
How Tales of ‘Flippers’ Led to a Housing Bubble - boulos
https://www.nytimes.com/2017/05/18/upshot/how-tales-of-flippers-led-to-a-housing-bubble.html
======
brudgers
The flipper mentality played a role. But individual mom and pop flipping
profits from actual houses were anecdotal and _ad hoc_. The systematic and
deliberate and low risk flipping was of mortgages. Mortgage flipping was done
at large scale by large players and was moving the market in large increments.

The big changes to the market when the bubble burst was an oversupply of
housing. Mom and pop flipping does not create an oversupply. There's one
property at the beginning and one property at the end (in most cases, though
there are a myriad of edge cases). Instead the oversupply was created because
the important product was in the B2B sector.

The bubble created an oversupply because housing was built as a precondition
for generating mortgages. Every extra dwelling built during the bubble
generated another mortgage or two for the mortgage market. Big national
homebuilders built houses to generate mortgage loans to flip. Local and
regional banks wrote construction loans to generate mortgage loans to flip.

The buyers of the loans flipped them off to pension funds and institutional
investors. Wall Street loved it for very rational reasons. Individual
homeowners were not driving loan prices down and real estate prices up. Sure
they thought they were savvy rather than lucky when their house appreciated.
But they weren't generating the message.

Pointing to an obscure book as causal misses years of nightly news and decades
of standard best industry practice advice that buying a home is a way to
accumulate wealth.

~~~
ouid
The mortgage bubble was exclusively created by the very explicit government
subsidy on mortgage interest. Regular people defaulting on homes is both
allowed and rational behavior. It's not illegal, and blaming people for it
misses the point entirely.

The aggregate effect of the mortgage interest tax credit, on the housing
market however, is highly dependent on how much income tax can be written off
with it, which is itself highly dependent on how much income middle america
makes. This is a volatile figure.

Banks have to have limited liability in order to function. They accomplish
this limited liability through explicit hedges called insurance policies.

Insurers, unfortunately, have no such requirements to limit their liability,
and in this case were liable for VASTLY more than they were worth.

The problem is that this is a rational strategy. As soon as your liability
goes beyond what your company is actually worth, it no longer makes any sense
to try to limit your liability on other investments. In fact you want to take
on as much liability as possible. If someone gives you a loan which you could
never repay, then rational behavior dictates that you go to vegas and put the
entire sum of the loan on red. If you win, you pay your loan back, and if you
lose, you declare bankruptcy.

The only problem with this is that it is fraud. This is where the story gets
interesting, because the only thing required for the insurers to maintain
plausible deniability in the event of a default on their massively
overleveraged positions was for an "independent third party" to call the
investments that they intended to insure "triple A".

Regardless of whether or not those agencies were truly independent, the fact
is that they are an unacceptable point of failure.

------
propter_hoc
It is nice to see that author of this article is remarkably qualified to be
speaking on this topic, having coined the term "irrational exuberance" during
the dot-com bubble, and the Case-Shiller price index.

[https://en.m.wikipedia.org/wiki/Robert_J._Shiller](https://en.m.wikipedia.org/wiki/Robert_J._Shiller)

~~~
jtraffic
Indeed, he is well qualified, and I find that he is an original thinker, able
to go against the grain of mainstream economics and find valuable insights.

However, in _this_ case, I find the narrative to be simplistic. It is almost
shockingly narrow to pin it specifically on tales of house flipping. Yes, lots
of people thought buying a house was a good investment, but the attribution to
an enthusiasm about house flipping doesn't hold water for me.

~~~
ci5er
> able to go against the grain of mainstream economics and find valuable
> insights.

Like what?

~~~
jtraffic
Irrational exuberance is the best example, in my eyes. Conventionally,
economists would say that "bubbles" are just rational price fluctuations, and
result from new information. Shiller's explanation was much more about
contagion, psychology, excitement. This may not seem to have implications, but
the fact that momentum trading has been shown over and over to work (if done
in a very specific way), suggests that Shiller is correct.

That is just my perspective on it. I'm a bit apprehensive about characterizing
the entire field of conventional economics as I've done. There is a large
amount of variation in opinion among economists. But my feeling is that the
prevailing consensus before Shiller was about rationality.

Some will say that Shiller didn't come up with the idea, that it's just a
packaging of what Keynes said about Animal Spirits. Consider this quote from
Keynes, for example:

"Even apart from the instability due to speculation, there is the instability
due to the characteristic of human nature that a large proportion of our
positive activities depend on spontaneous optimism rather than mathematical
expectations, whether moral or hedonistic or economic"

In any case, Shiller has received a large degree of credit for consistently
pressing the issue, and he was lucky enough to be pushing it forward right
before 2008, which many saw as a validation of his theory.

