Everyone knows about the pain experienced by a homeowner in a foreclosure or short sale. But when the dust is settled and the home is lost for good, what becomes of displaced owners?
We, the displaced
Over 800,000 former homeowners have lost homes to foreclosure in California since the end of 2007, and each has a story to tell. An estimated 15,000-20,000 owners take the short sale alternative each month to rid themselves of their negative equity, black hole homes.
The hardships of being forced from a home, for whatever reason, go beyond a mere reduction in credit score. Families are displaced from their residences, have very likely suffered a concurrent blow to income, and in many cases are required to make serious alterations to their standard and mode of living.
In their vast numbers, however, homeowners wiped out by foreclosure or short sale represent not only the past of California homeownership, but its future. The decisions of these former homeowners will be a major factor determining the fate of California’s real estate market.
The behavior of displaced homeowners has been little studied, but poses vital questions:
- Do these displaced owners ultimately seek out ownership of a replacement single family residence (SFR) similar to the one they have lost, or do they choose to become permanent renters instead?
- Do they stay in the same (or a similar) neighborhood and school district on relocation, or do they move to an area with a lower quality of life and standard of living?
- Do they continue to live with the same immediate household, or do they combine resources with other renters/buyers, either by subletting or cohabitating, to reduce overall costs?
After five years of exceedingly high foreclosures, it is now possible to make some informed predictions about how the majority of displaced homeowners will behave.
Federal Reserve Board of Governors: The post-foreclosure experience of U.S. households
Place of residence
According to the Federal Reserve Board of Governors report, 23% of all homeowners whose mortgage go into foreclosure move to a new location within one year after the notice. Nearly half will have relocated to a replacement residence by the end of the second year. Since this report deals with national data, these timelines reflect both the nonjudicial and the longer judicial foreclosure processes. Thus, how quickly migration occurs after foreclosure in California can’t be readily ascertained based on this report alone.
However, the character of migration, when it occurs, does have a significant bearing on the California housing market. When those who sell or suffer foreclosure move to a new location, they do not tend to go far, or to a substantially different type of residence. Fed researchers observed that those who lose their homes to foreclosure tend to move to more densely populated — urbanized — areas closer to places of employment. These areas often have smaller households and lower average income than the community left behind, although the difference tends to be small. There is also little difference between the ex-homeowner’s prior neighborhood and these new communities in terms of neighborhood affluence, education, racial/ethnic composition, house value or rent.
In sum, displaced homeowners tend to move to rental units in denser urban areas where jobs are located. These new neighborhoods are just as desirable as the neighborhood left behind. Indeed, the new neighborhood may even offer additional benefits over the old location, like a shorter commute and access to culture and entertainment. This is in keeping with first tuesday’s own prediction that the younger generations of Californians will, over time, abandon the suburban homes of their childhood to live in more convenient urban areas.
Although displaced homeowners are likely to (and in in most cases, compelled to) rent rather than immediately buy a mortgaged replacement home, the Fed finds the majority of these renters continue to live in single family residences (SFRs), rather than multi-family rentals. Thus, on displacement they occupy a comparable home, at comparable rental values to the home they lost, but their monthly rent is often less than half their former mortgage payments.
It is also a well-documented fact that homeowners of more limited means, including those who have experienced the financial shock of foreclosure, are more likely to cohabitate with friends and family members while waiting for better days to arrive. Builders have responded to this trend by constructing larger SFRs designed for occupancy by large or extended families. One family qualifies, and both live in the home sharing the financial burdens between them.
However, the Fed’s research also indicates that displaced homeowners are more likely to reduce their household size; that is, while they may move in with friends or family members, displaced households often divide into smaller groups. As a result, the average household size undergoes almost no net change after a foreclosure or short sale.
Effect on the market
Should real estate agents leasing or selling houses or condos in the SFR market despair of soliciting homeowners who have been subject to an NOD recording? Certainly not!
Although foreclosures and short sales remain high, the majority of displaced homeowners will eventually go on to purchase another SFR with similar amenities. This means that housing consumption nationwide, and thus housing prices, will not be strongly damaged in the long term by the continuing high rate of foreclosure. If there is a larger shift to from purchases to rentals, as first tuesday predicts, it will be driven primarily by “Generation Y” and their propensity to rent – not by displaced former owners.
On a more general level, the Fed states “foreclosure does not impose an economic burden large enough to severely reduce housing consumption,” including the rate of homeownership and home sales volume.
. The repopulation of suburban SFRs will accelerate as lenders come to accept a past foreclosure as a sign of the times, rather than a fatal financial error by creditworthy and employed individuals who have sufficient savings to take up the mantle of homeownership once again.
This is not to say foreclosure has no impact on homeownership rates, especially in California. It’s important to note that the Fed’s study does not consider the specific conditions of California, where homeownership has been in steady decline since the mid-2000s. Foreclosures, i.e., a correction of the unsustainable increase in homeownership during the Millennium Boom, play a part in this decline, but so do demographic shifts and changing interest rate trends. first tuesday anticipates California homeownership will continue to fall to approximately 51% by 2016-2017.
A forecast for California
In conclusion, the clearest results of foreclosure and short sale are those which might be expected:
- displaced homeowners are much more likely to rent; and
- they will usually move to population-dense, urban areas closer to jobs.
While this will increase the demand for vacant multi-family rental properties and SFRs, as first tuesday has previously predicted, it is significant that most foreclosed homeowners remain in the same area and live in rental SFRs. With time, credit scores will heal, lenders will become more accepting, and, those rented units will return to the MLS inventory as homes listed for sale, sold and taken off the market.
Moreover, the fact that household size remains relatively constant after foreclosure suggests that foreclosures will not increase statewide vacancies as much as some have feared. After all, the state’s population is growing steadily at 1% annually, with households split nearly evenly between ownership and rentals (according to the U.S. Census Bureau).
Ongoing foreclosures and short sales remain a serious setback for the families going through them and for the growth of our state economy. Yet, the population’s need for a place of residence and the ingrained preference for detached SFRs will insure that California’s marketplace of existing housing recovers, mostly through buyer and renter demand, not some shortage of inventory.