Neverending Pain: Foreclosures Will Hurt Housing for at Least 5 More Years

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.

MortgagesHistory.png

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.
MortgageHistory2.png

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.
Presented by

Matthew O'Brien

Matthew O'Brien is a former senior associate editor at The Atlantic.

How to Cook Spaghetti Squash (and Why)

Cooking for yourself is one of the surest ways to eat well. Bestselling author Mark Bittman teaches James Hamblin the recipe that everyone is Googling.

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register.

blog comments powered by Disqus

Video

How to Cook Spaghetti Squash (and Why)

Cooking for yourself is one of the surest ways to eat well.

Video

Before Tinder, a Tree

Looking for your soulmate? Write a letter to the "Bridegroom's Oak" in Germany.

Video

The Health Benefits of Going Outside

People spend too much time indoors. One solution: ecotherapy.

Video

Where High Tech Meets the 1950s

Why did Green Bank, West Virginia, ban wireless signals? For science.

Video

Yes, Quidditch Is Real

How J.K. Rowling's magical sport spread from Hogwarts to college campuses

Video

Would You Live in a Treehouse?

A treehouse can be an ideal office space, vacation rental, and way of reconnecting with your youth.

More in Business

Just In