BOOMERANG BUYERS TO HELP FUEL 2017-2018 MARKETS

The housing collapse and fall out for those caught in its crossfire is not yet a distant memory; however, millions of previous home buyers may be ready to enter the housing market over the next two years. This segment of the market has prematurely been identified as potential buying sources in the recent past; however, now that pundits have mostly turned away from them, clear factors are in place for a strong increase in buyer demand from previous homeowners recently shut out of the housing market.

What is a “boomerang buyer”? The general definition for a boomerang buyer is someone who was a former homeowner who was forced to go through a short sale, foreclosure, or bankruptcy in the past, and who has since been saving money and improving his/her credit rating to better able to qualify for a mortgage loan again.

What has precluded this group from stepping up and buying in the past few years? There are many factors here, and each case is different. The most often cited reasons are as follows:

  • The mortgage regulations are very strict in not allowing recent homeowners who have lost a home through short sale, foreclosure, or bankruptcy to re-enter the market using most of the available alternative lending platforms.
  • Mortgage qualifications have become much stricter in response to the market collapse of 2008-2010. Political leaders were lax to see the negative impact of overly aggressive mortgage policies leading to millions of “bad loans” being made, and the response to improve lending quality has resulted in much tougher qualifying standards for all Americans.
  • It takes time to rebuild, whether it be to rebuild individual credit scores or rebuild savings necessary for a down payment and closing costs on a home purchase.
  • The general shock and debilitating emotional effects of losing a home also impacts any potential buyers from re-entering the market as owners again. This factor is slowly eroding over time.

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Why will sales to these people increasingly look to re-enter in 2017-2018?

  • Most boomerang buyers are market savvy; they understand my basic Ten Reasons to Own a Home, and realize that in the long term, the benefits of owning outweigh the benefits of renting in most cases. They want back in.
  • Rent rise, and most boomerang buyers have seen increases in monthly payments for housing, whereas home buying provides an opportunity for stable payments for the life of the loan.
  • They understand the many tax benefits of owning versus renting.
  • Markets have stabilized, and many are showing early signs of a major rebound.
  • The elapse of time: Credit agencies are reporting that credit scores for large numbers of previous short sale victims are rising rapidly. In fact, 68% of people in this class have higher average credit scores than all others combined. As the length of time since losing one’s home increases, the effect of a negative, or derogatory, credit event on one’s score decreases or may even be eliminated. There are several timeline points to be aware of, and I welcome a call from you to discuss details. However,  for purposes of this essay, keep in mind that seven years is a key time elapse from time of short sale to one’s present circumstances to clear derogatory credit of this nature. And given the importance of a raw credit score to home loan qualification, this is probably the major reason for a buying surge from boomerang buyers in 2017-2018. Given the large numbers of short sales and foreclosures in 2010 through 2012, millions of those who lost their homes and have been renting, will be strong qualifiers for a new loan. Most of them know the mortgage qualifying from previous purchases, and want to be home owners, not renters.
  • Extended period of low interest rates: Most potential boomerang buyers are accustomed to much higher interest rates than what is available today. In fact, today’s long-term fixed mortgage rates are lower than the first year “teaser” period on ARMs that existed when they were homeowners. This is no small factor in terms of actual economic benefit, and psychological/emotional reasons previous homeowners will want to be owners again.
  • Prices increases could get boomerang buyers “off the fence” faster than other other buying groups: Prices have not increased in our area as much as one might expect given extremely low interest rates and higher rents. For the most part, boomerang buyers are well aware that the current market favors buyers over renters in most economic situations. Once they see a market that looks very active and threatens to bring back days of bidding wars and the like, they will likely jump in in much larger numbers.
  • The shear increase in those who will satisfy the needed required time frames since foreclosure/short sale to qualify again will drive up the potential buying pool, regardless of factors stated above. In summary, an elixir for more buyer demand may be brewing. The impact of this increasing buyer group, on the margins as economists are and of reminding us, should not be minimized.

 

I welcome all questions and discussion on this important topic and anything related to D.C. Area residential housing.

 

Ray Wedell

Chartered Financial Analyst, CFA

5-star service and expertise

Samson Properties

703-855-7299

raywedell@comcast.net

 

 

 

 

 

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