Home buyers get another chance

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USA Today
By:  Julie Schmit
April 1, 2013


Four years ago, Dave Peterson was in the worst financial crisis of his life. He was in foreclosure, had declared bankruptcy and was struggling to find a place to rent in Las Vegas because of his terrible credit.

But last year he and his wife, Gabby, bought a $280,000 home that's bigger than the one they lost.

Peterson is a "boomerang buyer," one of several million who'll return to the market in the coming years, real estate experts say, bringing needed muscle to a housing market that seems to be finding its footing.

They are people who lost homes in foreclosures and short sales in the historic housing bust who are striving to be homeowners again. Their time out of the market may be shorter than many Americans might expect. People who go through foreclosure can rebuild credit records and qualify for home loans again in three to seven years if they manage their finances well. With home prices still low and interest rates near record lows, today's boomerang buyers might find their next mortgage more affordable than their last one.

Boomerang buyers are most prevalent in areas such as California and Arizona that were hardest hit by foreclosures, and their return is contributing to rebounds in those markets. Going forward, growing num-bers of boomerang buyers could help offset the expected slackening in demand from investors as home prices rise, says Stan Humphries, economist for real estate website Zillow.

Since 2007, more than 4.7 million homeowners are estimated to have lost homes to foreclosure or short sale. Seven in 10 will return to homeownership within eight years of their short sale or foreclosure, estimates John Burns Real Estate Consulting.

With the start of the housing bust now six years past, this will be the first big year for returnees, accounting for 10% of home sales, up from 4% last year.

They'll stay at that level until starting to subside in 2016, about eight years after the height of the foreclosure crisis, Burns projects. His firm estimates the crop of boomerang buyers who lost homes in 2007 through 2012 will exceed 500,000 a year in 2013 through 2016.

Already, boomerang buyers are adding up to real numbers in some markets. In Phoenix, one of the areas hardest hit by foreclosures, 40% of Academy Mortgage's home-purchase customers are boomerang buyers, estimates Chad Melin, Academy's branch manager in Chandler, Ariz.

In San Diego, such buyers account for 20% of new home sales for builder Cornerstone Communities, says its president, Michael Sabourin. They started shopping in 2011 but didn't qualify and came back in greater numbers last year. "We really see them today," he says.

BOOMERANGERS OUT WEST

In Southern California and across the Southwest, almost 14% of new home sales in the last half of 2012 were to boomerang buyers, according to a Burns Consulting home builder survey of 178 builders nationwide. That compares with less than 5% of new home buyers in the Northeast, Southeast and Northwest, the survey shows.

Outside the West, other large cities with many foreclosures will also see substantial numbers of boomerang buyers, Burns says. Those include Atlanta, Chicago, Miami, Orlando and Washington, D.C.

Like Peterson, some have already purchased again. He got his new home loan through the Department of Veterans Affairs, paid no money down and got a 3.74%, 30-year fixed-rate loan last April.

Given the 60% drop in Las Vegas home prices from 2006, Peterson now pays $1,600 a month in mortgage costs vs. $3,000 for the smaller house he lost. While his previous house plunged in value with the housing bust, his new house has risen in value, he says. 
Las Vegas prices were up almost 13% in December year-over-year, Standard & Poor's Case-Shiller data show.

"Our development is booming," Peterson says.

WATCHING THE CALENDAR

Other boomerangers are counting the days until they can buy again.

"They know the exact date they can qualify," says Dennis Webb, sales executive with Fulton Homes in Phoenix. He says such buyers make up about 20% of Fulton's Phoenix-area sales. The builder expects to finish 750 new homes this year.

Most of the buyers get loans from the Federal Housing Administration, which requires just 3.5% down payments vs. 20% for many conventional loans.

FHA borrowers can also have less-stellar credit. In January, their average credit score stood at 717 vs. 767 for conventional-loan borrowers, according to data from mortgage tracker Lender Processing Services.

If consumers repair credit, they generally face waits of two to seven years to become eligible for home loans after a foreclosure or short sale. A short sale occurs when lenders allow a home's sale for less than what's owed. The FHA wait is three years for either one.

Like Peterson, Hoss and Terri Wylie are homeowners again. A house they bought in 2006 was lost in foreclosure following a job loss. The couple just closed on a $147,000 home in Phoenix, three years after their foreclosure. They got an FHA loan at a 3.55% interest rate.

During their wait, the couple rebuilt their credit score to a respectable 700-plus, from below 500, where it sank after their foreclosure. The Wylies also paid off a $4,700 car loan and $5,000 in credit card debt.

"We just really buckled down," Hoss Wylie, 50, says.

They, too, have seen their new home rise in value. Phoenix prices jumped 23% last year, S&P data show. "We bought the last $147,000 house" in the neighborhood, Wylie says.

Even after the financial wreckage of a short sale or foreclosure, boomerang buyers say they're driven to own for the same reasons they bought before. They want their own place. They see it as a good investment.

The rent vs. own equation is also driving homeownership. Nationwide, buying a home is now 44% cheaper than renting in 100 leading metro areas, data from real estate website Trulia indicate.

Helping affordability: interest rates below 4% and home prices still 30% off their 2006 peaks. Rents, meanwhile, have risen 8.3% in the past 2.5 years, Zillow data show.

"A lot of these people are just doing the math," says Sean Fergus, analyst for Burns Consulting.

Trulia's rent vs. buy calculation assumes a 3.5% 30-year fixed-rate mortgage, 20% down and seven years in the home.

To rent a smaller home, the Wylies paid $1,000 a month, and that was headed to $1,200 this year, Hoss Wylie says. By owning, they pay $952 a month, which includes all costs, except utilities.

Phillip Greene, 28, did the same calculation.

The Seattle real estate liaison for online brokerage Redfin went through a bankruptcy and foreclosure in 2009 after he lost half of his income because of the real estate downturn. The condominium he bought in 2006, near the height of the market, tanked in value.

Greene rebuilt his credit and now touts a credit score above 680, he says. He secured an FHA loan and bought a $190,000 house in February. He paid $1,600 a month to rent a similar-size house. He's paying $1,500 a month to own.

"I could buy this house and rent it out for more than my mortgage," Greene says. "It would be crazy not to buy."

Yet other former homeowners stung by a foreclosure or short sale have had enough, and three in 10 won't return to the market, Burns estimates.

Even if they could buy again, some previous homeowners will remain renters.

"There's a select group of people who've said, 'I'm done with homeownership. I got burned too badly,'" Fergus says.

Today's tighter mortgage credit standards will trip up others.

Last year, new mortgage holders had credit scores that averaged 745, up from 699 in 2006 at the peak of the housing bubble, LPS says.

"Getting a mortgage these days isn't for the average Joe," says Guy Cecala, publisher of Inside Mortgage Finance.

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