by Calculated Risk on 12/05/2011 06:25:00 PM

Several readers have asked me to comment on this new paper from Fed economists Haughwout, Lee, Tracy, and van der Klaauw: “Flip This House”: Investor Speculation and the Housing Bubble (ht Josh)

[W]e present new findings from our recent New York Fed study that uses unique data to suggest that real estate “investors”—borrowers who use financial leverage in the form of mortgage credit to purchase multiple residential properties—played a previously unrecognized, but very important, role. These investors likely helped push prices up during 2004-06; but when prices turned down in early 2006, they defaulted in large numbers and thereby contributed importantly to the intensity of the housing cycle’s downward leg.

It was pretty obvious that investor buying was pushing up prices in 2004 and 2005. I wrote a post in April 2005 (over six years ago!) on that subject: Housing: Speculation is the Key (Note: in that 2005 post I treated speculation as storage and showed how speculation pushes up prices during the bubble - and pushes down prices after the bubble bursts).

The Fed economists have added some data. Although I think the data suggests a significant role for speculation - especially in certain bubble areas - I think the data is a little confusing. One problem is that many move up buyers tend to buy their new home before selling their old home. So they have two mortgages while the old home is on the market. This was especially common during the bubble because move up buyers didn't want to sell until they were sure they had found something to buy. The Fed data appears to count these people as investors.

Another problem is the Fed didn't try to adjust for 2nd home owners.

But one thing is clear: investor buying did contribute to the bubble, but it wasn't the cause. But - as I noted in 2005:

Speculation tends to chase appreciating assets, and then speculation begets more speculation, until finally, for some reason that will become obvious to all in hindsight, the "bubble" bursts.

It was no surprise that investors piled in after prices really took off. But the real causes of the bubble were rapid changes in the mortgage lending industry combined with a lack of regulatory oversight. The speculators just added to the fire.