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US housing fraud rises as first-time buyers priced out of market

Consumer demand
By Paul Hodges on 04-Dec-2014

US housing Dec14Signs of stress seem to be appearing in the US housing market once more.  Thus the Wall Street Journal reports:

An estimated one in seven appraisals conducted from 2011 through early 2014 inflated home values by 20% or more..Bankers, appraisers and federal officials in interviews said inflated appraisals are becoming more widespread as the recovery in the housing market cools.”

The problem is that recent price rises have been driven by investors, not actual home buyers, as RealtyTrac warned back in July:

When we look at our data, it’s clear that the home price recovery has been largely driven by investors and other cash buyers.  As those investors and cash buyers slow down their purchases, the big question becomes, will demand from owner-occupant buyers be enough to keep the sales and prices moving higher?”

Today, it seems clear their concern was well-founded.  As the chart shows, latest data for the S&P Case-Shiller Index suggests prices began to plateau in June.  Seasonal trends may well cause them to gently weaken by year-end.

The problem is that the investor buying spree means prices are now too high for many potential first-time buyers, as the second chart shows.

US housing Dec14a

The reason is that the US now effectively contains two distinct racial groups with very different profiles:

  • Whites earn $42k/year and have median age of 42 years: Asians earn $49K and have median age of 37 years
  • Blacks earn $33k and have median age of 33 years: Hispanics earn $30k and have median age of 28 years
  • There are 84m white and 6m Asian households: there are 14m Hispanic and 16m Black households

Superficially, the average ratio seems reasonable at 7.6x earnings, close to the 7.4x ratio for Whites.  But the Whites are mainly ageing BabyBoomers, who are moving beyond their peak home-buying period.  Often, they are moving back to the cities and buying cheaper multi-family apartments instead of single homes.

The younger Black and Hispanic households have instead to do the ‘heavy lifting’ on home buying.  But:

  • Median earnings for Blacks are around 20% less than for Whites, and 25% less for Hispanics
  • Thus the average home price/earnings ratio is 9.4x for Blacks and an eye-popping 10.1x for Hispanics.

In addition, 8% of Hispanics and 12% of Blacks are unemployed, versus only 5% of Whites.  Thus first-time home buyers have been a declining part of the market since 2010:

  • Their share was around 40% of the market in the earlier 2000s, and jumped to 50% in 2010 as house prices fell
  • But since then it has been falling steadily, and is now just 33% – the lowest level since 1987
  • Similarly, new mortgage lending is now at a 13-year low
  • And new home sales since 2009 have been running at levels not seen since 1982

The rising amount of fraud in the house price appraisal system is thus a warning sign that the fundamentals of the US housing market are weakening once more.