Earlier quoted context omitted.
“ The scary thing is that it's easy to see how something how like this could drive a market boom and bust cycle.” The opposite really. Speculators do their best to buy low which pushes the price back up toward the mean in the aggregate, and sell high, which pushes it back down toward the mean. Speculation is a stabilizing force overall. The boom and bust cycle in real estate is very real, but driven by other things.
> Speculation is a stabilizing force overall. a sophisticated speculator is. an unsophisticated speculator is actually destabilizing, because they might incorrectly speculate capital (that they cannot really afford), causing a loss in market efficiency in allocating capital to where it's needed. The 2008 GFC is in part caused by unsophisticated speculators (home buyers) to speculate on property. Initially they saw so…
What happens when that unsophisticatded speculator purchases a bunch of properties at prices above what they're worth? If he can't make the payments on them, eventually he'll be forced to sell, or perhaps even declare bankruptcy.
Those properties will eventually be sold at the market equilibrium price, possibly even lower than that because he will likely need to sell in a hurry to meet his obligations, or because a bank forclosed on him and wants the money now and will also accept a below market price to liquidate them quickly.
Which is exactly what happened to Zillow. They realized they paid too much and couldn't make money with them and are now unwinding their position at a loss.
The 2008 crash was caused by fraud on the part of consumers on their loan applications. It was not caused by speculation. Income was not properly documented on a lot of those loans. Many lenders actually did verify income and required a significant down payment from buyers, and weathered the crisis well.
The fraud coupled with low down payment requirements turned these loans into very risky assets, but the banks securitized them and sold them to third parties, who percieved them as nearly risk free assets. The real scandal was that those assets were rated as very low risk by Moody's and S&P but turned out to be basically junk quality.
And then lots of investors used leverage to buy them and, lo and behold, they were not risk free assets, and the use of leverage when investing in those securities destroyed a lot of investors and institutions when those securities stopped performing. The fact that the ratings agencies stamped the assets as very low risk is the real scandal: banks thought they were almost as good as treasury bonds and they clearly were not.
After the crash, a lot of those securities got picked up at basment bargain prices, and most of them actually did peform fairly well, with 90%+ of individual loans performing. I invested in a company that picked up a lot of those securities at fire sale prices after the crash and did pretty well.
Which gets back to my original point: speculation is only a destabilizing force if the speculators are not well capitalized against losses, and things move against them.
The 2008 crash would have turned out differently if the purchasers of those loans used less leverage or were better capitalized, or did their own due dilligence when investing.