The charts reveal some astonishing facts. At the peak of the boom in 2006, over a third of all U.S. home purchase lending was made to people who already owned at least one house. In the four states with the most pronounced housing cycles, the investor share was nearly half—45 percent. Investor shares roughly doubled between 2000 and 2006. While some of these loans went to borrowers with “just” two homes, the increase in percentage terms is largest among those owning three or more properties. In 2006, Arizona, California, Florida, and Nevada investors owning three or more properties were responsible for nearly 20 percent of originations, almost triple their share in 2000.
Investors Are Different from Owner-Occupants
Whether they were buying vacation homes or flipping houses, real estate investors behaved very differently from borrowers with just one first lien, a group almost certainly dominated by owner-occupants. For one thing, investors are very unlikely to move to the house they bought, especially if they own three or more properties. In rising markets, “buy-and-flip” investors typically want to hold properties for relatively short periods, and we show in our study that multiple-property owners in the mid-2000s tended to sell their properties much more quickly than those with just one first-lien mortgage. Importantly, we also show how buy-and-flip investors can make higher bids on houses, even if they had relatively little cash, by using low-down-payment loans. Nonprime credit—mortgage lending to borrowers who were unable or unwilling to qualify for cheaper, prime loans—enabled optimistic investors to speculate by making highly leveraged bets on house prices.
Because investors don’t plan to own properties for long, they care much more about reducing their down-payments than reducing their interest rates. The expansion of the nonprime mortgage market during the 2000s provided the perfect opportunity for optimistic investors to get low-down-payment credit, albeit at high interest rates. As shown in the charts below, investors were far more likely than owner-occupants to use nonprime credit to make their purchases, especially at the peak. Again, the colors show the number of properties the borrower owns, but this time we leave in the single-property borrowers for comparison.
