Apr042016

The epic fail of boomerang homebuyers

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.

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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?

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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.boomerang_missed

Given the poor financial management skills of many who lost their homes in foreclosure, it shouldn’t be too surprising this group didn’t suddenly acquire the discipline of saving and rebuild their credit scores and put themselves in a position to buy again even if they had the desire—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.misfortune_teller

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).

Comparing Credit Profiles of American Renters and Owners

Wei Li and Laurie Goodman, March 2016

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Here are a number of their fascinating conclusions:

  • Sixty-four million or 52 percent of all renters have credit scores below 650, generally not high enough to qualify for a mortgage.
  • At least 57 percent of individuals who experienced a foreclosure between 2003 and 2015 are not homeowners in 2015. Even so, a significant minority have reestablished homeownership.

That falsely implies that 43% are homeowners today, and that isn’t the case. While the number may be higher than the 10% from previous studies, it isn’t the 50% to 80% industry analysts predicted. Many of these former owners haven’t improved their credit scores enough to qualify, and many others haven’t saved for the necessary down payments.sucks_to_be_you

There are no real numbers on the number of boomerang buyers, but we can infer these people are not returning in large numbers because the homeownership rate hit a record low in 2015, and the homeownership rate was down year-over-year in 2015 from 2014. If boomerang buyers were coming back to the market, wouldn’t the homeownership rate be higher or at least hold its ground?

  • Many of the 15 million middle-aged renters with a past mortgage, particularly those in the four sand states (Arizona, California, Florida, and Nevada) and Colorado, appear to have been forced out of homeownership by financial troubles.
  • Of the 96 million renters who have never had a mortgage, 42 percent have debt in collections.

Another ridiculous meme that appears in the financial media is the oft-repeated idea that everyone who rents wants to own a home (90%+ is commonly reported). Let’s assume that number is accurate (which it isn’t); if 42% of the prospective buyer pool has debt in collections, their FICO scores are not going to be high enough to qualify for a mortgage (See chart above). Who cares how many of them “want” to own a home? If they can’t get a mortgage, their desire doesn’t translate into demand.

  • Twelve million or 5 percent of adult consumers are renters with a mortgage on another property. These consumers look almost identical to consumers who own their own property and have a current mortgage

Essentially, the big take-aways of the data are that people who rent tend to be younger and poorer. The assumptions one could make from the data are that many renters are not so by choice, but because the homeownership option may be a stretch for them, or beyond their reach.

One could make that assumption, but it would only be half true. Many are renters by choice. (See: The surprising change in buyer behavior caused by the housing bust)

I hold out hope that this meme will finally die. Since these buyers clearly did not materialize in 2015 as expected, perhaps this idea will disappear; however if people are desperate for hope, even feeble hope, so perhaps this meme may find a second life in 2016.

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