IT HAS BEEN NEARLY A DECADE SINCE the beginning of the foreclosure crisis. Ten years ago the real estate market was still hot and home values were still rising; but the first cracks in what would become the biggest housing crisis in history were beginning to show, and mortgage loan delinquencies were beginning to rise.

A new study released by the National Association of Realtors (NAR) predicts a surge in home buyers over the next several years as millions of former homeowners affected by the crisis return to the market as new homeowners.

NAR analyzed the nearly 9.3 million homeowners who lost homes between 2006 and 2014 to estimate the number of credit-worthy borrowers expected to re-enter the housing market in the coming years. Its findings revealed that nearly a million of these affected former homeowners have already purchased another home, and an estimated 1.5 million more will become eligible over the next five years.

However, this leaves a potentially pretty big gap of several million homeowners who will not be entering the market because of bad credit and lingering issues from the Great Recession.

Lawrence Yun, NAR chief economist, says there were two waves of defaults during the housing crisis, from subprime and then from prime borrowers. “While loose lending standards in the mid-2000s led to the rise in subprime buyers who ultimately became distressed owners, falling home prices and rising unemployment resulted in a large share of prime borrowers also defaulting or going through a short sale,” he said.

“Now fueled by a gradually improving economy and the strong rebound in home prices, some of these former distressed owners have returned to the market, and more will likely become eligible in coming years.”

NAR’s findings reveal that about 950,000 formerly distressed homeowners of prime quality loans have become re-eligible under FHA lending standards, and another 1.5 million will likely buy again over the next five years. The study predicts the states with the largest share of foreclosures, including California, Arizona and Florida, will see the largest impact from this wave of return home buyers.

In a practical sense, the easiest point of re-entry for formerly distressed homeowners is with government-sponsored programs such as FHA, a program backed by federal insurance that insures banks make loans according the FHA guidelines against certain levels of loss. Another easier point of re-entry is the Veterans Administration loan for eligible veterans.

Both programs offer lower down payments and more flexible underwriting standards. That’s the good news. The bad news is that both programs can carry a certain stigma in the real estate community, and buyers attempting to use them sometimes face greater difficulty getting their offers accepted by sellers reviewing multiple offers.

FHA is supposed to be self-sufficient and not a government giveaway; as such, there is a mortgage insurance premium added to the borrower’s monthly payment that can sharply increase the overall housing expense. In addition, FHA has lower loan limits in many counties, effectively pricing buyers with this type of financing out of the market.

Many prospective home buyers want to buy again but cannot because of lingering issues. Prospective borrowers who fell behind on auto loans and credit cards, or who may have filed bankruptcy, could have compounding issues affecting their credit scores. It will be interesting to see how the real estate market adapts and changes as these home buyers leave their rental properties and seek to become homeowners once again.

Will this change the dynamic in the rental home space, or will these renters simply be replaced by younger renters coming into the rental market? Over a million new home buyers in an already tight housing market could have an impact on home values when you consider the inevitable law of supply and demand.

One thing is certain: Real estate and the dynamics affecting it are constantly changing.

Guy Benjamin (CAL BRE License #01014834, NMLS 887909) writes a weekly column for The Herald, offering general information on real estate matters. As it is impossible to address all possibilities and variations, he will try to answer individual questions by readers who contact him at 707-246-0949 or guyb@fairwaymc.com.

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