Industry insider fosters false hope for boomerang buyer surge
2015 was touted as the year of the boomerang buyer. Lenders and realtors prepared, and the financial media wrote the invitations, but the boomerang buyers failed to arrive.
Many people criticize the financial media for running negative stories that “talk down the market,” but realistically, the financial media doesn’t have the power to move markets, and when they report an uncomfortable truth without the sugary spin, some people complain. When it comes to financial news, people only want to read good news, news that reinforces their belief in the correctness of their investments and reaffirms their faith in lifelong financial prosperity. Thus we have an entire branch of media that only presents good news. Any news that isn’t positive must be spun and interpreted in a way that provides comfort to readers. Personally, I prefer the truth.
The financial media periodically runs stories about the return of boomerang buyers, those who lost their homes in foreclosure but bought again. From the beginning I flatly stated this group would not participate in the housing recovery, and they would not be a significant source of demand. In the most complete study conducted on the behavior of boomerang buyers, the authors concluded that “Only about 10% of borrowers with a prior serious delinquency regain access to the mortgage market within 10 years of their default.”
So why did so many analysts think it would be different after the housing bust? Mostly it was spurious hope and wishful thinking.
The housing bust devastated ordinary people. Despite the pain and hardship, most housing analysts believed these dispossessed former owners would desire homeownership and dutifully make payments if given the chance. While such stories of American redemption are noble and appeal to our collective sense of pride, it ignores some inconvenient facts of human behavior.
First, people who experience the trauma of losing their homes in foreclosure aren’t eager to try again: once bitten, twice shy. For many people the American Dream turned out to be a nightmare, and they simply don’t want to risk the pain of loss again. Can you fault them for feeling this way?
Second, many people who became homeowners during the 00s learned very bad financial management habits; many were Ponzis. Many people who bought homes did so with no money down, so they never mastered the financial discipline of saving—an essential prerequisite to maintaining home ownership.
Further, many also learned to borrow and spend the appreciation from their homes and manage personal Ponzi schemes. Not just did this group fail to develop the discipline of saving, they actually learned how to create an irresponsible empire of debt to live well beyond their means. They secured debt against their homes, which they ultimately lost because of this unwieldy debt.
Given the poor financial management skills of many who lost their homes in foreclosure, it shouldn’t be too surprising this group didn’t prepare themselves properly to buy again. The entire boomerang buyer myth presupposes that a group of irresponsible Ponzis suddenly acquired the discipline of saving, rebuilt their credit scores, and put themselves in a position to buy again. This further assumes this group desired homeownership again — which many didn’t.
During the housing bust millions of people lost their homes, more than one million alone in California. With the nine million people who lost their homes, it would take 900,000 boomerang buyers just to get up to the 10% level observed in the federal reserve study. Since saving for a down payment takes time, most boomerang buyers will use FHA financing.
So how many FHA buyers had previous foreclosures? Lenders originated just 2,162 FHA mortgages in the year through September 2014 for buyers with a previous foreclosure, according to the FHA. That was up slightly from 1,808 in the same period in 2013. So in a nine-month period in 2013, only 1,808 boomerang buyers purchased using FHA financing, and in 2014 during the same nine-month period, only 2,162 boomerang buyers materialized. It certainly doesn’t look like we will reach the 900,000 level any time soon.
This is proof the boomerang buyer meme is dead and should be buried.
These boomerang buyer reports all have one thing in common: they discuss how many could buy homes without ever discussing how many actually do buy homes. Most of these articles also loudly proclaim that boomerang buyers are back, but they never provide any evidence of their return, proving these stories are merely hopes and dreams rather than reporting solid facts.
Realistically, many (probably most) of these buyers will never return. Many were never qualified for homeownership to begin with, added only when credit standards evaporated. Continuing to exclude those who can’t sustain homeownership is necessary and appropriate. Many more won’t even try because the credit and down payment barriers are too difficult to surmount—and toxic financing won’t cure that problem in this cycle (or hopefully ever).
July 22, 2016, Sue Woodard
‘Rebound’ might not be a good thing when referring to a dating situation, but it’s not a bad thing at all when we’re talking about housing.
In fact, there are a lot of people ‘on the rebound’ that mortgage loan officers and their Realtor partners should be courting.
Online information and marketplace RealtyTrac estimates that more than seven million Americans lost their homes during the Great Recession. Depending on circumstances and taking into account that people generally have a two to seven year waiting period to repair credit and restore their eligibility to get a loan, the home-buying pool is about to get even more crowded.
People are coming back in position to buy homes on a regular basis, but a peak is expected in 2018 when a surge of 1.5-million consumers become able to buy homes again.
Mortgage Loan Officers and Realtors need to get ready and get them ready! …
Here are some things MLOs and Realtors need to keep in mind and communicate to prepare for this “new group” entering the market above and beyond the normal flow of buying and selling:
Reaching out to renters:
Lack of housing inventory – particularly in the first-time home buyer price range – has been making news all over the country, increasing competition for properties, creating multiple offer situations and lengthening the time it takes to find and close on a home. A big infusion of rebound buyers could intensify these conditions, so marketing should focus on the importance of making a plan, how soon they need to get started and the reality of timelines for qualifying, searching for and closing in competitive market conditions.
No need to worry about the sudden infusion of entry-level buyers. It simply won’t happen.
An influx of home buyers is a great reason to connect with current homeowners and past clients about equity position, area appreciation and goals for the next one to five years. Outreach to homeowners should tap into curiosity and get their imaginations going about moving up, moving on, buying a vacation or second home. Focus on the importance of needing to be ready for the “buyer surge of 2018” so their homes can be top contenders when they hit the market. …
In other words, we can reignite the manic behavior and foolishness of the housing bubble.
I can’t fault people for their optimism. I told people 10 years ago that the housing bust would crush homebuilding and put the economy into a tailspin that would take a decade to recover from. The message was so disheartening that nobody wanted to believe it. Denial was far more comforting that truth or accuracy 10 years ago, which is why Cassandras are never popular.
Everyone in the real estate industry wants to believe in a return to the “good ol’ days,” but realistically, we will never again witness the kind of market activity and short-term prosperity the real estate market enjoyed during the housing mania.