"Shadow consumers": Why the housing market is going to bounce back faster than people expect
28 Aug 2012
Posted by Andrew Kantor, Editor & Blogmaster 
We all know the real estate market has been improving steadily for the past, oh, six or eight months. Here’s my prediction: It’s going to start improving much more quickly in the next two to three years.
The reason is simple, as you’ll see. But first…
U.S. homeownership is at its lowest rate in 50 years — so says National Mortgage Professional magazine. It looked at the official Census Bureau number (65.5% of households are in homes owned by one or more members) and then subtracted households that were 90 or more days delinquent.
The result: 62.1% of American households are owners, and the rest are renters or “renters in waiting.”
This isn’t good news, except for me. Because this low number means my prediction has a greater chance of coming true.
One: In 2004, homeownership peaked in the U.S. at 69% of households. Now it’s 65.5%. (I’m using Census Bureau figures for consistency.) So there’s that 4.5% who used to own but now rent. I bet a lot of them would like to own again.
Survey after survey confirms that Americans want to own their homes. It’s part of the American Dream and all.
So why aren’t they buying? Well, many of them don’t want to own. (Those surveys say that most people would rather own, not all.) Some simply can’t afford a down payment, or a mortgage payment, or plan to own once they’re ready to put down roots.
Considering how this is the best buyer’s market in a long time, it’s safe to say that most of them wouldn’t be buying today — August 2012 — no matter what the market was like.
What about the rest? The ones who do want to own? What’s with them?
Easy: A lot of them got clobbered by the bursting of the housing bubble, or one of the Great Recession aftershocks. They were foreclosed on, or had to sell short, or filed for bankruptcy. Ain’t nobody gonna give them a mortgage these days.
I mean that — wait.
FHA won’t give a loan until three years have passed from a foreclosure. And foreclosures and short sales typically stay on your credit report for seven years. (Bankruptcies last for 10.)
That means that out there is the opposite of a shadow inventory: shadow consumers. These are people who want to buy, can afford homeownership (especially with today’s rates), but have to wait for their credit to improve enough to get a mortgage.
That’s three to seven years after foreclosure.
Foreclosures peaked in, oh, late 2008 to mid-2009. (And they were pretty high before and just after that, too.)
Which means that starting in late 2011 those people will be eligible for FHA loans. And starting in 2015 their foreclosures will be gone, period.
When did the market start recovering in a big and noticeable way? Why… late 2011.
Getting the picture?
We’re entering the peak of ‘former foreclosures able to buy again.’ These are people who we know want to own — they already did and were forced out. (Sure, some may have been permanently turned off from ownership, and others never should have owned in the first place, but let’s play the percentages here.)
Between now and 2015, a lot of people are going to become eligible for FHA loans, and then for traditional mortgages. A whole swath of former owners will have their chance again.
I’m betting they’ll want to buy.
So instead of worrying about shadow inventory bringing the market down, think about the shadow consumers in the pipeline, waiting for their chance to own again.