Boomerang buyers are out there by the millions, possible purchasers with the potential to heat up the real estate marketplace and with it large parts of the U.S. economy. And yet while the real estate industry is ready to gleefully welcome such buyers the path back to homeownership may be more difficult than expected.
Boomerang buyers include millions of former homeowners, individuals who in the tough aftermath of the mortgage meltdown found themselves foreclosed. Millions more lost their homes through short sales and with deeds in lieu of foreclosure. The crisis was even more difficult for those who faced bankruptcy and the loss of not only their homes but also personal possessions.
The one common feature shared by returning buyers has been a loss of credit, a loss so severe that in the past it made a quick return to ownership virtually impossible. In the eyes of the credit scorers, foreclosures, short sales and deeds-in-lieu of foreclosure all have the same impact, they’re regarded as “not paid as agreed” accounts. Bankruptcies are seen as a greater financial sin because they impact multiple accounts.
The good news is that time heals many financial wounds. Foreclosures and such stay on credit reports for seven years while bankruptcies linger for a decade. Given that much of the foreclosure crisis hit in 2006 and 2007 many credit dings from back then are simply falling off the system. The result is that the financial “blackout” period faced by millions of potential borrowers is coming to an end.
Even better, the mortgage industry has been reducing the effective penalties faced by those who lost their homes to foreclosures and such. For instance, the FHA has established a “back-to-work” program which allows qualified buyers who had an adverse “economic event” to finance within as little as 12 months.
The FHA plan is a welcome idea for those who have re-established their credit and this program, along with other industry initiatives, has already shown some results.
Figures from RealtyTrac show that there are potentially some 7.3 million boomerang buyers. The National Association of Realtors says that 950,000 boomerang buyers have already returned to the housing market and that raises a question: What about the six million or so potential boomerang buyers who have not yet gone back to ownership? Where are they?
No doubt some returning buyers will gradually ease back into ownership during the next few years. That said, some won’t.
Boomerang buyers are likely to be confronted with several problems they did not face when they last sought real estate ownership, issues which are likely to keep large numbers of returning buyers out of the market for a very long time, if not permanently. Here’s why:
First, the mortgage application system has changed: Borrowers must now provide extensive proof showing they have the ability to repay their loans. This is a concern because in many cases incomes have declined: In 2007, the median household income in real terms was $56,436. By 2013, the figure was down to $51,939. Less income means less ability to save and a reduced capacity to borrow.
Second, while home values are generally rising they are not going up everywhere. For the first quarter NAR says that existing home prices had annual increases in 148 metro areas — and fell in 25.
More importantly, the idea of rising home values may be an illusion. According to NAR, the median price for an existing home was $228,700 in May 2015 versus $230,400 in July 2006. By this measure prices have not recovered for almost nine years.
It’s likely that home values will soon reach a point where they exceed the peak levels seen before the financial meltdown — this is good news, at least on a cash basis. However, cash may not be the best measure of value because dollars buy less over time as a result of inflation.
According to the Bureau of Labor Statistics it takes $271,777 in 2015 dollars to buy goods and services that were worth $230,400 in 2006. In other words, in general the buying power represented by real estate, the true measure of real wealth, remains far from where it was.
Combine less household income with home values which have not kept pace with inflation and no doubt some prospective boomerang buyers will want to think carefully before once again entering the housing market. After all, they know first-hand that profits from real estate ownership are not a sure thing, even in what seemed the best of times.