Formally Distressed Buyers Beginning to Re-enter the Market

Incredibly it’s been nearly a decade since the foreclosure crisis began and now formally distressed homeowners who have seen their credit restored are beginning to re-enter the property market. While this is good news, less-than-perfect credit scores will limit their eligibility to buy according to a new study carried out by the National Association of REALTORS®.

During the next decade Arizona, Florida and California are expected to see the largest share of these return buyers. The study analyzed nearly 9.3 million homeowners who had undergone a foreclosure, received a deed of lieu of foreclosure or who had a short sale between 2006 and 2014 in order to estimate the number of buyers expected to re-enter the housing market during the next few years. The study found that nearly 1 million of those hit by the housing crisis were likely to have already purchased a home while another 1.5 million are likely to become eligible for purchasing a new home over the next five years. This should help boost demand for new homes but due to low credit scores millions more will not have the opportunity to purchase a property in the coming decade.

According to experts there were two different types of defaults during the housing crisis, beginning with subprime borrowers and moving on to prime borrowers. Subprime borrowers were affected by low lending standards during the mid-2000’s and ultimately ended up as distressed owners, but falling home prices and rising unemployment levels also meant a large proportion of prime borrowers ended up defaulting on their mortgage or were forced into a short sale. Now the rebound in home prices combined with a stronger economy has meant some previous homeowners have returned to the market.

This study took into account several important criteria which included the time required to prepare credit scores and whether the purchaser will be able to meet more stringent credit requirements in today’s environment. It found that around 950,000 former homeowners who would’ve been regarded as prime borrowers have become re-eligible for Federal Housing Administration or similar types of borrowing programs and are likely to have purchased a home and restored their credit scores to pre-crisis levels. Another 1.5 million are likely to purchase over the next five years as they gradually become eligible.

In spite of the increased demand from these returning buyers, the article in RisMedia points out that the impacts of a distress sale on a borrower’s credit score will severely limit those able to purchase in today’s environment.