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More than 7 million homeowners who suffered a foreclosure or short sale during the housing crisis are poised to become buyers again.
Over the next eight years, nearly 7.3 million Americans who lost their homes in the housing crash will become creditworthy enough to buy again, according to a new analysis.
RealtyTrac, a real estate information company and online marketplace for foreclosed properties, estimates that these “boomerang buyers”—those who suffered a foreclosure or short sale between 2007 and 2014—are rapidly approaching, or already past, the seven-year window “conservatively” needed to repair their credit.
This year, the firm expects, more than 550,000 of these buyers could be in a position to get back into the market. The number of newly creditworthy individuals will then top 1 million between 2016 and 2019 and gradually decline to about 455,000 in 2022.
RealtyTrac notes that the return of these former homeowners could have a strong effect on housing markets with a particular appeal to the boomerang demographic: areas with “a high percentage of housing units lost to foreclosure but where current home prices are still affordable for median income earners” and a healthy population of Gen Xers and Baby Boomers, “the two generations most likely to be boomerang buyers.”
Based on those criteria, the analysis targets metro areas surrounding Phoenix (with an estimated 348,329 potential boomerang buyers), Miami (322,141), and Detroit (304,501) as the most likely to see an uptick in return buyers.
Chris Pollinger, senior vice president of sales at First Team Real Estate, told RealtyTrac that previously foreclosed Americans shouldn’t rule out another try at homeownership. “The housing crisis certainly hit home the fact that homeownership is not for everyone, but those burned during the crisis should not immediately throw the baby out with the bathwater when it comes to their second chance,” Pollinger said.
Here are the top 10 areas that could see a boom in boomerang buyers:
A tight inventory of houses for sale has been stymying buyers who want to trade up. That could change soon.
Joe and Debbie Valerio, a couple in their 60s, put their Westport, Conn., home of more than 20 years on the market because it was getting too big for them.
When they found a nearby condo they loved, they pounced. That set off a chain reaction allowing Peter and Leah Baiocco, a couple in their 30s, the ability to trade up.
The Baioccos lived a few miles away, contemplating a future move to a bigger home once kids came along. With favorable economic conditions, they jumped at the chance to buy the Valerios’ $2.7 million house last April. After renting it out for nearly a year, the Baioccos’ starter house in Fairfield, Conn. is on the market for $739,000.
This seemingly simple sequence of events is still relatively rare in the U.S. housing recovery. Despite an improving economy and rock-bottom rates, inventory of available homes is inconsistent. Anything more than a trickle of listings sends prices down, causing sellers to pull their homes off the market.
Then prices go up again because competition gets fierce, and sellers re-emerge. As a result, a bustle of trade-up activity is expected for this spring’s selling season, before conditions change again.
“I think a lot of people have made a lot of money in the stock market the last few years. People who want to enjoy a luxury home, now is the time. Everyone has more cash available to them,” says Ken Barber, a real estate agent in Wellesley, Mass.
Other positive signs: new single-family housing starts are at a high since 2008, according to the Commerce Department’s latest report.
Also, fewer homeowners are renting out their homes to delay selling them, down to 35% in 2014 from 39% in 2013, according to Redfin, a real-estate brokerage.
And more consumers have positive equity. Last spring, 19% of homeowners in Redfin markets (such as Atlanta and Philadelphia) had low or negative equity. That was down to 11% in November. Nela Richardson, Redfin’s chief economist, expects it to hit 8% by March 2015.
Even better for buyers, interest rates are near-historic lows below 4%. “The question of staying versus leaving is shifting. For people who were afraid to leave their mortgage because they thought it was the best they’re ever going to get, now there is another good mortgage around the corner,” Richardson says.
Those trading up in 2015 should hit a sweet spot of selling near the top but not buying at the top, says Margaret Wilcox, an agent from agent in Glastonbury, Conn., for William Raveis.
Wilcox says a client couple recently traded up from a $500,000 house to a $1 million home. They did not get quite the price they wanted for the sale of their old home, but they got a discount of nearly $300,000 on their new purchase, Wilcox says.
