Housing 2006 Redux-------Mortgage Fraud And Speculation Come Roaring Back


To preface this report, I consider the subject matter and my findings, herein, to be as important to contemporary housing and residential credit forecasting, as my early work in 2005/2006 on Bubble 1.0.

These data go a long way in identifying the “missing energy / link” driving what I have coined a “demand-less house-price surge” and explaining what the recurring annual rate plunges to historical lows; institutional speculators tripping all over themselves for sub 3% cap-rates on single-family rental houses; boomerang buyers; boomers longing for “vacation” condos on beaches; and a deluge of foreign demand with H1B and EB5 visas can’t.

Bottom line: “Second / Vacation” home demand has surged more than any other housing segment over the past three years.The overwhelming market opinion is that aging, equity-market affluent baby-boomers are all rushing in at the same time to buy their dream “vacation” home.  But, this is misguided, as the data, herein, reveal the truth; there is no indication true “2nd/vacation” home demand is surging at all.

In fact, the data fully supports my thesis that this housing market is spun out of control from rampant speculation, process incompetence, relationship-driven dissonance, and outright fraud, or an exact repeat of 2005 to 2007.

Fraud in lending – occurs late-mid to late cycle when demand is stalling and can’t get a boost organically or fundamentally – is simply another form of stimulus and “transitory” by nature. It’s not durable. In fact, just like stimulus, pervasive fraud leads to a slingshot effect when the drivers suddenly turn counter-cyclical on some sort of catalyst.

Excessive speculation and fraud are driving house demand and certainly prices. “Vacation”, “second”, and “investment” properties are all part of the same speculative “trade”, but by different parties. And just like in 2006, the distinction between the property types has become de minimis.  As prices continue to increase past the ability for the incremental buyer to afford, either leverage-in-finance or fraud, must fill in the buyer qualification/house price divergence.


7/2 Hanson…Full Blown “Recovery”: Fraud back to 2006 highs


Pervasive “occupancy fraud in lending” – purposely misidentifying “investment” properties as “second/vacation” for the purpose of obtaining prime, “owner-occupied”, low-down payment mortgages vs expensive “investment” property loans — is back in a big way and driving housing demand, based on NAR’s “2015 Investment and Vacation Home Buyers Survey”. It comes on the heels of a multi-year cycle of increasingly “bad” appraisals – a widespread problem — by the Appraisal Management Companies (AMC) that in Bubble 2.0 are similarly conflicted, as independent residential appraisers were during Bubble 1.0 . Both appraisal and occupancy fraud are primary features to a speculative, house-price bubble.

This is an identical replay of 2005 to 2007 that nobody recognizes, expects, or is even looking for, which will present an opportunity at some point. It’s amazing to me they didn’t think of something new. But, I guess if you consider that housing bubble 1.0 was mostly a perfect fraud, why would one be so arrogant as to try to improve on perfection.

Sadly, “process incompetence, willful blindness, relationship-driven dissonance, and outright fraud” are late-mid to late cycle features of “this” housing market “normalizing” – defined by me as end-users retaking the mix and needing ever-more “creative” financing in order to purchase houses at extreme valuations — and a stiff headwind to volume and prices when a catalyst suddenly turns these drivers from pro to counter-cyclical.


Smoking Fraud Guns; Most were also key features in Housing Bubble 1.0:

Occupancy Fraud in contemporary lending is back with a vengeance and driving house purchase demand, a late-cycle condition. This follows my Dec 12th report on “appraisal” fraud running wild.

The “vacation” home data presented and analyzed herein show speculation moving from more institutional/professional and private investor cohorts to individuals chasing them, just like what happens in other asset markets experiencing bubble tendencies.

The salient point with “occupancy fraud” is that investment, not leisure, is the real motivator of the poorly named “vacation home” market with as little as 33% of “vacation/second” homes serving as purely leisure. In other words, the overwhelming majority of “vacation” homes are purchased specifically for “investment” purposes, which in the context of mortgage finance indicates fraud and pure real estate speculation.

It’s clear to me that the notion of strength in “vacation” homes sales coming from cohorts such as “boomers looking for a beach condo” for example is really just poor perception and that the majority of the activity in the last few years has been related to the gross hyper-speculation typical of the current trend in the real estate market.

Bottom line: The multi-year “surge” in “second/vacation” home purchases is largely driven by individual buyers and their agents/lenders chasing the rush of “investment” property speculators — who made headlines daily for years – committing fraud to get their slice of the “investment” property miracle. Just like from 2005 to 2007.


a) “Vacation” sales surge to historical highs of 1.13mm, slightly greater than Bubble 1.0, as “investment” property demand wanes. This represents 21% of all houses sold in the US; a whopper 57% yoy increase; and a mind-warping 140% surge since 2011.