------
cryptonector
Tales of flipping had nothing to do with the bubble that burst in 2007.

All the tales of flipping in the world are not sufficient by themselves to
cause a bubble. On the contrary, given the right conditions then tales of
flipping will arise and will be symptoms, not causes.

The bubble that led to the great recession had a number of causes, with the
most fundamental cause being credit inflation. Other causes included
distortions of credit markets causing pressure to direct credit to mortgages,
which set off the vicious cycle of demand leading to price rises leading to
more credit leading to more demand leading to... Among such causes was a
dearth of investment opportunities in aging (low-fertility) Europe. But also
the regulatory and tax environment in the U.S. causing more credit being made
available for mortgages, and tax preference given to renting capital over
renting property.

Flipping? That's just a natural consequence of the rest -- a symptom, a sign
of the debacle that would come. In those heady days no one wanted to see such
symptoms for what they were. No, people took them as symptoms of the opposite:
of a healthy market that would only ever go up -- and sure, in this sense
"tales of flipping" added pressure, but they were not _the_ cause, nor among
principal causes, and not enough a cause to be listed as such rather than a
symptom. Without apparently-ever-rising markets those tales would not have
existed in notable numbers.

------
dizzystar
Regardless of the real reasons for the housing bubble, I used to do
contracting for quite a few flippers down in San Diego. They were well-aware
that it was a bubble and were exploiting it to the fullest extent they could
get away with.

The funny part is that every single person on the ground, from the flippers to
the guy sweeping trash knew exactly what was happening. No one hid the fact
that you could buy a dingy house for 200k, put in 50k of work, sit on it, and
sell it for 400k.

There was a lot of other interesting types of people as well. I was aware of a
company who flipped, but their entire strategy was to move nice furniture into
the place to make it "feel" more expensive. Aside from paying day laborers to
move the furniture, they didn't spend any money.

It was a perfect storm of people moving across country, free money, and people
willing to exploit the situation. The silly part was that there was a mini-pop
around the year 2000, and everyone knew history would repeat itself. It was a
mad rush to get it while it was good.

I know all of that is ignoring the toxic bank loans (which the flippers took
advantage of as well), but just my experience and observation.

~~~
emodendroket
The article's thesis seems to be less about those guys and more about naive
investors who saw them making money and figured it couldn't be that hard.

------
stupidhn
> _" To single out one strand, recall the stories of flippers who would buy a
> house, fix it up, and resell it within months at a huge profit."_

You can sometimes see this in financial advice on forums like these: "buy
rental property!".

TINSTAAFL. Economic returns tend to even out across asset classes. Of course
your highly leveraged rental property looks good amidst a housing boom. Being
a landlord isn't easy and has many legal obligations.

~~~
BeetleB
Depends on the details of the local economy and the prices.

Buying a property on cash and renting it out is totally sound, with low risk.
As an investment vehicle, it is often poor as the same amount of money would
likely give you better returns elsewhere. If house values go down, it'll suck,
but you don't have a mortgage so it's not too bad. If house values go up, you
win even more.

Buying on loan is risky if the value goes down, but that's again an issue with
any investment. The upside, though, is that as long as the price doesn't drop
too much, your renter is paying for the house for you. You can put $50K down
on a $300K house, and the renter is working for a living to ensure you own the
house. This can be a phenomenal investment, but it does have a larger risk.

I know multiple people in my town who bought houses and rent them out (some
percentage is through loans). Both have recently quit their day jobs, because
the rental income exceeds their spending needs. Now they've been lucky: Rent
has gone up 30-40% in the last few years. But if prices go down, and they have
to lower their rent, they'll simply go back to work. In the big picture, it is
extremely unlikely that this will result in a net loss, even with another
housing crisis.

>Being a landlord isn't easy and has many legal obligations.

If you do all the work yourself, it sucks. Everyone I know uses property
management companies. One guy who's been at it 7-8 years said it's never been
a pain. Might have to deal with a repair once or twice a year (i.e. much less
than one repair per house). Everything else is handled by the management
company. Yes, they take their cut, but he still has enough left over to relax
at home and not have to work.

~~~
zzalpha
_Everyone I know uses property management companies._

Everyone I know who uses property management companies would describe it like
regular expressions. I.e. I became a landlord and now I have a problem in that
I have to deal with tenants.

I tried to solve that problem with a management company.

Now I have two problems.

Management companies are _not_ a panacea. Many suck. The rest are expensive.

And nothing stops a tenant from vandalizing your home and skipping town.

As far as I'm concerned being a landlord is a sucker's game.