There are a few red flags for buyers and sellers. Seller confidence is still low, with just 35% of sellers thinking now was a good time to sell, versus 48% the previous year, according to Redfin.
Keith Jurow, a housing market analyst who writes the Capital Preservation Real Estate Report, is something of a doomsayer and thinks talk of a housing recovery “is phony and only an illusion,” he says.
Given the number of mortgages originated between 2004 and 2010, he feels that too many of the people who would like to trade up still have little or no equity in their homes and are not prepared to do a sale below their purchase price.
“Unless you bring more cash to the table, you can’t trade up,” Jurow says.
Also, foreboding makes some people want to act now. They do not want to be the family that missed their chance, adds Bob Walters, chief economist for Quicken Loans. “People won’t delay forever,” he says.
The Valerios and the Baioccos have only happy thoughts about their real estate choices. They love their new homes.
“In our mind, it’s the house we’re going to be in forever,” says Peter Baiocco.
47% of buyers aren't comparison shopping for a mortgage, and it's costing them tens of thousands of dollars.
When it comes to purchasing a home, most buyers generally don’t have trouble comparison shopping. According to a recent study, 22% of house hunters even described themselves “addicted” to online listings. But while home buyers love shopping for homes, they aren’t doing the same with mortgages. And it’s costing them tens of thousands of dollars.
A new report from the Consumer Financial Protection Bureau shows that 47% of home buyers seriously considered only a single lender or broker before deciding where to apply for a mortgage. And 77% of buyers only applied with one lender or broker instead of applying with multiple lenders and selecting the best offer.
Granted, shopping for a mortgage isn’t nearly as fun as shopping for a house, but rushing this part of the process can cost consumers an enormous amount of money. The bureau’s research showed that a borrower looking for a conventional 30-year fixed rate loan could be offered rates that differ by more than half a percent. According to BankRate’s mortgage payment calculator, the difference between a 4% and 4.5% interest rate for a conventional 30-year fixed-rate mortgage of $200,000 is slightly more than $21,000 over the lifetime of a loan. Put another way, comparison shopping for a mortgage can save you enough money to buy a second car.
Why don’t most buyers make the effort? Aside from the obvious—comparing financial instruments isn’t exactly a day at the beach—the CFPB found that being informed has a lot to do with consumer behavior. Borrowers who felt confident about their knowledge of available interest rates were nearly twice as likely to comparison shop as those who were unfamiliar with the interest rates they could expect to receive.
To solve that problem, the bureau has created a website to educate prospective buyers on the home purchasing process. Among other tools, it offers a page that lets consumers check interest rates for their particular situation using their location, credit score, down payment, and other factors.
The changes will save borrowers an average of nearly $1,000 a year.
The White House announced on Wednesday plans to reduce government mortgage insurance premiums in an effort to make homeownership more affordable for low-income buyers. President Obama is scheduled to talk about the policy in a speech Thursday in Phoenix, Arizona.
In the announcement, Housing and Urban Development Secretary Julián Castro said the Federal Housing Administration would slash insurance fees by more than a third, from 1.35% of the loan amount down to .85 percent. The FHA had a 30% share of the mortgage insurance market in the third quarter of 2014, according to Bloomberg.
Mortgage insurance, required of FHA borrowers, is meant to protect the lenders in case of default by allowing them to recoup some of their losses.
Over the next three years, the FHA projects the rate drop will allow 2 million borrowers to save an average of $900 a year when they purchase or refinance a home. The agency also estimates these savings will encourage 250,000 first-time buyers to enter the market.
The move marks a trend of recent policy changes meant to help low-income Americans get into the housing market. In December, mortgage providers Fannie Mae and Freddie Mac announced that certain first-time buyers could now qualify for a loan with a down payment of just 3 percent of the home’s value.
