The boom that never materialized: boomerang homebuyers
Very few recent mortgage originations were from borrowers with a previous foreclosure. Less than 25% ever return to homeownership.
It’s human nature to find hope when times are bleak. When housing crashed, bankers and underwater loanowners clung to any hope of recovery that would bail them out from their catastrophic lapses of judgement during the housing mania. People look for hope wherever they can find it, and over the last eight years, people who work in real estate, homebuilding, sales, and so on, needed hope for a better tomorrow because their current situation was consistently bad. One story of hope was the inevitable return of legions of boomerang buyers, those who lost their homes in foreclosure but bought again.
Over the last several years, the financial media periodically runs stories about the return of boomerang buyers. 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.”
Most housing analysts thought it would be different this time. Back in 2012, forecasters like John Burns predicted 80% of those people who lost homes would return to homeownership, dramatically increasing demand and home sales volume. Later his firm lowered their forecasts to a 50% return rate, and while this was a welcome message of hope to a beleaguered industry, the idea was also hopelessly unrealistic.
It isn’t only industry insiders who had faith in the return of former loanowners. A big part of the bullish sentiment toward real estate is the belief that former owners who lost their houses in foreclosure will return in droves to mop up the supply of distressed inventory and push prices higher. A comprehensive study from the federal reserve showed that almost 75% of those who lost their homes to foreclosure never return, and that’s why the recovery has been much weaker than the bulls expected.
So why did so many analysts think it would be different after the housing bust? Most housing analysts believed the housing bust hurt ordinary people who would want to own again 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.
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. Rather than mastering the discipline of saving, this group actually learned how to create personal Ponzi schemes to live beyond their means. They did so by securing debt against their homes, which they ultimately lost.
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.
Are those Americans who lost their homes to foreclosure permanently turned off of home ownership? CoreLogic’s Senior Economist Kristine Yao looked at that question in an article on the company’s Insights Blog and found they do become homeowners again, but not as quickly as they might.
She notes that the seven years that have passed since their peak of the foreclosure crisis in 2010 is enough time for the black marks of foreclosure to be erased from many consumers’ credit histories so that at least is not standing in the way of what has become known as “boomerang buyers.”
The false-hope narratives over the last several years analyzed the number of potential boomerang buyers that theoretically could return to the housing market once their mandatory waiting periods were over. The assumption was that millions of former homeowners were eagerly awaiting their release from FHA qualification jail, and just as soon as it was possible, large numbers of these former owners would buy again. This vision was a clear example of wishful thinking and delusion: It was never going to happen that way.
More than half of the 3.1 million homeowners, 1.9 million to be exact, who lost their homes to foreclosure between 2007 and 2013 have passed the credit report seven-year rehabilitation mark. The return of these buyers to homeownership would, Yao says, have a significant impact on home sales but history tells us this isn’t the way it happens. Retrospective data shows a more gradual return rate, with less than half buying a home even 16 years after their foreclosure. Recent rates show “incremental volumes of 150,000 boomerang buyers returning per year, or 12,500 per month.” Of the 4.4 million owner-occupied foreclosures completed since 2000 less than one-quarter of the owners have returned to the market.
This reality is exactly what the federal reserve study from a few years ago pointed to, yet forecasters completely ignored the less pleasant reality in favor of their own Pollyanna forecasts with no basis in reality.
In CoreLogic’s analysis, property tax and sales transaction data was linked to a sample of one million individuals who underwent owner-occupied foreclosures between 2000 and 2013. (There were 8 million foreclosures over this period, but non-owner occupied homes were excluded from the analysis.) The company found that the number of previous owners who returned as homeowners varied by the foreclosure vintage. Figure 1 shows that a decade after their foreclosures, 38.5 percent of homeowners who lost their homes in 2000 returned as buyers but only 26.3 percent of those foreclosed in 2006. The 2007 vintage is expected to boomerang even less. Yao says “The vintage curves from 2008 through 2011 saw marked improvements in the shares of boomerang buyers returning to market, while the more recent vintage curves in 2012 and 2013 appear to be declining again, although it still may be too early to tell.”
The foreclosures after 2006 were those people who borrowed the most during the mania. These were those most likely to be unqualified to begin with or Ponzis who finally imploded — not groups that we should expect or want to return to homeownership.
As to the buying behavior of boomerang buyers, CoreLogic found they were four times more likely to finance with FHA loans than repeat buyers without a foreclosure history. FHA guidelines allow one to apply for a loan three years after the foreclosure sale date with a minimum 3.5 percent down and a credit score of at least 580, while Fannie Mae conventional guidelines allow one to apply for a loan seven years after the foreclosure sale date with a minimum 10 percent down and a credit score of at least 620.
It shouldn’t be a surprise that FHA financing is the loan of choice for the few boomerang buyers who do participate in housing again — not because the FICO score standards are lower, but because the down payment requirement is lower. That’s the real barrier.
It appears that the harder a state was hit by foreclosures the higher its percentage of returning homeowners. Arizona, Nevada and Michigan each saw 32 percent of foreclosed homeowners purchase again, which is 10 percentage points higher than the national buyer share. California and Florida, states with the highest numbers of foreclosures, had shares of 24.8 percent and 20.3 percent, respectively. CoreLogic’s figures include buyers who purchased their post foreclosure homes outside of the state where their foreclosure took place, but the company notes that 60 to 70 percent of boomerang buyers bought within their original metropolitan area.
When the housing market bottomed in 2012 and surged in 2013, many pundits thought we reached escape velocity, and both sales volume and price would keep rising. Few in the mainstream media expected loan originations to drop to a 20-year low in 2014; in fact, most expected a surge in demand. Analysts fantasized about owner-occupants taking up the slack of retreating investors. The linchpin of their dreams was the idea that boomerang buyers would return in large numbers. That was never going to happen, no data justified the belief that it would.
The boomerang buyer meme is dead and should be buried. Please, reporters, let the boomerang buyer idea die a quiet death. Just stop writing about it and let this silly idea disappear.