Investors smash record with 18% of home purchases

David Goldsmith

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Staff member
A lot has been made recently on both sides of the "Wall Street buying up SFR" argument. One side says that hedge funds still represent less than one percent. But they aren't then only investors. Whether good or bad, there seems little question that the percentage of homes being bought by investors is increasing.


Investors smash record with 18% of home purchases​

90,215 homes in Q3 up 10.1% from previous quarter: Redfin​

Amid high home prices and the prospects of high returns, investors are snapping up a bigger piece of the single-family market, according to a new report from Redfin.
Redfin reports investors accounted for 18.2 percent of home purchases across the United States in the third quarter, a record for the sector. The figure marks a jump from investors’ share of 16.1 percent of home purchases in the second quarter and 11.2 percent of the sales in 2020’s third quarter.
Investors — defined in the report as any institution or business purchasing residential real estate — bought slightly more than 90,000 homes in the third quarter, up a whopping 80.2 percent from the previous year. The quarter counted $63.6 billion spent on homes, almost $5 billion more than in the second quarter.
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The investors have also shown a willingness to pay top dollar. Redfin reports investors spent $438,770 on a typical home last quarter, over $120,000 more than the national median home price.
Almost 77 percent of investor home purchases in the third quarter came in all-cash deals.

“With cash-rich investors taking the housing market by storm, many individual homebuyers have found it tough to compete,” stated Redfin Senior Economist Sheharyar Bokhari. “The good news for those buyers is that the housing market has started to cool. Bidding wars are on the decline, and if home-price growth continues to ease, we may see investors slow their roll.”

A record-high 74 percent of investor purchases in the quarter were for single-family homes. Meanwhile, less than 17 percent of purchases were for condos and co-ops, a record low.
Of the 40 metro areas analyzed by Redfin, Atlanta had the highest share of investor purchases, accounting for 32 percent of all sales in the third quarter. Phoenix and Charlotte also had more than 31 percent of all purchases made by investors, while Miami finished with the fifth-largest investor purchase share of 28.1 percent.

On the opposite end of the spectrum, Rhode Island’s Providence had the lowest share of investor purchases last quarter, accounting for 5.4 percent of home purchases.
Other notable metros to see homes snapped up by investors include Chicago (8.5 percent of Q3 purchases), Los Angeles (19.1 percent), New York (12.5 percent) and San Francisco (20.4 percent). New York stands out as one of only two metros to see a year-over-year decline in investor market share, which dropped 0.6 percent — San Jose is the other.
 

David Goldsmith

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Staff member

Whistleblower suit based on AI accuses landlord of cheating SoCal cities​

Whistleblower lawsuit alleges Invitation Homes bilked 18 cities in Southern California out of fees, property taxes​

A Dallas-based landlord has been accused in court of buying thousands of cheap homes in Southern California after the Great Recession, fixing them up, then bilking 18 cities and counties out of millions of dollars in unpaid permit fees and property taxes.
Blackbird Special Project, owned by La Jolla businessman Neil Senturia, filed the whistleblower lawsuit against Invitation Homes in 2020 based on software that used artificial intelligence to confirm the alleged fraud, the San Bernardino Sun reported. The entity could be in line for a significant reward if the suit leads to recoveries for local governments.
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The civil complaint was unsealed by a San Diego judge late last year.
The lawsuit alleges Invitation Homes obtained building permits for less than 7 percent of the more than 6,700 single-family homes it owns in San Diego, Sacramento, Los Angeles, Moreno Valley, Riverside, Compton, Temecula, Palmdale, Lancaster, San Bernardino, Vallejo, Fontana, Murrieta, Fairfield, Perris, Yucaipa, Corona, and Rialto.

The complaint filed in a San Diego County court lists 18 cities as plaintiffs.
The vast majority of the Invitation Home renovations required permits – for demolishing and building sections of single-family homes, installing and demolishing pools, and significantly altering electrical work – that were not obtained, according to the civil complaint.
“Once the single-family homes were renovated without the required permits, Invitation Homes rented them to tenants who were unaware of the unpermitted and potentially unsafe renovations,” the lawsuit said.

Invitation Homes declined to discuss the lawsuit.
“While we cannot comment on pending litigation, we believe the allegations are without merit and we intend to vigorously defend the company,” a company spokesperson said.
The business model for the scam was simple, according to the lawsuit.

