How Home Builders Helped Create the Current Housing Crisis
Home builders say they are the victims of the housing crisis. But the reality is that builders played a large role in creating this current mess. Builders kept building, kept buying land, and kept pushing their mortgage products, even after it was clear that demand was slowing down. In the process, they did little to stop speculators and investors from snapping up property and driving up pricing for everyone.
Excess Inventory
Builders continued to flood the market with new properties even after it became clear that demand for new homes was slowing down. According to the CEO of the National Association of Home Builders (NAHB), "There were some builders [who] were probably overly aggressive. There's no question about that." The NAHB CEO noted that during this time, “Economists were starting to say this is a cynical business and we are going to get into a downturn. But some guys were chasing the gold and pursuing the brass ring, and they didn’t heed the market warnings as quickly as they should have.”
Speculators
In the process, builders underestimated how speculative investors were inflating the market and didn’t do enough to keep them from leveraging inventory. NAHB’S CEO said, “For the first time that I can remember, you saw investors coming into the housing markets and trying to play it almost like a day stock.”
An analysis by Professional Builder magazine showed that in major markets like Phoenix and Fort Lauderdale, 17 percent of buyers in 2005 were speculative investors. In Las Vegas and Sacramento the figure is 16 percent. According to the president of Home Builders Research in Las Vegas, in some of the communities close to 50 percent of sales went to speculators. From late 2003 to the first part of 2005, speculators drove up Las Vegas new home prices by 40 to 50 percent.
Mortgage Lending
The large home builders have mortgage operations to which they steer the vast majority of homebuyers. In order to have these buyers qualify to buy homes at the inflated prices the builders wanted, the builders’ mortgage companies became increasingly reliant on the types of predatory and risky mortgage products that have come under so much recent scrutiny, such as adjustable rates and stated income, or piggy-back loans with high cost second mortgages. For instance, 40 percent of the mortgages made by Richmond American’s lending affiliate HomeAmerican Mortgage were interest-only ARMs.
Not only did home builders and their mortgage subsidiaries act irresponsibly, at times they acted criminally. In 2005, KB Home paid a record $3.2 million to settle charges regarding its poor underwriting practices such as approving loans to borrowers who were not eligible, approving loans based on overstated or incorrect income and other issues. The FBI and SEC are currently conducting probes into dozens of other home builders and lenders.
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