In early 2007 the San Francisco Chronicle carried a front page story quoting a couple from The City frustrated with dropping home prices in Las Vegas.
They had used low down, sub-prime loans to buy two homes being built in a Pulte Homes neighborhood. Their expectation was to flip the home six months after they were constructed and pocket $20,000 to $30,000 per home.
They were bemoaning the fact homes were going unsold and how they were not going to make any money and possibly even lose money.
A column pointing out that speculation was squeezing people who wanted to own their own home to live in them out of the market prompted a Bulletin reader e-mail that people shouldn’t criticize flippers. She pointed out that as a grandmother she was simply trying to “earn” money for her grandchildren’s college fund and how dare anyone call what she was doing irresponsible. It wasn’t speculating, she insisted. It was investing.
Now the Federal Reserve Bank of New York has compiled a report that largely blames flippers for accelerating housing prices and triggering the recession.
Almost half of all mortgages issued in California from 2000 to 2006 went to people who already owned one home. They were able to secure investment loans with almost nothing down and without the traditional collateral such loans for non-owner occupied homes would require. That forced those trying to buy a home to live in pay even higher prices. It also drove up rental prices.
If easy money for virtually nothing upfront hadn’t been made available to such speculators, the Reserve Bank suggested the recession would have been significantly less painful and the recovery much stronger.
If flipping homes is what caused a super overheating of housing prices and triggered a housing collapse unparalleled since the Great Depression, then what is being done to make sure we don’t make the same mistakes again?
Not much at the moment.
There are though, some things that could be done to reduce speculation.
Those in an owner-occupied home with an outstanding balance on government issued or backed loans should be required to pay off that loan if they obtain any type of loan to secure another house.
A great many first-time investors in the hey days of the housing bubble lived in a primary residence acquired using FHA, Fannie Mae, VA, or some type of California assistant programs when they went to buy a second home. If they are becoming investors - or speculators - they should be required to forsake any government benefit of lower rates and even lower mortgage insurance on outstanding loans.
Local government agencies that use tax-exempt financing to float bonds to build infrastructure accessed by new development whether it is a wastewater treatment plant or domestic water facilities should have the power to restrict home sales in new developments.
Any new housing project that is built and uses such facilities being financed with tax-exempt bonds should be restricted to buyers who are going to occupy homes unless a “buy-out penalty” is paid.
The “buy-out” would reimburse state and federal government for taxes on interest bondholders avoided. It would be calculated on the proportionate share of infrastructure costs to serve that particular housing unit plus include a penalty and processing charge.
If the intent of housing assistance programs and tax-free bonds to support housing is to put housing within reach of people to own and occupy then there should be reasonable restrictions that keep a lid on speculating.
This column is the opinion of managing editor, Dennis Wyatt, and does not necessarily represent the opinion of The Bulletin or Morris Newspaper Corp. of CA. He can be contacted at firstname.lastname@example.org or 209-249-3519.