Invitation Homes bought devalued properties across the U.S. after the 2007-08 financial crisis, amassing more than 12,000 single family homes in California. It then spent about $25,000 to renovate each home before renting them out.
The alleged fraud, according to the complaint, occurred when the company ignored permitting requirements to avoid permit fees – and pushed properties into the rental market as fast as possible to avoid property tax increases.

As a result, Invitation Homes cheated California counties and cities out of millions of dollars, the complaint alleges.
Blackbird, in conjunction with Deckard Technologies, used artificial intel and “lookback” technology to access images of homes from multiple listing services to compare them with images from rental advertisements after renovations, the suit states. It includes 14 before-and-after photos of homes, mostly in Riverside County, purported to have been purchased by Invitation Homes and renovated without obtaining necessary permits.

In Moreno Valley, roughly 20 percent of homeowners have pulled permits for renovations since 2012, Invitation Homes pulled permits for less than 4 percent percent of its 526 properties in the city, the suit says.
The complaint alleges Invitation Homes has avoided safety oversight from city building inspectors, potentially putting thousands of tenants at risk
 

David Goldsmith

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Invitation Homes often skipped permits as renters allege shoddy repairs​

Rental landlord owns 80K homes across the US​

Invitation Homes, one of the winners in the rise of single-family rentals, has often skipped permits and facilitated poor repair work, leaving tenants with leaky plumbing and other unpleasant problems.
The corporate landlord, a $23 billion company that owns 80,000 homes across the United States, frequently renovates properties without building permits, the Washington Post reported, citing a California lawsuit, review of properties and analysis of building data. As the company traded bureaucratic delays and fees, renters claim the lack of permits has led to poor maintenance and endangering tenants.

The outlet examined three of the landlord’s markets: Orlando, Charlotte and Riverside, California. In each, it found the company was less likely than others to have permits for renovations and projects, including only half as likely in Charlotte and Riverside.
In the past decade, Invitation Homes was issued permits for only 13 percent of the homes it acquired in Riverside, compared to 28 percent for the rest of the population. In Charlotte, it was 24 percent for the company’s homes, against 48 percent for others. The gap was closer in Orlando: 56 percent for the company, 63 percent for everyone else.

At more than a dozen homes across several states, the company hired contractors without a record of proper permits for work such as roof replacements, air conditioning installation and pool demolition.

“We always seek to comply with applicable laws and regulations, including permitting laws, and are continually evaluating and improving our compliance procedures,” the company said in a statement to the Post. “We expect our third-party vendors to adhere to these same standards and enter into agreements that obligate them to do so.”

Permits have surfaced in previous legal issues for the company. In 2020, Blackbird Specialty Project sued Invitation Homes, alleging work done in California without permits; the lawsuit aims to recover money for local governments. Invitation Homes has said the allegations in the whistleblower suit are “unfounded.”
Despite the allegations of shoddy work, the rents Invitation Homes are charging are increasing in a soaring rental market. The company charged an average of $1,851 per month in the first quarter of 2020, but an average of $2,074 in the first quarter of 2022.
for $132M
 

David Goldsmith

All Powerful Moderator
Staff member

Investors cool home purchasing for single-family rentals​

Several firms waiting to see if prices come down​

The cooling of the housing market isn’t only affecting prospective homeowners — it’s hampering investors, too.
Several investors are slowing home purchases for single-family rentals due to high home prices and the rising cost of financing, Bloomberg reported. People close to the decisions told the outlet three investors — KKR & Co.’s My Community Homes, American Homes 4 Rent and Amherst Holdings — are among those to slow purchases in recent weeks.

Institutional landlords are hiking yield requirements for new purchases, according to the publication. As a result, some have cut their buying activity by more than 50 percent.
“Let’s tap the brakes and watch the markets,” Mynd Management CEO Doug Brien, whose company advises institutional and retail investors, told the outlet. “There’s a belief that in the fall, buying opportunities will improve.”

Home prices have soared to historic highs, pricing ordinary homebuyers out of the market. Increasing mortgage rates are doing the same, which may result in a correction in the market that could bring down sale prices, which would help investors’ profits on single-family rentals.