Bottom line:  “Second/Vacation” home sales “growth” of 21%, 57%, and 140% over the past three years has never been rivaled at any time in housing market history and represents the largest Bubble 2.0 gains — by an order-of-magnitude — of any housing market segment. Of this specific “growth channel”, I estimate that minimum of 33% was based on fraud and never should have occurred.

But, it’s all the same “trade” – a late-cycle phenomenon — only by different cohorts.

The new-era of occupancy fraud began at the cross highlighted in yellow.

Vacation vs Investment Sales NAR 2001-14


b) “Vacation” purchases made up a record 21% of all US new and resale purchases in 2014 while “investment” fell to 19%, still a very high number historically, yet less than “vacation” homes, which has never happened before.

Bottom line:  This convergence with “investment” properties is a big red flag.  Just one year earlier, “vacation” homes only made up 13% of all US house sales while “investment” homes made up 20%. In 2012, “vacation” homes “only made up 11% of deals with investment coming in at 24% . As recently as 2000, only 7% of all houses sold were vacation or investment houses.



c) Combined, “vacation” and “investment” properties made up 40% of all US home sales in 2014, a speculative frenzy only seen one time before…in 2006



d) “All-cash purchases of “vacation” & “investment” homes has plunged over the past two years, a key feature of pervasive occupancy fraud also present in Bubble 1.0


e) The median distance to “vacation” homes from the buyer’s primary residence plunged from 435 to 200 miles over the past three years. In 2006 the distance was 215 miles, down from nearly 400 three years prior.

Obviously, this occurs as speculators buy investment property closer to their primary residence.  As such, the plunge in “median distance” occurs when more speculative investment properties — generally under 30 miles from the owner’s primary residence — enter the “vacation” home mix.



f) House prices plunged in 2014: the median vacation home price was $150,000, down 11.1 percent from $168,700 in 2013. This, while all other home prices rose 5% nationally in 2014.

  • The laughable excuse for the 2014 house price plunge by NAR’s Lawrence Yun: Yun explained the decrease in vacation and investment sales prices is likely due to the increase in vacation and investment buyers purchasing condos and townhouses. Additionally, the rise in vacation buyers purchasing distressed properties and buying in the South, where home prices are often lower, contributed to the overall decline in the sales price of vacation homes.
  • The laughable, EERILY SIMILAR, excuse for the 2006 house price plunge by NAR’s DAVID LEREAH (remember him?): “The drop in investment prices comes as no surprise, but for vacation-home prices to edge down in a record market is a bit puzzling,” Lereah said. “It may result from a large dumping of inventory on the market by speculators, especially in the condo sector, with long-term, second-home buyers taking advantage of the glut and buying at negotiated discounts. This underscores that housing should always be viewed as a long-term investment, providing solid returns over time. “Anecdotally, part of the drop in the median investment price results from investors shifting away from pricier markets like Florida, Nevada and Arizona, and into affordable locations in New Mexico, Idaho, Utah, Georgia, Tennessee and the Carolinas,” Lereah said.



g) The 16% price delta between the plunge in “vacation” home prices and 5% rise in all others is not explained by condos, as national condo volume fell 2% and prices were up 4%.

Bottom line:  This isn’t a chart that can skew the mix-shift and prices lower, as suggested by NAR. More likely, “vacation” home prices plunged because more lower-end “investment” properties fraudulently labeled as “vacation” homes entered this mix.


h) Buyer age of “Vacation” houses has plunged and converged with the age of “investment” buyers, as volume surged JUST LIKE IN BUBBLE 1.0.  This is a a strong indication of Occupancy Fraud.

Armies of baby-boomers retiring and buying their dream condos would push average age higher, not lower.

What these data suggest is ever-younger, more digital-friendly “landlords” are using new online services to rent their “vacation” home, which runs contrary to their lender’s definition of “vacation” home, and is fraud, plain and simple.

“Vacation” home prices plunging 11% in 2014 while house prices were up 5% also suggests occupancy fraud.

This sets the lenders up for putbacks, Realtors up for lawsuits, and borrowers up for Federal bank and wire fraud charges if in fact this was the plan from the time they obtained the loan.

Lastly, this is not “durable demand.  Rather, late-cycle, transitory demand that will go away as quickly as it arrived, just like with “institutional” buy-to-rent speculators who this channel is chasing.


i) Vacation demand surges and buyer age drops, just like in Bubble 1.0

Again, the exact opposite of what one would expect if baby-boomers were driving the manic surge in “vacation” home demand.

All data in the graphics above come from the NAR series of annual Investment and Vacation Home Buyers Surveys and our in-house residential housing databases.


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