Taken together, today’s announcement and lower down payment requirements should make the housing market far friendlier for the economically disadvantaged. However, David Stevens, CEO of the Mortgage Bankers Association, told CNBC that the effect of the new policy may not spur an especially large increase in home buying.
“I think the marginal impact on sales will be small because potential buyers make the decision to purchase based on trigger events, such as a new job, marriage, kids, etc,” Stevens told the network. “Changes in affordability only impact how much home they can buy.”
While Democrats have been supportive of policies that aid low-income and new homebuyers, Republicans are concerned that lower insurance premiums could put the government at risk if borrowers once again default in large numbers. The FHA has previously required billions in taxpayer assistance, and while the agency is no longer losing money, its capital requirements will not meet the legal limit until 2016.
The NYPD's legendary Theo Kojak has some wise words for a young couple ready to purchase their first home.
Terri and David came in for a meeting with me. They were expecting a baby and wanted to buy a house.
“I’m a contractor,” David said. “I do painting.” Terri was an attorney with a law firm. Together they made about $150,000.
They had their eye on a $500,000 house, and wanted to make a down payment of 5%, or $25,000. Their question for me: “How should we make the down payment?”
David, who had $30,000 stashed in a safe deposit box, wanted to use that cash for the down payment. Terri wasn’t quite sure that was a good idea. Terri hugged her chair nervously.
Their basic problem was becoming clear: David worked in a business that can be largely cash. Terri liked to follow rules. She wanted to know whether showing up at the closing with a pile of $100 bills would get them into trouble later.
It’s at times like this that you need to remember Telly Savalas. That’s right, the actor who played the detective Kojak in the 1970s TV series of that name. He was famous for sucking on a lollipop and saying, “Who loves ya, baby?”
“You’re asking the wrong question,” I said to them.
I had their attention.
“What both of you should be worried about is that you can’t comfortably afford this house,” I said. “I don’t care where the down payment is currently located. Let me be clear: You’re buying too much house.”
“But the mortgage guy said that we could swing it,” said David. “I should be able to replace the cash in a year. I’ve calculated it all out and we can do it before the baby arrives.”
This is when we need Telly Savalas.
The answer to the question “Who loves ya baby?” is not “your mortgage broker” or “your realtor.”
This is a lesson I learned the hard way.
Before I started working as a financial planner, I didn’t know what I know today. I made a big mistake.
I bought a house I couldn’t afford. That’s not what I intended to do. It’s just that I was listening to the wrong people and not to Telly Savalas.
I focused on how much mortgage a bank would lend me. Here’s what my experience taught: The bankers don’t love me. They don’t give a rip about me. All they care about is making the most money for themselves. They got their money, but I was miserable.
I made the decision in a month or two and locked myself into the expenses for years to come.
In retrospect, this was predictable. A good rule of thumb is that a home is out of your price range if it costs more than two or two-and-a-half times your annual income. The house I bought was way over this range of affordability.
Housing costs soaked up my disposable income and made it tough to save. Living paycheck-to-paycheck, I couldn’t afford a decent vacation. When an emergency arose, I didn’t have adequate funds. So I felt the stress of both the emergency and scrambling to pay for the emergency.
All this stress was unnecessary.
If I did it right, I would have bought a condo that cost less than 2.5 times my annual income — say, $150,000 instead of the $200,000 I spent. And I would have saved up and made a 20% down payment, not the 10% payment I made.
Yes, the location wouldn’t have been as nice. And I wouldn’t have had an extra half-bath and an icemaker, both of which I enjoyed having — but which I didn’t really need.
Mortgage people and realtors will tell you there isn’t much of a difference. Let’s run some numbers, though: what I did, and what I should have done.
|What I did||What I should have done|
|Monthly mortgage and tax payments||1,400||860|
|Total monthly cost||$1,800||$1,170|
Spending $1,170 a month on housing would have been fine. Spending $1,800 made me feel “house poor.” It wasn’t the mortgage. It was everything else.