~~~
BeetleB
>And nothing stops a tenant from vandalizing your home and skipping town.

Landlord insurance covers this.

And if they violate their lease, PMC lawyers can help.

But so far no one I know had to deal with this. All the headaches I've heard
come from people who did _not_ use a PMC: They found tenants themselves, so
their vetting was poor compared to that of a PMC. They get repair calls at all
times of day - not an issue with a PMC (tenants do not know your name or
number). Tenants stop paying: Doesn't happen because the PMC vetted the
tenants. But if it does, the PMC deals with it.

------
joe_the_user
_There is still no consensus on why the last housing boom and bust happened.
That is troubling, because that violent housing cycle helped to produce the
Great Recession and financial crisis of 2007 to 2009._

It's also troubling because the origin of bubbles has been combination of econ
101 and psych 101 since Charles Mackay wrong about the Madness of crowds back
in the day[1]. Well, ironically, "it's different this time" is one of the
constants in these thing.

And simple explanation for this kind of situation is that Feds are resisting
the conclusion that inflating the currency lead to the situation, both to
avoid blame and because similar tools are still in use [2].

[1]
[https://en.wikipedia.org/wiki/Extraordinary_Popular_Delusion...](https://en.wikipedia.org/wiki/Extraordinary_Popular_Delusions_and_the_Madness_of_Crowds)

[2]
[https://en.wikipedia.org/wiki/Quantitative_easing](https://en.wikipedia.org/wiki/Quantitative_easing)

~~~
emodendroket
I think deflationary policy would cause a housing crisis of its own. Taking
out a mortgage in a deflationary environment would be extremely unattractive
financially (because even as you paid down the balance you'd hardly build any
equity in the home).

~~~
joe_the_user
Sure, maintaining an appropriate monetary policy that's compatible with growth
but doesn't lead to bubbles is difficult. Of course, when you wind-up with a
bubbles, it's evidence you've screwed up.

I'm pretty sure my original post wasn't an uncritical call for a deflationary
policy since this isn't the only alternative.

~~~
emodendroket
> Of course, when you wind-up with a bubbles, it's evidence you've screwed up.

Can you think of _any_ country under a market system at any time and place
where the market was not characterized by boom-and-bust cycles?

------
justinzollars
I bought and sold my home in Berkeley over a period of less than one year. I
had no intention in "flipping it" \- I simply couldn't tolerate my 1.5 hour
commute.

I made money.

That said, it was such an emotional an psychological effort I'm not sure how
anyone could ever do this to earn money. I had a very very large leveraged
bet, that could have easily went south. Flipping is crazy.

~~~
emodendroket
> That said, it was such an emotional an psychological effort I'm not sure how
> anyone could ever do this to earn money. I had a very very large leveraged
> bet, that could have easily went south. Flipping is crazy.

Because at the time people were saying that housing values would never go
down.

------
prostoalex
Flipping is a consequence. Availability of cheap credit is the prime cause.

If ratings agencies did not assign the issued mortgage tranches a triple-A
rating, they would not be bought en masse by institutions seeking safety, and
their interest rates would reflect that.

Turn on HGTV _today_ and there are more tales of flipping than ever ("Flip or
Flop", "Property Brothers", etc.), CNBC just started filming a reality show
following a successful flipper ("The Deed"). Go online, and there are pitches
from RealtyShares, RealtyMogul or LendingHome advertising "flipper" real-
estate-backed loans. Take an amazing journey into your Gmail's "Spam" folder,
and you will be greeted by dozens of experts who made incredible money
flipping, selling their flipping systems and holding seminars in a town near
to you.

Yet we don't see a bubble, because hard money loans are rated accordingly and
turn out to be expensive for most people.

------
danvoell
I wonder if this same philosophy applied to stocks as well which has created
the roller coaster we have today. Has the idea of day trading and flipping for
profit always applied to the stock market? I have to believe at one point the
sole idea of stock ownership was to have the right to receive dividends/rents
and that's about it.

~~~
emodendroket
It probably does, but the amount of money day traders have riding at a time is
probably not so large comparatively.

------
cperciva
_The Consumer Price Index for Rent of Primary Residence, compiled by the
United States Bureau of Labor Statistics and corrected for inflation, went up
only 8 percent in 1997 to 2005, so unmet demand for housing services can’t
explain the huge increase in real home prices._

In a free market, this would be true. But rent controls make prices sticky,
diminishing their utility as an indicator of the balance between supply and
demand. In the worst case, you can see rents staying completely flat -- and a
large unmet demand for housing because those flat rents take away any
incentive to add supply.