Investors have a greater ability to pay in cash and avoid the trappings of increased interest rates, but they aren’t immune from the need of financing. In one example, Tricon Residential recently refinanced nearly 1,700 homes at a 5.5 percent interest rate, more than double the rate the company took out for a securitized loan in November.

The reported pullback comes after investors accounted for a record share of home purchases in the first quarter. Redfin reported investors accounted for 20 percent of home purchases across 40 of the country’s major markets in the first quarter, paying $49.8 billion for homes.
Seventy-three percent of investor purchases in the quarter were for single-family homes.
Single-family rentals have been a consistent winner for investors during the pandemic as sustained demand and the short supply of homes have sent some prospective homeowners into the rental market instead. The boom began in 2020 and built-to-rent homes became the fastest-growing housing sector in the nation.
 

David Goldsmith

All Powerful Moderator
Staff member

Private equity giant Carlyle’s latest big play: Small Brooklyn buildings

Flying under the radar, the Carlyle Group has stitched together a half-billion-dollar portfolio of small apartment buildings in Brooklyn.

Over the past year, the private equity giant has bought more than 130 of them in hot neighborhoods such as Bushwick, Bedford-Stuyvesant, Park Slope and Cobble Hill, according to sources and an analysis of property records by The Real Deal.

It’s one of Wall Street’s biggest moves into the realm of mom-and-pop landlords and an unusual approach for a company that raised an $8 billion real estate fund in December.

In many instances, Carlyle is buying these buildings one at a time, writing the kinds of $2 million or $3 million checks common to the small investors who dominate the space.

“Generally these owners are small to mid-sized operators that bite off what they can chew,” said Michael Tortorici of commercial brokerage Ariel Property Advisors. “It’s not often you see people looking to amass massive portfolios.”

A spokesperson for Carlyle declined to comment. People familiar with the firm’s strategy said it’s targeting a specific type of building that falls into the city’s 2A/2B tax designation, which limits increases on real estate taxes to no more than 8 percent a year. These properties have no more than 10 units and tend to be mostly free-market, avoiding the severe restrictions imposed on owners by the 2019 rent stabilization law.

And because they lack such amenities as doormen and elevators, the buildings have relatively low operating costs.

That type of high-margin, predictable investment is becoming increasingly attractive to institutional players willing to endure the grunt work of building large portfolios one small building at a time, according to Rich Velotta of commercial brokerage Raven Property Advisors.

Besides, he said, there’s no easy alternative.

“If you’re someone like Carlyle and you’re looking to put out quite a bit of capital, it’s difficult in the more supply-constrained markets of prime Brooklyn and Manhattan to find large-scale multifamily that isn’t rent-stabilized,” said Velotta. “It’s probably borne out of a function of necessity.”
Going small

Such smaller buildings have traditionally been stepping stones for rookie landlords.

“These are often kind of an entry point for new investors,” Tortorici said. “They’re not too big financially or operationally, so people look to fix them and then sell and move on up.”

Carlyle’s U.S. real estate head Jason Hart and principal Wonjoong Kim made a big move into the space in December, when the firm teamed up with landlord Greenbrook Partners on a portfolio of about 45 buildings.

Greenbrook, led by Greg Fournier, had recently gone on a Brooklyn buying spree but was drawing some unwanted attention. Tenants at Greenbrook-owned buildings in Park Slope cried foul last year when their landlord declined to renew their leases on free-market apartments.

The move came as Wall Street was drawing heat for buying up single-family homes, and then-City Council member Brad Lander and U.S. Senate Majority Leader Charles Schumer publicly denounced Greenbrook.

Lander, now the city’s comptroller, said he hasn’t heard of any similar complaints at Carlyle-owned buildings. But he did object to the encroachment of private equity investors “which focus on short-term profit-making at the expense of long-term tenants … accelerating the crisis of housing affordability and stability across our city” and furthered his call for “good cause eviction.”

Greenbrook did not respond to requests for comment. Immediately following the initial negative publicity, the firm had said it would talk to tenants about lease renewals. (This May, Mother Jones published an extensive investigation on the company, documenting tenant experiences at its building as part of a series called “How Private Equity Looted America.” The publication identified ties to Carlyle on three-dozen of its properties, but TRD’s analysis reveals a far bigger bet.)

After partnering with Fournier, Carlyle went around buying buildings on its own across Brooklyn and picked up a few in Queens as well. This month, the firm landed a $500 million mortgage from Invesco secured by the properties.

