Insomnia (insomnia) wrote,

Real Estate Speculation Drives the Subprime Crisis.

I discovered a few interesting tidbits in a recent article on the subprime / foreclosure crisis that point towards real estate speculators being a much bigger part of the problem than I would've guessed.

Apparently, California, Florida, Nevada and Arizona have more than a third of the nation's subprime adjustable-rate mortgages and a third of the foreclosure starts for these loans. These four states also have a disproportionately high share of investor loans or loans to buyers who do not plan to live in the houses. 

As of June 30, the non-owner-occupied share of loans in default -- 90 days or more past due -- was 32 percent in Nevada, 25 percent in Florida, 26 percent in Arizona and 21 percent in California. That compares with 13 percent for the rest of the nation. 

This is just a tip of the iceberg, however, as in many cases, real estate speculators have used subprime loans to purchase a larger second home as a primary residence, while renting out their first house. This real estate technique relies on the primary residence exclusion on capital gains tax, where home owner / investors rent out their first house, while moving into a piece of investment property for no less than two years. At the end of that period of time, they can then legally sell the property without having to pay ANY taxes on the gain.

As a result of the primary residence exclusion laws, only those investors who previously owned MORE THAN TWO houses would have any real incentive to use subprime loans to purchase a house that they didn't live in. Instead, most real estate speculators would choose to use a subprime loan to secure a second house, with the goal of avoiding paying any taxes on the gain, ideally flipping the house before the interest rates on the loan reset to a higher level.

Unfortunately for many such investors, they are now finding themselves paying higher rates on their mortgage, stuck with a house that hasn't appreciated in value, trying to sell them in a marketplace overcrowded with sellers, and with fewer potential buyers due to stricter qualifications and higher interest rates for mortgages. In some cases, they are finding themselves with negative equity, as prices have started to drop.   

This kind of real estate speculation was pretty obvious in California a few years back, as shifting savings from stocks to real estate seemed like a safe bet in the wake of the dotcom crash. In large parts of California, real estate prices surged due to rampant speculation, even as high-paying, high-tech wages fell, unemployment increased, and local economies worsened noticeably.  

In short, it's reasonable to assume that real estate speculation may, in some key states, be the cause of over 50% of subprime foreclosures.

It's no wonder that so many politicians are pushing for a bail out; they get to help their wealthy constituents who stand to gain by preventing the bubble from bursting -- private investors, lenders, Wall Street investors, the real estate industry, the construction industry, etc. They also get to look like concerned politicians trying to help their local constituents at the same time. 

It's perhaps not surprising that none of the proposed bail-out programs being suggested by politicians specifically target those who really need assistance -- those who own ONLY one property, which they use as their primary residence. The lower middle class/soon-to-be poor don't contribute to politicians... the speculators do.  


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