Up to 2.5 million formerly foreclosed homeowners — or those who sold while in the foreclosure process — could be re-entering the housing market as buyers much faster than anticipated thanks to a recent change in Federal Housing Administration (FHA) guidelines.
Introduced August 15, 2013, by the U.S. Department of Housing and Urban Development (HUD) in Mortgagee Letter 2013-26, the new guidelines allow these previous homeowners with a black mark on their credit history to qualify for a new mortgage as soon as 12 months after foreclosure or pre-foreclosure sale (typically a short sale), down from the 36-month minimum window set under previous guidelines.
RealtyTrac data shows nearly 2.5 million additional homeowners could now become so-called “boomerang buyers” due to this change. That 2.5 million is the number of homes lost to foreclosure or short sale between September 2010 and August 2012 —the date range that in effect was added by the loosening of the guidelines.
That’s in addition to the more than 4.3 million potential boomerang buyers who went through foreclosure or short sale between September 2007 — after the housing price bubble burst —and August 2010 and already may have qualified to buy with an FHA mortgage even under the previous guidelines.
Anecdotal evidence suggests at least some of those buyers are re-entering the market, but certainly the time limit is not the only constraint that keeps some of them from buying again. They still must qualify from an income and credit score standpoint — and those qualifications are much tougher now than when many of these folks originally purchased their homes.
Some of these potential boomerang buyers may not be interested in becoming homeowners again, given the bad experience they had with that their last try at home ownership. And there is now an entire multi-billion dollar industry, which did not exist before, devoted to renting single family homes to many of these former homeowners — providing the trappings of home ownership without the risk. Since March 2012, when median home prices nationwide bottomed out, this industry of institutional investors — those who buy at least 10 properties in a 12-month period — have purchased nearly 340,000 single family homes valued at approximately $57 billion dollars, according to RealtyTrac data.
The new FHA rule may throw a bit of a wrench in some of the projections that these institutional single family rental entities have been counting on, but if returns on rentals are not cutting it for them, they always have the option of selling the homes — and the boomerang buyers would provide a source of demand for many of those homes, even as they have thus far provided a source of demand for single family rentals.
The added crop of potential boomerang buyers also could help homeowners who purchased during the housing downturn to move up.
Kathy Walls, a RealtyTrac member and real estate professional with RE/Max Platinum in Livingston County, Mich., said many of the buyers she has worked with over the past few years — often purchasing via short sale or foreclosure sale — are now in a position to move up and buy again. She noted many of those buyers took advantage of the first-time buyer tax credit when they originally purchased, but now are past the three-year limit to live in that home without losing the tax credit.
Walls recounted the story of one such couple who was surprised when she showed them how much equity they had gained after purchasing a home via short sale about three years ago.
“They have gained so much money they were shocked when I brought them the comps,” she said. “That will turn into a listing.”
Those move-up buyers will in turn open up a home for the boomerang buyers to purchase. And although it’s not likely many boomerang buyers will be buying back their former home, it could turn out that they are purchasing homes where the last transaction was a short sale or foreclosure sale — ironically the same event that resulted in them losing their homes.
The ability and willingness of boomerang buyers to re-enter the market over the next year will be a key bellwether of the long-term health and direction of the U.S. housing market going forward for the next decade, and possibly beyond. The more who re-enter the market sooner rather than later — possibly spurred on by this new FHA rule enabling them to do so — the more likely we’ll see a return to a typical home ownership-dominated society and the more quickly institutional investors will pull out of the single family rental market and move on to other ways of making money.
On the other hand, if significant numbers of boomerang buyers are unable or unwilling — or both — to go through this door that has been opened a little wider for them , the more likely we’ll see a longer-term paradigm shift toward a renter nation.
