The Breakdown | Explaining Southern California's economy

Bad investors v. good investors in the California housing market

A foreclosure sign sits in front of a home for sale.
A foreclosure sign sits in front of a home for sale.
Justin Sullivan/Getty Images

This is from AP (via the Washington Post):

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 Nevada, California, Arizona, Florida 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.

The story goes on to point out that less swashbuckling investors in Nevada are now buying foreclosed, abandoned homes, "fixing them up" and selling them.

In California, similar investors are doing the same thing and also renting properties. 

As a result of various discussions I've had with real estate investors, I've come to think that this way of using all-cash deals to take properties off the market — and thereby getting banks out of the ownership business — then quickly re-selling them to new buyers provides a formula by with real-estate investors can help alleviate some of the ongoing housing crisis.

The trick will be in creating a larger pool of buyers. In order to do that, some of the sins that the New York Fed points to could be, in a manner of speaking, brought back. Buyers with good credit and verifiable incomes with a solid job history could perhaps be extended favorable loan terms with less than the typical 20-percent down payment. 

The critical thing is that these buyers be long-term potential owners, not investors. For gainfully employed first-time home-buyers with prime credit scores and real cash-flow, this could represent a great opportunity, enabling them to take advantage of low prices and low interest rates. 

And for the rest of the economy, especially California, it would be the beginning of the end of our long national real-estate nightmare.

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