My message to Terri and David: David, report your income. Then, Terri, it doesn’t matter if the money is stored in a savings account, safe deposit box, or plastic baggie in the basement freezer. Don’t worry about it. And for the question that you didn’t ask: When buying a house, remember who loves ya, baby!
Bridget Sullivan Mermel helps clients throughout the country with her comprehensive fee-only financial planning firm based in Chicago. She’s the author of the upcoming book More Money, More Meaning. Both a certified public accountant and a certified financial planner, she specializes in helping clients lower their tax burden with tax-smart investing.
Consumers think 2015 will be a better year than 2014, especially for selling a home. But the recovery faces an uphill climb.
What does 2015 have in store for the housing market? Nine years after the housing bubble peaked and three years after home prices bottomed, the boom and bust still cast a long shadow. None of the five measures we track in our Housing Barometer is back to normal yet, though three are getting close. The rebound effect drove the recovery after the bust but is now fading. Prices are no longer significantly undervalued and investor demand is falling. Ideally, strong economic and demographic fundamentals like job growth and household formation would take up the slack. But the virtuous cycle of gains in jobs and housing is relatively weak, and that will slow the recovery in 2015. All the same, consumers are optimistic, according to our survey of 2,008 American adults conducted November 6-10, 2014.
Consumers Expect 2015 to Be Better, Especially for Selling a Home
Consumers are as optimistic about the housing market as at any point since the recovery started. Nearly three-quarters — 74% — of respondents agreed that home ownership was part of achieving their personal American Dream, the same level as in our 2013 Q4 survey and slightly above the levels of the three previous years. For young adults, the dream has revived: 78% of 18-34 year-olds answered yes to our American Dream question, up from 73% in 2013 Q4 and a low of 65% in 2011 Q3.
Furthermore, 93% of young renters plan to buy a home someday. That’s unchanged from 2012 Q4 despite rising home prices and worsening affordability.
Which real estate activities do consumers think will improve in 2015? All of them – but especially selling. Fully 36% said 2015 will be much or a little better than 2014 for selling a home. Just 16% said 2015 will be much or a little worse, a difference of 20 percentage points. The rest of the respondents said 2015 would be neither better nor worse, or weren’t sure. More consumers said 2015 will be better than 2014 for buying too. But the margin over those who said 2015 will be worse was not as wide.
Despite this optimism, barriers remain to homeownership. Saving for a down payment is still the highest hurdle, as it was last year, followed by poor credit and qualifying for a mortgage. Not having a stable job has become considerably less of an obstacle, dropping to 24% this year compared with 36% last year thanks to the recovering job market. But affordability has become a bigger obstacle. Some 32% of respondents cited rising home prices, compared with 22% last year.
Housing Recovery in 2015: Rebound Effect to Fade Before Fundamentals Can Take Over
Different engines power each stage of the housing recovery. During the early years—roughly 2012 to 2014 – the rebound effect drove the recovery. Investors and other buyers scooped up undervalued homes and took advantage of foreclosures and short sales, boosting overall sales volumes. Local markets hit hardest in the housing bust posted the largest price rebounds. Now, though, the rebound effect is fading. Price levels and price changes are both approaching normal, foreclosure inventories are dwindling, and investors are pulling back. This is inevitable as the market improves and therefore shifts to slower, more sustainable price increases and a healthier mix of home sales.
So what replaces the rebound effect in the next stage of the housing recovery? The market increasingly depends on fundamentals such as job growth, rising incomes, and more household formation. But here’s the hitch: These fundamental drivers of supply and demand haven’t returned to full strength. They aren’t able to fully take the reins from the rebound effect. Importantly, the share of young adults with jobs is still less than halfway back to normal, many young adults are still living with their parents, and income growth is sluggish. This points to a tricky handoff, and means housing activity in 2015 might disappoint by some measures, though the rental market will remain vigorous.
