Study: After foreclosure, families take a decade or more to buy another house

November 14, 2012

The collapse of the housing market in 2008 brought a huge increase in home delinquencies and foreclosures. By the first quarter of 2010, the Fed found that the mortgage delinquency rate had topped 11 percent, the highest figure on record and over five times the 2 percent rate three years previously:

And that rate hasn't gone down much since 2010, as the above chart shows. In some cases, falling behind or even defaulting on a loan can be preferable to continuing to pay it off, especially if one is "underwater" and must pay off a mortgage that's larger than what the property is actually worth. But that has enduring costs in terms of lost credit for the delinquent or defaulting homeowner.

William Hedberg and John Krainer at the San Francisco Fed have a new paper attempting to quantify that damage, and it's bleak. Even among foreclosed upon lenders who had good credit before default, a majority didn't return to the mortgage market within 40 quarters (or 10 years):


Source: Hedberg and Krainer

If anything, the above figure is too optimistic. Hedberg and Krainer also compared returns to the market for homeowners who defaulted or were otherwise "seriously delinquent" in 2008 to those in the same boat in 2003 or 2001. You might think that those who defaulted in the crisis would get a break from lenders, given that so many people are in that situation. Nope. Despite rock-bottom interest rates, 2008 defaulters are returning to the market far more slowly than their counterparts in previous years:


Source: Hedberg and Krainer

Likely explanations include lender reticence following the crash, homeowners' hesitance about adding new financial burdens when growth is so uncertain, and fewer consumers having enough saved for a down payment. But in any case, Hedberg and Krainer's data suggests that those put out of their homes by the crisis could be renting rather than buying for a decade or more. Given that the researchers also found that defaulted upon homeowners ended up renting properties of lower quality than the houses they once owned, that's hardly an encouraging prognosis.

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Neil Irwin | November 14, 2012