Photographer: Andy Cross/Denver Post via Getty Images

How to Know If the Housing Recovery Passed You By

Hint: You have experienced the foreclosure process firsthand.

Last decade’s housing bubble lifted a lot of Americans into home ownership, especially low-income families that took advantage of easy credit and a steady supply of new, simply built homes. We all know how that ended.

But it turns out the Great Recession, foreclosure, and even personal bankruptcy weren’t the final insults for millions of homeowners who suddenly found themselves without a home. A new study published this week by Zillow will add significant sting to those injuries.

Foreclosures in the years after the bust were concentrated in the cheapest tier of homes. These days, foreclosed homes in most big metropolitan areas have not only recovered their lost value, but done so at a faster clip than the market as a whole. Thus many of those people who lost their homes during the recession have missed out on almost a decade’s worth of price appreciation.

“There was real potential for wealth accumulation that would have happened if these people had held on to their homes,” said Svenja Gudell, chief economist at Zillow. “Instead, they were shut out of the home-buying market and forced to rent at a time when rents have become extremely high.”

The chart below shows nine big markets where foreclosed homes gained value far faster than all housing stock, on a percentage-point basis. For instance, the entire Phoenix market is up 64 percent from its lowest point. But Phoenix homes that were the subject of foreclosure have gained 81 percent over the same period. 

The appreciation of foreclosed homes isn’t the only way the recession increased the wealth gap. Since then, wages increased faster for top earners than the workforce at large—an accounting that doesn’t even include capital gains, which generally increase faster for the wealthy. Moreover, the new Zillow report follows research published last month showing that the recent rise in rental prices has disproportionately affected poorer tenants.

A handful of forces are driving foreclosed homes to gain value faster. Their values fell further, giving them more room to catch up. About half of foreclosed homes in the U.S. were in the bottom third for home value, making them appealing as starter homes—a market that currently lacks the inventory to keep up with demand. As the housing market recovered, foreclosed homes were snapped up by investors, including local buyers and Wall Street firms. Both groups bought homes for the purpose of renting them, often to the same people who lost homes in foreclosure. 

To be fair, in many cases people who bought homes in the runup to the housing crises used adjustable-rate mortgages requiring smaller payments first and ballooning payments later. For those buyers, home ownership wouldn’t have been possible without the shaky lending that primed the market for collapse—and doomed them to foreclosure.

But poor Americans who took out those shaky loans shouldn't feel entirely singled out, Zillow's Gudell said. There were plenty of low-income homebuyers with plain-vanilla mortgages on reasonably priced homes that nevertheless became unaffordable when unemployment rose in the recession. 

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