Boston Fed: Negative Equity and Foreclosure
Submitted by
CalculatedRisk on Thu, 06/12/2008 - 7:18pm (81 comments)
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I guess it pays to live on the left coast and have no life.
SS
I am really curious to see what happens when the OptionARMs start resetting in LA and BayArea. For many of those, it will be one heck of a payment shock!
asign a factor to new unemployment figures, where if a certain percentage of folks who lost their jobs also own a house under water. That must be close to a guarantee that they would walk.
I'm not surprised by the findings.
I still don't think that most who can still handle the payments will walk away. Those who are walking have other cash-flow issues endemic to debt-heavy individuals.
So if they can cross-reference the Mass data vs debt levels in that area, if they're available...
CR: "I believe it is like(ly) that a majority of homeowners with negative equity will not walk away from their homes."
I think that depends on how deeply and how long people are underwater. Here's my if-then equations:
If Underwater > 30%, then Defaulters > 50%
If Underwater > 5 years, then Defaulters > 50%
Combining the two equations gives us:
Underwater > 30% and 5 years, then Defaulters = 100%
Very interesting paper and I can't say that I have thoroughly digested all of it, but I have a bit of a problem with some of their assumptions. I generally agree with this, "A foreclosure requires both negative equity and a household-level cash-flow problem that makes the monthly mortgage payment unaffordable to the borrower."
But I believe for a host of reasons that comparing Boston's decline in the early 90s is substantively different than today's decline. One, as you said, mortgage loan underwriting standards were more stringent then, and there was not the proliferation of no/low down payment, no doc, neg am, and creative ARM loan instruments. These loan instruments themselves change both the negative equity and the monthly cash-flow part of the model for the worse. So, I believe a lot more people will find themselves with both neg eq. and cash-flow problems.
Two, variable Stigma (an interesting parameter in a mathematical model) as they are using it will have shifted by the sheer magnitude of the extent of the crisis. Past localized steep declines in housing values did not have the same effect in changing homeowner's stigma in walking away from their house, as I believe today's widespread crisis will. In addition, as you say, the extent of homeowner's underwaterness will also alter household's rational economic behavior. If you are a little underwater, you may believe that if you swim hard enough against the current, you will eventually save yourself. However, if you're a lot underwater, and the currents are overwhelmingly powerful, bailing out may be your only option. Sorry for the water analogy, but it is apt.
Three, Boston was not nearly as overbuilt as some areas are today, and the lack of demand was much more driven by employment, income and housing affordability economics, not by the huge influx of financing capital that drove much of this speculative bubble. Consequently, any demand/supply parallels between Boston in the early 90s and today must be better researched and understood.
I have alot more to say, but bed beckons.
Does the thinking include the relatively new "Buy and Bail" scenario as a possibility for underwater owners? If it does not, would adding it have a noticeable effect? Leaving a house and admitting defeat is one thing, but if the person can move into a similar house nearby and cut their debt in half, would that not change the probabilities?
I believe that many more will walk away once it becomes obvious that the RE market will not recover quickly and that it will take years for them to recover their losses.
At the moment, the benign outcome projections are all theory as most people still like RE as an investment. Just look at investors piling in on well priced REOs in SoCal and even Vegas.
Once it sinks in that the market will really not recover, then a different psychology will take over and people will look at their situation from an investment standpoint. They will have no choice! And then they will walk away en masse.
I'm guessing that the down payments figure in psychology too--even though 10% negative equity is the same either way, if you got there after chewing through $100,000 cash you might feel more inclined to hang on than if you never put a dime other than your monthly payments into the place. This could be a pretty profound difference between the 90s and now.
There are a lot, I mean a lot of different possible scenarios.
If housing is to drop say 30%, and then get back to where you'd have real values estate grow in excess of 5% a year then I can see why people with negative equity would chose to wait out the bottom. But what if your 300k home is now worth 200k and it stays around level for the next 5 years.
1) There is a pretty descent chance that sometime during that 5 years a healthy % of homeowner may feel some cashflow problems and be forced to sell.
2) The perception that your home is an investment and will be a source of future will fade into the distant past.
3) Sooner or later they'll figure out that if you have a 300k mortgage on a home that is worth 200k, the home has to appreciate by 50%, not 33%!
Now consider that historically real estate appreciates at 5% a year, it will take 7 years for them to get back to par.