While Carlyle may be the biggest name to make a play for 2A/2B buildings, it’s not the first. And investors are paying more attention to the space.

Highpoint Property Group, led by former Naftali Group executive Drew Popkin, has been collecting these small buildings since 2017.

Highpoint recently put on the market a portfolio of 20 buildings with 146 units in Chelsea, the East Village and Cobble Hill/Brooklyn Heights with an asking price approaching $300 million, according to a source.

Marketing materials from Meridian Investment Group, which is handling the sale, highlight the buildings’ upside and their “unique protections afforded only by NYC tax class 2A/2B properties.”
Protection premium

Carlyle appears more willing to grind out lesser deals than its peers, who tend to go big.

Blackstone, for example, paid $930 million in June for the 76-story 8 Spruce Street rental tower in Manhattan, and KKR has spent about $1 billion over the past two years buying up relatively large, new buildings in Brooklyn with the Wrublin family’s Dalan Management.

And while Carlyle in March closed a deal to buy an 18 million-square-foot portfolio of net leased properties from iStar for $3 billion, its deals in New York have been more modest – except when looked at in aggregate.

The company in October paid $34 million to buy a 40-unit loft building in Clinton Hill. In November, it bought a new 175-unit rental building in Queens at 22-22 Jackson Avenue for $85 million.

Carlyle plans to build a three-story, self-storage facility in Crown Heights on a property it bought for $13 million in 2020.

It’s not clear what the company has in store for its tax-protected portfolio. Some observers speculated the company could be employing the typical private-equity roll-up model of assembling a portfolio to sell down the line.

Blackstone and KKR have also launched non-listed REITs that allow retail investors to buy into their portfolios.

Shimon Shkury, president of Ariel Property Advisors, said investor interest for the 2A/2B buildings is growing.

“Because they’re tax class–protected, there is a premium investors are willing to pay,” he said. “You know your taxes are going to stay stable for the foreseeable future, and in an inflationary environment like today, they could also be considered inflation hedges.”
 

David Goldsmith

All Powerful Moderator
Staff member

Could a recession be rocket fuel for single-family rentals?​

As rents keeps pace with rising costs, portfolios are poised to expand​


SFR-chart-705x482.jpg

The single-family rental sector has grown steadily in value (Source: John Burns Real Estate Consulting)
As housing braces for a prolonged downturn, the single-family rental sector appears poised for a shopping spree.
Accounting for a third of the total U.S. rental inventory, single-family rentals now comprise nearly 16 million units worth over $4 trillion, according to data from Harvard’s Joint Center for Housing Studies. The sector — and especially its even faster-growing build-to-rent segment — would appear to be threatened by a combination of rising rates, inflation and sky-high construction costs crimping the rest of the real estate world.

But with the growing realization that even wealthy Americans may be locked out of buying, and with rents increasing at record rates — 11.8 percent year-over-year in June, according to Yardi Matrix — the prospect of owning rental homes appears increasingly popular and profitable. Just follow the money. John Burns Real Estate Consulting found $45 billion was invested in the sector last year, making 2020’s $3 billion look like pocket change. The firm also estimates that the sector has doubled in value over the last decade.

“It is a golden hour for build-to-rent,” said Brad Hunter, founder of Hunter Housing Economics. “People who would have been in the market to buy a home are rethinking, shut out of ownership or simply indignant at the monthly cost of a mortgage. We’ve studied hundreds of build-to-rent developments around the country, and they’re leasing up as fast as the homes can be delivered.”
Even inflationary pressure can’t constrain the flow of funds and renters; while profits seem less eye-popping, it’s merely a quick set break in the midst of an all-day dance party. Recent financials reflect how, because of a lack of housing options, ever-rising rents are far from hitting a ceiling, or as American Homes 4 Rent CEO Bryan Smith said on a May 6 earnings call, the firm hasn’t encountered much price sensitivity in the marketplace.

