Federal Reserve Bank of New York Staff Reports Real Estate Investors, the Leverage Cycle, and the Housing Market Crisis Andrew Haughwout Donghoon Lee Joseph Tracy Wilbert van der Klaauw Staff Report no. 514 September 2011 This paper presents preliminary findings and is being distributed to economists and other interested readers solely to stimulate discussion and elicit comments. The views expressed in this paper are those of the authors and are not necessarily reflective of views at the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.
Real Estate Investors, the Leverage Cycle, and the Housing Market Crisis Andrew Haughwout, Donghoon Lee, Joseph Tracy, and Wilbert van der Klaauw Federal Reserve Bank of New York Staff Reports, no. 514 September 2011 JEL classification: G21, D18, R31 Abstract We explore a mostly undocumented but important dimension of the housing market crisis: the role played by real estate investors. Using unique credit-report data, we document large increases in the share of purchases, and subsequently delinquencies, by real estate investors. In states that experienced the largest housing booms and busts, at the peak of the market almost half of purchase mortgage originations were associated with investors. In part by apparently misreporting their intentions to occupy the property, investors took on more leverage, contributing to higher rates of default. Our findings have important implications for policies designed to address the consequences and recurrence of housing market bubbles. Key words: mortgages, leverage Haughwout, Lee, Tracy, van der Klaauw: Federal Reserve Bank of New York (e-mail: andrew.haughwout@ny.frb.org, donghoon.lee@ny.frb.org, joseph.tracy@ny.frb.org, wilbert.vanderklaauw@ny.frb.org). The authors have benefited from helpful comments and suggestions from participants at the April 2011 Housing Economics and Research Conference at the University of…