~~~
eridius
> _and a large unmet demand for housing because those flat rents take away any
> incentive to add supply_

Rent control generally only applies to existing housing, not new housing.

~~~
cperciva
True, but building new units is a slow process. High rents on existing units
move the supply curve much faster -- people take roommates, people move away
and free up units, etc.

------
pdeuchler
This article makes my blood boil.

>> There is still no consensus on why the last housing boom and bust happened.

Yes there is. There was widespread fraud on the part of mortgage lenders and
investment banks. Wow, crazy. Someone give me a Nobel.

Pretty impressive of this guy to then hand wave around and say inane crap like
"The problem for economists is that these changes don’t correspond to
movements in the usual suspects: interest rates, building costs, population or
rents." As if he's unable to stick his head outside of his office and
interpret the world through things other than stock tickers.

Political pressure in the 90's led to deregulation of the mortgage industry,
which led to the proliferation of "sub prime" loans, which led to a huge boom
in home ownership since people who shouldn't have been borrowing money were
borrowing millions, which led to a consumer spending glut, which led to easy
money in the market, which led to people papering over losses by playing hot
potato with bad loans, until the obviously unsustainable cycle came crashing
down.*

We also had multiple wars increasing government spending, continued
deregulation, unimaginable leaps in technology and automation, and huge
amounts of consumer spending enabled by credit card and other forms of debt
feeding into this cycle.*

But yeah, nobody knows, says the Nobel Prize Winning Economist, so lets blame
it on the plebes who were stupid enough to think they could get a piece of the
pie during one of the greatest wealth booms in history. Silly poor people,
taking advantage of unsustainable growth for personal wealth is for the ruling
elite! What, you're mad because you got left holding the bag after taking out
three mortgages because your lender encouraged you to do so with massive ad
campaigns? You were mislead about interest rate hikes by your local banker
because nobody cared to double check his numbers? Sorry, but _personal
responsibility_. Oh and by the way we need you guys to pay for all our bad
bets because we can't possibly be blamed for this when our models said
everything was going to come out rosy!!!

Seriously, things like this make me want to bring back the guillotine.

* To be clear, this is obviously a simplistic version of events, but it's still dramatically more accurate than any of the drivel in this article and actually manages to frame responsibility accurately.

~~~
erickhill
> This article makes my blood boil.

This article being bumped off the homepage makes my brain confused.

~~~
pdeuchler
47 comments in 40 minutes, especially with comments like mine, probably set
off the flame detector. Not really complaining, the author of this article
doesn't even deserve to be ridiculed.

------
phkahler
>> There is still no consensus on why the last housing boom and bust happened.

I always thought it was triggered by the Fed. They dropped rates after the
tech bubble and then around 2006 they abruptly raised them:

[https://en.wikipedia.org/wiki/Federal_funds_rate#/media/File...](https://en.wikipedia.org/wiki/Federal_funds_rate#/media/File:Federal_funds_rate_history_and_recessions.png)

Mortgage rates roughly (directionally) follow that rate, and home prices vary
inversely with interest rates. So they jacked up the home prices, waited for
that to take effect and then pulled the plug once people were leveraged to a
new record level of consumer debt.

There were other factors in play too, but even this article about house
flipping - that was enabled by the easy money and related rising prices in the
years prior to 2006.

All I can say is that they better raise rates very very slowly for several
years or we'll see something similar happen again. Imagine what a 2 percent
increase would do (that's tripling the interest rate) if it happened in a
short time.

~~~
emodendroket
The fact that multiple posters in this thread have offered different facile
answers suggests that Schiller is right and nobody really knows for sure.

------
crdoconnor
>The problem is that these changes don't correspond to movements in the usual
suspects: interest rates, building costs, population or rents

Shiller is ignoring:

* Banks relaxed lending standards.

* Appraisers were pressured to deliver fraudulently high appraisals (see 2005 petition delivered to Congress which was apparently studiously _ignored_ by Shiller (Greenspan's advisor) and Greenspan who claimed "nobody saw it coming").

* The loans packaged into mystery-meat CDOs, misrepresented and sold on to investors by ratings agencies that agreed to look the other way for a fee (and declared their right to lie under the first amendment when challenged).