There has been a speed bump due to increasing acquisition costs — nationwide, the median home sale price topped $400,000 this summer, and many operators have slowed down purchasing single homes until values moderate. A recent Attom Data report showed that in the last year, average gross yields before expenses for newly acquired single-family rentals decreased in over two-thirds of counties, but only by a percentage point. Most markets, especially the fast-growing South and Midwest, still show 8 percent yields.
Other figures tell the whole story: Lease growth for renewals rose 7.8 percent in the first quarter, and operating incomes soared by double digits. Canadian-American giant Tricon Residential saw 11.6 percent year-over-year growth in net operating income, while Invitation Homes notched an 11.7 percent gain. The stock prices of public single-family rental firms have declined roughly 5 percent this year, significantly outperforming the broader market.

As demand for rental housing rises, industry players will push to expand.
“You need to be doing scattered-site, build-to-rent and buying portfolios,” said Doug Brien, co-founder of Mynd, which develops property management software. “That’s really the way to make sense of this business.”
Trevor Koskovich, an investment sales broker at Northmarq, sees a perfect storm for growth: Minimal housing construction in hot Sun Belt markets like Phoenix, Las Vegas and Nashville creates opportunity; increased operational efficiency means owners are collecting more on a per-square-foot basis; out-of-reach homeownership means wealthier tenants with less turnover; and capital is pouring in.
John Burns recently found that it costs, on average, an additional $800 a month to own rather than rent. Build-to-rent firms expect to deliver a record 14,000 new homes nationwide this year.

“With rents keeping pace with home values, even though the latter is leveling off, it’s still one of the best risk-adjusted investments you can make,” said Koskovich. “One thing people always need is housing, and they’ll forgo a lot of other expenses and luxuries to make sure they get to live in the kind of place they want to live in.”
As Josh Hartmann, CEO of national single-family rental developer NexMetro Communities, puts it: “The rents work for us, the cap rates work for us, the costs work for us, and the land cost works for us.”
It helps that demographic tailwinds have pushed renters from two of the biggest generations in history, baby boomers and millennials, into rental housing. Boomers want to age in place and forgo the pains of ownership but not the privacy of a detached home. Some builders, like Maxwell Group, are planning senior-focused build-to-rent communities.

But even more vital to the sector’s success are aging millennials, who are filling a key 30- to 44-year-old age group that is expected to grow to 70.2 million in 2030 from 65.7 million in 2021, outpacing the overall U.S. population. This single-family segment, including a wealthy cohort of would-be homeowners, has driven up occupancy and renewal rates; Invitation Homes saw occupancy hit just over 98 percent in early 2022, with renewal growth almost hitting double digits every month.
While the customer base grows, now may seem like an especially expensive time for expansion, with record housing prices and building costs already slowing down homebuilders. Bloomberg reported that KKR, American Homes 4 Rent and others have hit the brakes on acquisitions, with some investors cutting buying activity by half. But while there’s definitely appreciation in land costs — Hunter expects aggressive land purchasing to taper off as home prices settle down — the SFR world is uniquely positioned to grow even in recessionary times.

Some developers, like NexMetro, have focused on smaller units and squeezing more profit out of build-to-rent communities. They’re opting for compact, 1,000-square-foot homes, maximizing returns on 20-acre plots and charging higher rents per square foot.
Increasingly stuck with spec inventory many buyers can’t afford, homebuilders are simply offloading to growing institutional landlords. They’re running a dual track, said Koskovich, especially publicly traded builders under pressure to sell; they can counter rising interest rates by diversifying and simply selling homes to rental firms. Multifamily players like Alliance Residential and builders like Toll Brothers, Lennar and D.R. Horton either have deals with such firms or have vastly expanded their in-house rental-home segments.

Homes, as the owners of these rapidly appreciating assets know, are not just places to live, but investments. For single-family rental firms, these assets seem poised to continue to pay off. Unlike commercial property leases, home leases get re-signed and adjusted annually, allowing inflationary pressures to be more immediately reflected in rents. Another recent John Burns analysis suggests rents almost never drop for single-family homes. While home values see-sawed during the Great Recession and other downturns, rent growth never went negative.
Factor in operational efficiencies from technology and green design — Hunter has seen more single-family rental builders and long-term owners invest in energy efficiency and sustainability features — and a clearer picture emerges of better profit margins.

