With the recent run-up in real-estate prices amid the housing shortage and now rising mortgage rates, many people are concerned that a housing bubble—similar to the one 15 years ago that set off the Great Recession—is about to burst in the United States. As a sign of what’s to come, some point to the level of speculation in the market. A recent Atlantic article highlighted activity by house flippers, “aspiring Airbnb tycoons,” and other investors in the market for single-family homes.
Research suggests that the interest in this activity could be well placed. Northwestern’s Anthony A. DeFusco and Charles G. Nathanson and Chicago Booth’s Eric Zwick find that speculation was one factor that drove the dramatic 2000–05 boom and subsequent collapse. Short-term buyers such as house flippers were particularly influential in the market.
Like many other economists, Zwick sees the US housing market slowing and says it has entered a phase called the quiet—the lull following a boom that’s just before a potential bust. Other research (including by House of Debt authors Booth’s Amir Sufi and Princeton’s Atif Mian) finds that credit played a large role in the prior bust, which suggests that credit levels are crucial to assess and watch now. DeFusco, Nathanson, and Zwick argue that speculation, possibly fueled by credit access, is another important force to monitor.
Focusing on which buyers are most active during each phase of the cycle can shed light on the underlying mechanisms causing prices to rise and fall, according to the research. Similarly, looking at those markets that attract more speculative buyers can be a predictor of the degree of downturn that might follow. That has relevance to today’s market, Zwick says. In comparison to the prior cycle, “what’s different about this one is that [transaction] volume didn’t go up that much. I’m not sure we have the same speculative-entry phenomenon driving price growth.”
During the US housing-market boom of 2000–05, many homes sold were either owned briefly or not owner occupied.
The researchers used data from 50 million home sales between 2000 and 2011, measuring speculative buying and selling across 115 metropolitan areas representing 48 percent of the US housing stock. Prices fell by 28 percent from 2007 to 2011, and transaction volume by 63 percent, they find. The researchers studied deed records rather than mortgage documents, as many speculative deals are all cash. To narrow in on speculative activity, they identified buyers who sold within three years of initial purchase and nonoccupants who listed a mailing address different from the property address.
While total sales volume increased 40 percent during the early 2000s boom, it doubled among short-term buyers and those who didn’t reside in the property. Speculative transactions accounted for 40–50 percent of housing sales from 2000 to 2005, contributing substantially to the price bubble.
The cities with larger speculative booms, such as Phoenix; Las Vegas; and Orlando, Florida, experienced larger price surges, sharper increases in unsold listings when the market turned, more severe price drops, and more foreclosures.
“Speculative buyers indirectly cause foreclosures by leading prices to overshoot,” Zwick says. People may overpay for a property, then be unable to make mortgage payments when a recession hits and they lose their job. And when prices fall, they may be unable to sell the property if its price is below that of the mortgage amount.
When the researchers removed short-term buyers from their model, along with those who didn’t occupy a property, they find that price busts did not occur. And when they removed only nonoccupants from their model, the housing price surge remained strong, suggesting that short-term buyers were the primary amplifying force driving up prices.
Anthony A. DeFusco, Charles G. Nathanson, and Eric Zwick, “Speculative Dynamics of Prices and Volume,” Working paper, June 2022.
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