Last week, I saw this academic paper come across NBER and thought the abstract was interesting. A few days ago, a news outlet covered it. Further enhances my skepticism of the benefits of real estate marketplace lending. A long held fear of mine is that these platforms would make it too easy for "dumb" money to bid up prices and cause speculation, given the retail investor belief that collateral somehow makes it safe.
https://qz.com/1064061/house-flippers-triggered-the-us-housing-market-crash-not-poor-subprime-borrowers-a-new-study-shows/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.
I agree that House flippers were a problem and as a ground floor investor I often cringe at the shoddy jobs the flippers do and the insane prices they price the houses at, but I have some first hand experience with some of the loans during that time and it was seriously, insane lending practices. Giving a 400,000 mortgage to someone who makes 18K per year.
I suspect now that there are regulations in place that make things more reasonable. And truth... some of the properties that the GF people list that are junk, usually get reduced.
For my money the prime bubble instigators remain money from foreign interests such as china. When new housing gets built it is invariably insanely priced. Forcing real people into bad decisions just to have a roof over their heads. It is my hope that crowdfunding investors can blunt this trend but the influence of new housing into markets that creates competition and reasonable housing.
Thanks for the interesting reference. The thesis makes a lot of sense.
Buying a house is the same as buying stocks on margin, but the bet is on house prices not equities. If your down payment is 20% then you're leveraged 5 to 1 on house prices. If house prices fall 20% you've lost everything. If they go up 20% you've doubled your money. So, the lower the required down payment the higher the leverage, the greater the housing availability to sub-prime borrowers, and the greater the incentive for speculation. My understanding is that over the years down payment requirements dropped to ridiculously low levels (even zero). Politically there was no opposition; every one wins. This fueled both sub-prime buying and speculation. When you've invested almost nothing in a house to begin with and the house is under water, then the only answer (at least financially) is to just walk away and mail in the keys. America has had many housing booms and busts over its history. This one was scary bad.
"The yuppies flipped houses to poor folks. The banks waved both in with a grin. The government insured all the papers. The taxpayers got robbed, again!" +1. It doesn't really matter if it was flippers or po folk. Markets created a demand for mortgage loans because they were seen as so safe. Banks filled the demand with crap loans to everyone on earth. And then it all fell apart, what a surprise.
Dont forget that the last housing bubble was fueled by: speculation, artificially low interest rates (courtesy of the Fed, and Alan Greenspan).
This time around it's fueled by: artifically low interest rates, massive Federal Government debt and bailout (Quantitative easing, you guessed it) by the Fed (Bernanke/Yellen), technological change (fintech crowdsourcing, P2P etc)
The difference is that there may be no next time. IMHO, The Central bank bailouts are no longer possible, in the short or long run.