“Owners are saying, ‘I want to keep buying — I have a long-term thesis, and I can whittle away at the edges, but if I could apply technology, I can actually change my cap rate,’” Lucas Haldeman, co-founder and CEO of proptech firm SmartRent, told The Real Deal last year.
Invitation Homes, Tricon and others can also continue to afford expansion because the funding is there. The long-term value of these assets keeps increasing with rent growth, enough to make this period of higher mortgages an opportunity to expand portfolios.
In some sense, the sector might be an even better investment now.
Hartmann noted that due to a limited supply of rental homes, high demand and hungry investors, the sector is experiencing what’s called cap-rate compression; the income stream for the same investment is rising, making it an even bigger target for investors. So far this year, there have been 10 single-family rental securitization deals worth $7.8 billion, according to Kroll Bond Rating Agency data. MetLife Investment Management recently predicted that growing the institutional ownership of single-family rentals to 10 percent from its current 2 percent would require $200 billion in incremental debt financing.

Negative sentiment over institutional landlords has been growing, with a congressional subcommittee meeting in June bringing attention to what one representative called the “mass predatory purchasing” of private equity, while the same NIMBY sentiments and regulatory issues that harm other builders also apply to the build-for-rent sector. But even with slowing growth, investors seem confident that the value of rental assets during a housing crisis is assured.
“As the space continues to proliferate, it will become more efficient,” said Koskovich. “It’s like Amazon — you become the largest company in the world by becoming more efficient.”

 

David Goldsmith

All Powerful Moderator
Staff member

The Other Shoe Drops: Blackstone Landlord Halts Home Purchases In 38 Cities As Market Crashes​

One month after we reported that home prices finally dropped for the first time in year, an observation echoed yesterday by Black Knight which also found that home prices had fallen for the first time in 3 years last month - in the biggest decline since 2011 - we knew the other shoe in the ongoing housing crash was set to drop any minute.
We didn't have long to wait, because just after the close today, all those who had defended housing as backstopped by Wall Street's biggest firms and thus unlikely to crash, were suddenly silenced when Bloomberg reported that Home Partners of America, the single-family landlord owned by Blackstone, the largest residential and commercial landlord in the US, will stop buying homes in 38 US cities, becoming the latest institutional investor to back away from an overheated housing market.
The company, which was acquired by Blackstone in June 2021 for $6 billion, told customers that as of Sept. 1, it is pausing applications and property submissions in Boise, Idaho; Fresno, California; Memphis, Tennessee, and 25 other areas. The company will go on hiatus in 10 additional cities on Oct. 1 (incidentally, Boise, ID is the city which saw explosive price increases during the covid pandemic, and has since then seen an unprecedented plunge with Redfin reporting that a record 70% of home sellers had dropped their asking price in July).

“We assessed several factors such as home price appreciation, state and local regulations and market demand to guide our investment plans to best serve consumers,” Home Partners of America said in an announcement on its website. “We hope to resume purchasing homes in these markets in the future.”
According to Bloomberg, Home Partners of America, which operates in more than 80 markets, stands out from other large single-family landlords because it’s designed to give tenants a pathway to homeownership. Customers apply for the program and, if approved, can submit homes they would like to eventually buy. Home Partners purchases the property in cash, then rents it to the customer, who gets the right to purchase the home at a predetermined price.
Under the new policy, customers who have been approved but don’t submit a home by the cutoff date will be withdrawn from the program and have their application fee refunded, according to the announcement.
Home Partners isn’t the first Wall Street institutional investor to back away from the US housing market, which reached a frenzied bubble during the first half of the year, a bubble which has since popped with both new and existing home sales collapsing at near record rates. As we reported last month, Invitation Homes, American Homes 4 Rent, and KKR’s My Community Homes are among landlords that have slowed purchases during a period of high home prices and rising financing costs.
Mynd Management, a real estate platform that helps investors find, buy, lease, manage, and sell residential investment properties, advised institutional clients to dial back acquisitions and wait for housing prices to readjust to the interest rate shock. In an interview, Mynd's CEO Doug Brien told Bloomberg that market conditions could improve in the fall as "buying opportunities" emerge. He said, for the time being, "let's tap the brakes and watch the markets."
Only instead of tapping the breaks, they were slammed full force...

57,441251

 

David Goldsmith

All Powerful Moderator
Staff member

'Enormously costly' business loan fraud drove inflation in home prices in certain markets, research suggests​

  • Covid-era Paycheck Protection Program fraud may have contributed to home price inflation in certain U.S. markets, research suggests.
  • "Fraud on this scale is enormously costly," said Sam Kruger, co-author and assistant professor of finance at the University of Texas at Austin.