Here’s what we expect:
- Price gains slow, but affordability worsens. Price gains slowed in 2014 and we’ll see more of the same in 2015. In October 2014, prices increased4% year-over-year, down from 10.6% in October 2013. The slowdown has been especially sharp in metros that had a severe housing bust followed by a big rebound. Now, prices nationwide are just 3% undervalued relative to fundamentals. That leaves fewer bargains and scant room for prices to rise without becoming overvalued. What’s more, with consumers expecting 2015 to be a better year to sell than 2014, more homes should come onto the market, cooling prices further. Nevertheless, despite slowing price gains,home-buying affordability will worsen in 2015 for two reasons. First, even these smaller price increases will almost surely outpace income growth. In 2013, incomes rose just 1.8% year-over-year in nominal terms, and a negligible 0.3% after adjusting for inflation. Second, the strengthening economy and the Fed’s response should push up mortgage rates.
- The rental market will keep burning bright. Next year will see strong rental demand and lots of new supply. The demand will come from young people leaving homes belonging to parents or roommates and renting their own places. Until now, they’ve been slow to leave the nest. But the 2014 job gains for 25-34 year-olds should lead to the rise in household formation we’ve been waiting years for. At the same time, the 2014 apartment construction boom will mean more supply in 2015 since multi-unit buildings take about a year to build. Will rent gains slow? Probably – provided that this new supply keeps up with formation of renter households. This surge of renters will probably cause the homeownership rate to fall. To be sure, the ranks of homeowners will probably rise. But an even larger number of young adults will enter the housing market as renters.
- Single-family starts and new home sales could disappoint. While apartment construction is breaking records, single-family housing starts and new home sales are still not much better than half of normal levels. They’ll improve in 2015, but not as much as we’d like. Our consumer survey suggests more people will try to sell existing homes. That would add to the supply on the market and possibly reduce demand for new homes. Also, the strongest source of housing demand will be young people getting jobs and forming households. But they’ll be moving into rentals and saving for a down payment rather than buying homes right away. Finally, the vacancy rate for single-family homes is still near its recession high, which discourages new construction. The apartment construction boom shows that where there’s demand, builders will build. But buyer demand for single-family homes simply hasn’t recovered enough to support near-normal levels of single-family starts or new home sales.
If these predictions for 2015 sound similar to our predictions for 2014, you’re right. As the rebound effect fades and fundamentals take over, the recovery gets slower and the market starts to look more similar from one year to the next. But there’s good news here. Even though the recovery remains unfinished, the housing market is becoming more stable and more certain for buyers, sellers, and renters.
Markets to Watch in 2015
As the rebound effect fades, our 10 markets to watch have strong fundamentals for housing activity. These include solid job growth, which fuels housing demand, and a low vacancy rate, which spurs construction. We gave a few extra points to markets with a higher share of millennials. These young adults are getting back to work and that will drive household formation and rental demand. We didn’t include markets where prices looked at least 5% overvalued in our latest Bubble Watch report. Here are our markets to watch, in alphabetical order:
- Boston, MA
- Dallas, TX
- Fresno, CA
- Middlesex County, MA
- Nashville, TN
- New York, NY-NJ
- Raleigh, NC
- Salt Lake City, UT
- San Diego, CA
- Seattle, WA
These markets are spread across the country: Boston, Middlesex County (just west of Boston), and New York in the Northeast; Dallas, Nashville, and Raleigh in the South (the Census considers Texas part of the South); and Fresno, Salt Lake City, San Diego, and Seattle in the West. No Midwestern metros make the list because they generally have slower job growth and higher vacancy rates than other markets, even though many are quite affordable and prices are rebounding.
In 2015, more markets will settle back into their long-term housing patterns. Fast-growing markets that boomed last decade, collapsed in the bust, and then rebounded are now leveling off. Even the markets that have been slowest to recover and have struggled longest are seeing foreclosure inventories decline and the sales mix moving back toward normal.
At the same time, first-time homeownership, single-family starts, and new home sales won’t come close to fully recovering in 2015. But if 2015 brings strong job growth, big income gains, and the long-awaited jump in household formation, then 2016 could be the year when we see a major turnaround in homeownership and single-family construction.