Aug282014

What if Millennials and boomerang home buyers never materialize?

Housing bulls continue incorrectly predicting the return of Millennials and boomerang buyers. It’s time to consider what happens if they never come back.

As home ownership rates plummeted with waves of foreclosures in the aftermath of the housing bubble, real estate pundits pinned hopes for a real estate recovery on the return of so-called boomerang buyers, people who lost homes to short sale and foreclosure who return to home ownership.

It’s a compelling fantasy. It envisions hard-working Americans diligently saving for a down payment and paying their bills to improve their credit score as they eagerly await their opportunity to buy a home again. Reality is less supportive of the bullish fantasy.

In the largest study ever conducted on boomerang buyers, the federal reserve concluded that less than 10% of borrowers who lose homes to short sale or foreclosure return to home ownership. Further, even the small subset who were never delinquent on a loan and paid off their mortgage, only 35% ever borrow money to buy a house again. Once people purge themselves of mortgage debt, few choose to take it on again.

This gets to one of the core problems of the boomerang buyer hypothesis; borrower reluctance. Many people may want to own a house again, but they aren’t willing to take on a huge mortgage to do it, particularly after they were so badly burned the first time — and these borrowers have good reason to be cautious because the entire housing market is heavily manipulated and not supported by strong fundamentals.

After losing their homes in the foreclosure crisis, boomerang buyers are back

By Michele Lerner August 21real-time_mistake

Chris Noblejas, a former real estate agent, got hit by a double whammy during the housing crisis. His income declined drastically, and so did the value of the Gaithersburg, Md., townhouse he bought for $480,000 in 2006. He ended up selling the townhouse in a “short sale” in 2010 for $320,000. A short sale occurs when a lender agrees to accept a sales price for a home that is less than the amount owed on the property. …

I wanted to buy a house again, but I was still nervous because I made such a bad mistake before,” Noblejas says.

That is buyer reluctance, and it’s very difficult to overcome.

In a recent post, Despite industry spin, mortgage lending standards are not tight, the staff of John Burns Real Estate Consulting urged industry activists to get out the word that credit is widely available, even to those who think they have bad credit. This report is part of that effort to get out the word.

“Even renting was hard when I first lost my house. I didn’t even know if I could buy again, but I talked to a loan officer and was able to qualify for an FHA [Federal Housing Administration] loan. I plan to refinance that loan into a conventional loan as soon as I can to get rid of the mortgage insurance payments.”

The  FHA is the new subprime and the real estate industry wants to take advantage.housing_recovery_Austin_Powers

Boomerang buyers who lost a home to a foreclosure or short sale between 2007 and 2013 are projected to make about 10 percent of all U.S. home purchases in 2014, according to John Burns Real Estate Consulting (JBREC). … According to JBREC, the number of boomerang buyers will increase in 2015 and 2016 as more former owners become eligible for new loans.

This is wishful thinking. The huge study conducted by the federal reserve shows that only 10% ever return in their lifetimes. This demand cohort will never be 10% of the entire purchase demand in the housing market in one year. The dataset for their study is from the pre-housing bubble era, so for the sake of argument, let’s assume their data includes mostly deadbeats and that many of the foreclosures from the housing bubble are people who ordinarily would be diligent about paying debt. If that assumption is true, housing bubble borrowers who lost homes will return to the market at higher rates, but how much higher?

If you double the rate of return, then 20% will come back. How much higher can we reasonably expect the rate to be, particularly given the pain these borrowers endured when house prices collapsed?

Some housing market analysts, smitten with foolish optimism, projected as many as 80% of former owners may return to buy homes again, which isn’t going to happen.

miaj99-miaj7preal.centerpiece.g0217

“We always wanted to buy again, so we rented for a while and moved in with family for a year to save money,”Ashley Lawrence says. “We rebuilt our credit, and my husband got a good job in Virginia now, but we’ve moved every year since we lost our first house, which has been tough on our kids, who are now 7 and 4. ” …

This is the propaganda fantasy of the responsible, hard-working Americans returning to home ownership. Unfortunately, they represent 10% of those who lost their houses, not 50% or more as the housing bulls hope.American-Gothic-House-Underwater

“Most buyers I work with now, especially if they lost a home in the past, don’t want to get in over their heads,” Harich says. …

This is buyer reluctance, and buyers shouldn’t blithely ignore the risks of buying a house.