Prospective buyers are welcomed by real estate agents at an open house in West Hempstead, New York on April 18, 2021.
Newsday LLC / Contributor
It's been a tough market for U.S. homebuyers with a limited supply of properties driving up prices nationwide.
But another factor may have contributed to rising home costs in certain markets — fraudulent claims from the Covid-era Paycheck Protection Program, or PPP, according to new research. PPP loans were designed to help cover business expenses during the pandemic, such as employee payroll.

"Fraud on this scale is enormously costly," said Sam Kruger, co-author and assistant professor of finance at the University of Texas at Austin.

A historic pandemic-era relief program, PPP distributed more than $793 billion between April 2020 and May 2021. And previous research from the University of Texas at Austin team flagged $117.3 billion of the funds as "suspicious lending."
"The fraud was highly concentrated geographically," Kruger said. "And because of that concentration, there may have been spillover effects in some of those local areas."

PPP loan fraud affected home prices​

U.S. home prices rose by 24% between November 2019 and November 2021, according to the Federal Reserve Bank of San Francisco, driven by factors such as shifting demand and regional moves.
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However, government aid may have also contributed to that growth, including higher rates of fraudulent PPP loans in certain areas, according to the new research.
This is a very specific type of stimulus that injected cash into certain areas, and it seems to have played a pretty significant role.
Sam Kruger
ASSISTANT PROFESSOR OF FINANCE AT THE UNIVERSITY OF TEXAS AT AUSTIN
The paper found that certain markets had elevated rates of PPP loan fraud, and individuals who received fraudulent loans were more likely to have purchased property.
"This is a very specific type of stimulus that injected cash into certain areas, and it seems to have played a pretty significant role," Kruger said.
ZIP codes with "high suspicious lending per capita" had home price growth that was 5.7% higher than ZIP codes in the same county with lower levels of fraud, the paper found. "This effect is large relative to other proposed factors explaining house price growth during the Covid period," the authors wrote.

The findings were consistent after weighing factors such as land supply, previous home price growth, remote work access, population density, net migration, proximity to the central business district and prior rates of remote work.
"It's not just that you're stealing money from the government," Kruger said. "There are potential distortions and spillover effects that are affecting other people in the community."

'Enormously costly' business loan fraud drove inflation in home prices in certain markets, research suggests
.

But another factor may have contributed to rising home costs in certain markets — fraudulent claims from the Covid-era Paycheck Protection Program, or PPP, according to new research. PPP loans were designed to help cover business expenses during the pandemic, such as employee payroll.


"Fraud on this scale is enormously costly," said Sam Kruger, co-author and assistant professor of finance at the University of Texas at Austin.

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A historic pandemic-era relief program, PPP distributed more than $793 billion between April 2020 and May 2021. And previous research from the University of Texas at Austin team flagged $117.3 billion of the funds as "suspicious lending."

"The fraud was highly concentrated geographically," Kruger said. "And because of that concentration, there may have been spillover effects in some of those local areas."

PPP loan fraud affected home prices
U.S. home prices rose by 24% between November 2019 and November 2021, according to the Federal Reserve Bank of San Francisco, driven by factors such as shifting demand and regional moves.


However, government aid may have also contributed to that growth, including higher rates of fraudulent PPP loans in certain areas, according to the new research.

This is a very specific type of stimulus that injected cash into certain areas, and it seems to have played a pretty significant role.
Sam Kruger
ASSISTANT PROFESSOR OF FINANCE AT THE UNIVERSITY OF TEXAS AT AUSTIN
The paper found that certain markets had elevated rates of PPP loan fraud, and individuals who received fraudulent loans were more likely to have purchased property.

"This is a very specific type of stimulus that injected cash into certain areas, and it seems to have played a pretty significant role," Kruger said.

ZIP codes with "high suspicious lending per capita" had home price growth that was 5.7% higher than ZIP codes in the same county with lower levels of fraud, the paper found. "This effect is large relative to other proposed factors explaining house price growth during the Covid period," the authors wrote.


The findings were consistent after weighing factors such as land supply, previous home price growth, remote work access, population density, net migration, proximity to the central business district and prior rates of remote work.

"It's not just that you're stealing money from the government," Kruger said. "There are potential distortions and spillover effects that are affecting other people in the community."
 
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