!?!?

Tom Hickey said...

Right, Matt, nothing ever happened. Move along, nothing to see here.

Tom Hickey said...

"Hey! These people caused the housing crash and let me tell you why!!! It's because They defaulted when housing already crashed that's why!!!!"

I was actually on the ground in California in this period and witnessed it up close up since I knew some flippers, a few of whom were friends and others were acquaintances of one degree or another. It was easy pickings for them for awhile.

The crisis was not something that hit overnight. Initially, the market appreciation started decelerating — still growing but not so fast. That began to put a pall on an overheated market as the big, quick gains start slowing down and more and more people came to realize that it was not business as usual.

Lots of people were holding Ponzi-financed properties in the expectation of cashing out big with fairly small PITI in the meantime. As they gradually begin to sense the market deceleration, they realized that they had to shrink the PITI alligators on their back and they started cutting their asking prices.

This increased the deceleration. Then the selling mushroomed and carrying costs started looking unsustainable. At that point it becomes a rout. So I can definitely believe that the people who bought several properties for quick turnaround were involved in the onset of the crisis. These were generally the weakest hands owing to the their exposure. It's reasonable they rushed to get out first.

For example, I warned a close friend about the beginning of the deceleration and he was able to cash out several properties near the top. But he got stuck with one lot that he is still trying to sell. I think it only cost him about 17 K at a tax sales, so no big deal and it will sell eventually as prices come back, which they are now doing. But he is still paying taxes on it. Not a big thing to him since he made hundreds of thousand turning over properties, and he was able to capitalize on this buying properties at the bottom that he could rent for a positive cash flow. Those are appreciating nicely now.

Noah Way said...

You're looking at the effects at the bottom, not the causes from the top. The big investment houses bought ratings on toxic mortgages and sold them as triple AAA investments. Bankruptcy laws were conveniently overhauled just prior to the crash.

Pump and dump is time tested and proven strategy.

Tom Hickey said...

"Trigger" in the title of the post means proximate cause. There was a constellation of causes that got triggered by the proximate cause(s), leading to knock on effects that enveloped the global financial and then economic system, from which the world has yet to recover.

Matt Franko said...

Housing/development costs were higher as the oil monopoly rent kept going up to $140/bbl and govt just kept raising the conforming loan limits to accommodate this... the property prices didn't top until late 2008 when the Fed policy created 100s of $b of reserve assets and accordingly the other bank assets prices had to be marked down to maintain a constant regulatory Leverage Ratio...

It's a simple algebraic relationship...

LR = C/A = 0.1 If non risk component of A is increased by 10 then risk component of A has to drop by 10 ....

No metaphors used ...

Just have any of these people try to "explain" the events of 2008/2009 without using metaphor and instead use the professional terminology ... they simply are unqualified and can't do it...

Matt Franko said...

So Tom you are saying the cost of site development work (which all the equipment runs diesel) doesn't depend on the price of diesel ?????

Please.... lumber? Delivery costs to the site?

Why back then did a sheet of plywood cost $40 and today it is $13?

Control fraud at Home Depot?

Please...

Tom Hickey said...

Matt, the run up was in land value rather than construction cost.

Tom Hickey said...

For example, an easy way to make money fast was to buy raw land and put in a road to site, drill a well and put in a septic system. The sales price in about 6 mo. was at least double over cost. The new construction was mostly modular homes. This required putting a foundation on a lot, providing water and sewage if the lot was not located near a hook up, and constructing a garage and short driveway near the road. These was not costly and a lot of amateurs got into it easily. Many people made a bundle of money is a short time over a couple of years before it collapsed. It was pretty much a no brainer. The bottle neck was in getting contractors to do things like foundations and driveways. Modular homes were no problem. They could be delivered and assembled on a foundation quickly.

Condo conversions was another way.

These were the speculators.

Not to say there was no stick built, but that generally was done by professional contractors building on spec. Lots of them were hit bad when values collapsed since they were locked into a longer time frame from the start of the project to sale. Many went under, and the bank got partially finished properties that just deterioriated.

Matt Franko said...

Land price is 0.3 x improvements...