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

Abstract

In this paper, we first document the important role played by real estate investors in the recent housing cycle using mortgage loan level data. We show that the fraction of mortgage applications as well as originations that are for investment homes led both the boom and the bust. Additionally, the majority of investment mortgage borrowers are prime borrowers. We then develop a theory of housing demand where we differentiate between primary residence and investment housing. In particular, we assume that primary residence provides housing service but is costly to move out of compared with investment homes. Our model predicts that households with higher income purchase investment homes. Additionally, the higher the expected house price rate of appreciation is and/or the more relaxed the borrowing constraint is, the higher the relative demand for investment housing will be. Investment home mortgages, however, are also more likely to become delinquent than primary mortgages when house prices decline. Finally, the relative demand for investment housing also drives up house prices. We test the model implications using detailed micro mortgage loan level data and find supporting evidence. More importantly, we quantify the contribution of relative demand for investment housing to recent house price changes.