Buy Low, Sell High

My It’s the Economy column for the next issue of The New York Times Magazine looks at one venue through which the financial crisis helped the rich get richer and simultaneously wounded the middle class: real estate.

There’s a perception out there that the housing bubble was primarily driven by homes at the high end. Supposedly too many Americans tried to reproduce Versailles, building and buying homes with zillions of bathrooms, shoe closets, Jacuzzis and eight-car garages. Yes, there were highly telegenic examples of lavish McMansions. But in fact the homes that went into foreclosure between 2007 and 2012 were primarily in the lowest-price tier when they were purchased, and most were located in middle- and lower-income areas, according to calculations from Redfin, a technology-powered real estate brokerage.

Source: Redfin. Chart shows percentage of overall foreclosures for properties in the given home price tier. Home price tiers were assigned by placing all properties into thee even groups based on their non-foreclosure transaction prices between January 1990 and December 2005.  Price tiers were assigned by metro, because prices vary so widely across the country.  For example, a home selling for $300,000 in Seattle in June 2003 would be in Seattle’s upper tier, while a home selling for $300,000 in San Francisco in June 2003 would be in San Francisco’s lower tier.

In other words, middle- and lower-income families bought at inflated prices; lost their homes; ended up paying record-high housing rents because so many people lost the ability to own at once, pushing rents up; and of course ended up with their credit scarred for the better part of a decade.

During the bust, tight credit disproportionately benefited higher-income people, since you needed plenty of cash on hand to win fierce bidding wars. If you talk to brokers and real estate experts about the bust years, you’ll find that when housing prices and mortgage rates were at record levels of affordability, middle-class clients were largely shut out of the action because either they couldn’t get loans at all, or they were outbid by investors who could pay all cash.

Now that housing prices are coming back, investors who bought at fire-sale prices are able to flip those houses for big profits. As I write in the magazine column, there are homes around the country that lost half their value during foreclosure, and then recovered it almost entirely when they were subsequently resold. Redfin calculates that of the 87,062 foreclosures in the last five years in which homes were bought by corporate investors and have already been flipped, about a quarter were sold for at least $100,000 more than what the investor originally paid. (That $100,000-plus markup most likely isn’t pure profit, though, as we don’t know how much these investors spent on upgrades or renovations.)

To be clear, it’s hard to blame investors for buying low and selling high. That’s what smart capitalists always do if they can, and to do otherwise would make little financial sense, for both real estate buyers and their shareholders.

The housing bubble and subsequent bust left the country with winners and losers, as is always the case in capitalism. It just happens that the winners were disproportionately wealthier people, and the losers were disproportionately middle- and lower-income families. Reasonable people can disagree about whether that outcome is a result of public policy, financial expertise or deliberate malfeasance â€" or perhaps some combination of the three.