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Federal report blames real estate speculators for housing bubble

LAS VEGAS — A new federal report shows that speculative real estate investors played a larger role than originally thought in driving the housing bubble that led to record foreclosures and sent economies plummeting in Florida, Nevada, California, Arizona and other states.

Researchers with the Federal Reserve Bank of New York found that investors who used low-down-payment, subprime credit to purchase multiple residential properties helped inflate home prices and are largely to blame for the recession. The researchers said their findings focused on an "undocumented" dimension of the housing market crisis that had been previously overlooked as officials focused on how to contain the financial crisis, not what caused it.

More than a third of all U.S. home mortgages granted in 2006 went to people who already owned at least one house, according to the report. In Florida, Arizona, California and Nevada, where average home prices more than doubled from 2000 to 2006, investors made up nearly half of all mortgage-backed purchases during the housing bubble. Buyers owning three or more properties represented the fastest-growing segment of homeowners during that time.

"This may have allowed the bubble to inflate further, which caused millions of owner-occupants to pay more if they wanted to buy a home for their family," the researchers noted.

Investors defaulted in large numbers after home values began to drop in 2006. They accounted for more than 25 percent of seriously delinquent mortgage balances nationwide, and more than a third in Florida, Arizona, California and Nevada from 2007 to 2009.

As a result, millions of homeowners saw their home values decline so that they were worth less than the original purchase price. Foreclosures skyrocketed as people couldn't or refused to pay underwater mortgages. Residential construction languished, putting construction workers in the hardest-hit states out of work.

The report concludes that lenders and regulators must limit speculative borrowing to avoid future housing busts.

In Nevada, which has the nation's highest foreclosure rate, the housing market remains weak, with home prices continuing to fall in the Las Vegas area, where most of the state's population lives.

Home prices were down 7.3 percent in November compared with a year before, according to the Greater Las Vegas Association of Realtors. That means the median price dropped from $134,900 to $125,000 in one year. More than half of all home sales were purchased with cash.

Home sales data

to be revised

National home sales figures will be lowered dating back to 2007 after the private trade group that collects them said the numbers were too high. The National Association of Realtors said Monday that it will release the downward revisions for previously occupied homes Dec. 21. Among the reasons for the inflated figures, the Realtors group says: changes in the way the Census Bureau collects data, population shifts and some sales being counted twice. Last year's total sales figure of 4.91 million was the worst in 13 years. CoreLogic, the California-based data firm that first raised doubts about the annual numbers earlier this year, estimated that the Realtors group overstated sales in 2010 by at least 15 percent. The changing numbers could affect how economists view data from the trade group. It could also affect companies that use the figures for hiring and expansion plans.

Federal report blames real estate speculators for housing bubble 12/12/11 [Last modified: Monday, December 12, 2011 8:36pm]

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