Shiller has always been a regular apologist for bankers though, much like that
other Nobel prize winner who writes regular op-eds in the New York Times, so
it's not that surprising he dumbed it down and shifted the blame.

------
socrates1998
I would love to see the data on how much people actually made flipping vs. how
much they lost.

It just feels like one big ponzi scheme to me where most people lose money.

Flipping a house is basically taking a massive futures contract on the house.
You borrow most of the money and hope it goes up.

People will say "but you have an asset you can use". Not true. If you have a
two condos you are trying to flip and there is a housing glut, you won't even
be able to rent them out. They will just sit vacant eating away at your money.

No thank you.

------
Nanite
Interesting article, but it completely fails to address the more recent trend
of what the British call 'buy-to-let' i.e. buy, furnish, put on AirBnB.
Granted, it only applies to popular travel destinations, but it is also way
more profitable compared to flipping.

~~~
emodendroket
The article does not seem to be about "more recent" since it's talking about
the bubble leading up to the 2008 crash.

------
matrix
The narratives described in this article - "captivating the nation with tales
of people who made fortunes" \- reads very much like that around start-ups in
recent years.

Maybe the real money is in creating books and TV shows about startups...

------
taurath
What options are there for "the common person" to invest other than the stock
market and housing, that anyone knows about?

~~~
BeetleB
>There was widespread fraud on the part of mortgage lenders and investment
banks.

Your insightful comment listed many factors that were responsible for the
recession.

And none of them can reasonably be classified as fraud. And each action, on
its own, can be easily argued to be reasonable.

Like you, I'm in favor of regulation, and can easily believe deregulation
played a role. The fact that we _need_ this type of regulation is because it
really isn't fraud. If it were, it wouldn't need special regulation.

------
sparkling
> There is still no consensus on why the last housing boom and bust happened.

Stopped reading here.

~~~
erickhill
Not a single mention of sub-prime loans is baffling. The man is a hands-down
expert (leader) in the field. I found the lack of mentioning the ease of
financing risky home purchases odd, however. It nearly sent the US economy
over a cliff.

------
logicallee
A and B are in a room with a mortgage officer.

A: hey B, do you want to buy my house for $270,000? I paid $200,000 for it but
that was ten years ago.

B: Let me check. Hey mortgage officer, can I borrow $270,00?

Mortgage officer: Let me check. Well, prices have been going up so I think
it's a fair investment. Sure.

B: SUre.

A: Thanks.

A walks out of the room.

C walks into the room.

B: Hey C, do you want to buy my house? I paid $270,000 but prices have been
very strong. I'd like $290,000.

C: Let me check. Hey Mortgage officer, can I borrow $290,000?

Mortgage officer: Let me check. Yes, prices have been really good. This seems
like a safe investment for us. Go ahead.

C: Sure. Here's $290,000.

B: Thanks.

B walks out of the room.

D walks into the room.

C: Hey D, do you want to buy my house for $315,000? I bought it for $290,000
but prices have been going really strong.

D: Well, let me check. Hey Mortgage officer, can I borrow $315,000? I want to
buy C's house.

Mortgage officer: Let me see. Well, prices have been really strong - seems
like a safe investment to me. Sure.

D: Okay, here you go.

C: Thanks.

C walks out of the room.

Question: if you roll around to A after you get to Z, then at what point do
the musical chairs end? Who is responsible for the pricing bubble we have just
witnessed?

It seems to me that it's not the flippers.

~~~
logicallee
Could someone kindly explain the thought process behind the downvotes, or why
I actually am not correct? I thought I made a fair point and did it in a way
that is illustrative of my thinking. Could someone respond with a critique of
my analysis, if it is not accurate? Thank you. I'm certainly often wrong.

------
buckbova
> "Some people eager to make quick profits bought Donald J. Trump’s well-timed
> 2004 book, “Trump: Think Like a Billionaire: Everything You Need to Know
> About Success, Real Estate, and Life,” written with Meredith McIver. Some
> enrolled in the less well-timed Trump University, which emphasized real
> estate investment in 2005, at the very end of the housing boom; it shut
> down, amid lawsuits and recrimination, in 2010."

NY Times takes every opportunity it can to fire a shot across the bow at
president trump. Yes, let's blame this on trump, why not?

> "There is still no consensus on why the last housing boom and bust
> happened."

Seems like there is. Folks were given loans they were unqualified for and had
no reasonable way to pay off, some at the behest of the government.

[https://en.wikipedia.org/wiki/Government_policies_and_the_su...](https://en.wikipedia.org/wiki/Government_policies_and_the_subprime_mortgage_crisis)

