When will our long, national housing nightmare be over? Now, maybe. Prices are edging up. So is building. But it's not exactly 2005 all over again. The long shadow of the housing bust is still making another boom -- or even a stronger recovery -- much more difficult.
It's the foreclosures, stupid. They push down prices and ruin people's credit. The latter is why so many underwater borrowers are so reluctant to walk away from their bad investments -- if you lose your home, you aren't likely to buy another one anytime soon. Just look at how few households end up getting another mortgage in the decade after a default, from this San Francisco Fed paper
. That's a lot less people back in the market to buy a house.
But there have been a lot less people back in the market to buy a house after defaulting in 2008 than after defaulting in 2003. What a difference five years makes. Back in 2003, the housing bubble was in high gear. Rising prices meant people wanted to take out mortgages and lenders wanted to give them out. By 2008, the housing bust was in high gear. Falling prices meant people wanted to wait before taking out a mortgage and lenders, the few that still existed
, only wanted to give them out to the very best credits. As depressing as this 2008 data looks, the 2003 data is more depressing still -- even amid a historic housing bubble, only 25 percent of households that went through foreclosure had bought another house within five years.
The households that go from foreclosure back to homeownership are exactly who you would expect them to be: former prime borrowers. The chart below from the San Francisco Fed looks at which households return to the mortgage market by credit score. Notice how subprime borrowers plateau out at less than a 10 percent return rate.
The legacy of the housing bust looks to be a disappointing housing recovery. Consider that the foreclosure rate has historically been under 2 percent; it peaked at 10 percent in recent years. That's millions of households that won't be able to get credit to buy a house, assuming they haven't been scared off homeownership entirely.
Creditworthiness is a terrible thing to lose.