It takes 7 seven years for a foreclosure to disappear from a credit score. Now do the math from when the Great Recession began, and 2016 could very well signal the era of the boomerang buyer.
A boomerang buyer is one of the 7 million people who lost their homes to foreclosure during the recession. There are varying degrees of optimism as to what they will do now. On the high end of optimism, Realty Trac, using foreclosure, affordability, and demographic data, believes almost 3.5 million Americans will become eligible to buy a home over the next 3 years. The highest potential will be seen in the areas hardest hit by the recession, specifically the Phoenix, Miami, Detroit, and Las Vegas areas. TransUnion, whose numbers have been cited by the Wall Street Journal, has much more modest predictions. Their report, which defines a boomerang buyer as anyone who had a foreclosure, short sale, loan modification, or 60 day deiliquency during the recession, predicts that under 1 million of boomerang buyers will be able to meet underwriting guidelines over the next 3 years. While both reports are predict future growth, are we looking at an explosion of returning buyers, or will boomerang buyers offer more of a bunny-hill of growth?
They’re coming back! The TransUnion report is on the modest end, and it still predicts a solid 2.2 million boomerang buyers to return by 2021. That would double their current rate. It is also one thing to have a foreclosure taken off of a credit report, and another for a buyer to have a qualifying credit score. From 2006–2015, the number of Americans considered to be Super Prime credit holders rose by about 10 million. According to governing.com, the average credit score in the US is 687, with Minnesota boasting the highest average score of 718, and Nevada having the lowest at 660.
More encouraging, boomerang buyers in 2014 made up about 10 percent of homebuyers (counting FHA buyers). The overwhelming consensus is that these numbers will on go up over the next few years. FHA numbers may also hint at the future. It only takes 3 years for someone with a foreclosure to qualify for an FHA loan, so many boomerang buyers have already bought homes with an FHA loan, with plans to refinance into a conventional loan down the road.
With this in mind, the FHA’s 2015 Quarter 4 Report is promising for the entire industry. It shows what the FHA is calling ‘a shift in risk profile.’ In 2011, over 60 percent of FHA borrowers had credit scores in the 680-850 range, unreachable numbers for many who wouldn’t even be considered high risk borrowers. Today the number of borrowers in the 680-850 range is less than 50 percent, with the core of borrowers shifting to the 640-679 range. The FHA’s willingness to take on lower credit scores (while sub 619 borrowers stay at under 5 percent of volume) shows the bigger picture of the housing industry. It shows that the industry has learned lessons from the past, and is now taking on more risk without creating a bubble. That is spectacular news for low risk boomerang buyers, considering Bloomsburg’s estimate that between 2009-2013, about 4 million potential home buyers were stymied by underwriters for low credit scores.
How many boomerang buyers return to the market is anyone’s guess.Fortunately, the array of predictions have a common denominator; boomerang buyers are going to boost the housing market. We just have to wait and see how much.