Real Estate Investors and the Boom and Bust of the US Housing Market∗

This paper studies residential real estate investors and their relationship with local house price movement using several comprehensive micro data on mortgage application and performance. The paper makes two contributions to the growing literature on the recent boom and bust of the US housing market. First, using mortgage application data, we document the important role played by real estate investors. We show that the fraction of mortgage applications for investment homes rises significantly during the house price run-up and falls sharply during the house price decline and the pattern is more pronounced for the bubble states (Arizona, Florida, and Nevada). More importantly, the majority of investment mortgage borrowers are prime instead of subprime borrowers and they are less likely to use risky mortgage contracts with adjustable-rate or interest-only than their subprime primary mortgage counterparts. Second, we find that while relative demand for investment housing responds to past house price changes up to 10 months, it contributes significantly to changes in local house prices especially during the pre-crisis period. For the post-crisis period, we show that investors are more likely to default or being foreclosed on than primary home owners. We argue that this tendency deteriorated the housing bust.