Think about what the real estate industry is asking Millennials to do; Millennials just witnessed the generation before them get burned in the housing bust (43 percent of homeowners between 35 and 49 are underwater). Then they witnessed the rapid reflation of house prices that forces them to risk being underwater themselves in order to bail out the foolishness of the previous generation.

Should be really be surprised Millennials are reluctant to repeat the mistakes of the previous generation?

Most borrowers have learned that they need to be more careful about what they buy and to avoid overextending themselves, Cohen says.

LOL! No kidding!

They “want to build equity and want to make as big a down payment as they can,” Cohen says. “Even if it’s a 3.5 percent down payment on an FHA loan, that’s better than the old days of zero-down-payment loans. In this area, saving up 3.5 percent for a $300,000 home means you need at least $10,500, plus you need more for closing costs and cash reserves, so that represents a good effort to save for most people.”

Is saving 3.5% of a purchase price really that burdensome? If so, then Millennials and boomerang buyers may never come back to the housing market. What then?

What Happens if Millennials Never Enter the Housing Market?

By Kathryn Buschman Vasel, Money Tree, Published August 14, 2014for-sale copy

Millennials’ supposed lack of interest of becoming homeowners is often blamed for the market’s slowing recovery, but some experts say the generation shouldn’t shoulder all of the fault.

Anthony Hsieh, founder and CEO of mortgage company loanDepot, says lack of innovation and too tight regulations are draining the housing market’s revival.

He is wrong on both counts. First, financial innovation is a fallacy, and second, while new regulations on the mortgage industry are considered burdensome by industry insiders, these regulations are necessary to prevent the kind of foolish innovation that inflated the last housing bubble, and contrary to his spin, mortgage lending standards are not tight.FHA_loanownership

“Private capital is not back into the mortgage marketplaces, and this is seven years after the crisis,” he says. “Credit has not been widened or deepened, and there isn’t enough product innovation to offer loans to this generation. The only programs are still regulated very tightly by the government.”

Good. We should have a stable housing market with much less risk of another housing bubble.

He adds that the private mortgage market is currently $1 trillion, falling short of the $1.5-$2 trillion market in normal condition. “It’s too small of a marketplace to meet the needs of first-time buyers. In 2003, fresh mortgage originations was a $3.9 trillion market.”

housing_market_toiletThis man is a fountain of spin and bullshit. Perhaps he should consult with the NAr? The mortgage market can easily meet the needs of first-time homebuyers. The reason the market is smaller today is because demand is lower today, partly due to higher home prices, and partly due to high unemployment and stagnant wages.

The millennial generation, which is bigger the baby boomer generation and is the biggest cohort of first-time buyers, has been largely absent in the housing market for various reasons: record student loan debt, high unemployment and underemployment, stagnant wages and a general disinterest of moving to the suburbs and taking on the responsibilities of homeownership.

“The big question mark is how long they put off entering the market,” says Keith Gumbinger, vice president of HSH.com. “If these first-timers don’t come in, that means the train can’t get underway. No one can sell and move up and on, the demand home prices rely on goes away….”

This is the long-term drag on the housing market everyone in the industry fears. For purposes of looking at the impact on the housing market, there is no difference between boomerang buyers and first-time homebuying Millennials; neither group is participating in the move-up market using equity from a previous sale.

I wrote in early 2013 that the move-up market would suffer for a decade. The combination of underwater borrowers whose equity flows back to the banks, and the absence of first time homebuyers (boomerang or Millennial) will paralyze the move-up market.

boomerang_buyer

If Millennials and boomerang buyers never materialize, the lack of housing demand will prevent homebuilding from being the large economic force it once was, the home ownership rate will remain near the 64% average it sustained for 40 years prior to the temporary surge from subprime lending, and the home price appreciation that enriched the Baby Boomers will not materialize for subsequent generations.

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