So if real estate drops another 15% nationwide, and you believe homeowners with negative equity will continue to pay off their loans. You are saying that instead of walking away from their loans and moving on with their lives, they'll happily continue to pay a loan that won't reach par for 7 years.
If these are our policy makers...
The article is very interesting and provides a lot of food for thought. I think the stigma factor is the big question mark and is much more complex than the author realizes.
Part of the stigma of foreclosure is losing your down payment. Its basically admitting defeat and putting a monetary value on it. The bigger the loss, the bigger the defeat. Psychologically, I think people try to avoid decisions that make them feel like losers. So I would expect people who made bigger down payments to try harder to avoid foreclosures and people who made smaller down payments to try less hard.
The other issue I see is that the value of debt is relative. For example, if you owe $500,000 on a house worth $300,000 ... then that $200,000 difference is probably a big deal. But if you owe $2 million on a house worth $1.8 million, then that $200,000 probably doesn't mean as much to the owner.
These dudes are dreaming.
Comparing 1990 New England ethics with 2008 California or Florida?
Do they ever go outside their ivory tower?
50% decline is probably too optimistic for the bubble states ca/fl/nv. US auctions are already showing minimum bids at 1/3 of previous prices. For those that bought with no down, fairly typical, there's nothing to think about. Certainly walk, maybe buy another first... all it takes is 3% of a much smaller number. Maybe the bank holding the reo will find some way to gift the necessary.
Now imagine the option arms, with 500k house worth 200k and the loan balloons to 600k. Maybe the original rate competes with rent, particularly considering the tax benefit, but not when payment balloons 2x.
A long, long time ago some would pay back every cent to 'clear their name'. This is another era with other mores... ceo's grab all they can while they're on top, get the golden parachute to ease their way out after they run their company into the ground. Why should the average homeowner have better ethics that the average ceo?
The related "need to know":
How deeply our politicians are underwater morally, and try to understand their probable behavior.
((Obama-Johnson)+Furman)) = McCain+Gramm/Media
... lending standards were tighter in the late '80s compared to the recent bubble, and few homeowners bought at the peak with no or negative equity (like during the current boom).
I think this is key. If I have some of my own savings in a house (aka 30% down) then walking away equals a real loss. Thus, the perceived incentive to hang on is stronger even if the math doesn't make sense.
However, if I've put little or nothing down, the perception is I've got nothing to lose.
Like some have already said, the lower prices go and the longer it takes to start turning around, the more common it will be for people to walk.
Another point, it would be interesting to know how many houses in the Boston study were primary dwellings as opposed to investment properties. I would guess that many underwater houses today are second, third, etc. investment properties, and seen as investments gone bad, the stigma of walking would be less.
I tend to agree with CR that perceptions of outcome are more
important than have been given credit.
On one hand there is reason to believe that ownership is sticky, even in the face of adversity. "Investors" have a hard time selling even liquid investments when they go against them, even when the premise of their original investment goes sour.
Consider a different, but similar situation.
You've bought Nortel at 150.
Then its 75, having moved down quickly. You are dejected but unbowed, convinced that your investment will one day be back at 150.
Then NT moves to 50, 30, 20. You become despondent. You stop checking the stock price. One day you glance and see its 7$ and you give up and sell and walk away.
Investors in highly liquid stocks are always walking away near the bottom... in part that is how bottoms are formed.
I'm not suggesting housing has bottomed but that housing is a non-discretionary investment for most and if they perceive their lot in life is not going to change anytime soon, they will walk away or find some other way of removing the constant reminder of their pain from their lives. Deeply underwater mortgagees won't sell, so perhaps they'll set it on fire.
Perhaps what we need to be on the look out for is a surge in house fires / fire fraud, walk aways, suicides, distress sales / bankruptcies - and then we will know there is a bottom.
The analysis makes sense for owner-occupied houses. But what percentage of 2004-2007 buyers were non-owner-occupiers? A lot? With little skin in the game, and deeply underwater, they may very well foreclose en masse. I'm sure the places where speculation was rampant will be flooded.
Mike, in your example there are no carrying costs to owning stock. However, the negative equity homeowner stills has to make monthly payments based on the original mortgage.
Deeply underwater mortgagees won't sell, so perhaps they'll set it on fire.
Wonder how many people in FL want a hurricane.
CONgress and Bernankie just shoved a boatload of people over the cash flow cliff with the helicopter drops which sent commodities into orbit. I have 100% equity in my home and I ain't going any where, the rest I'm not sure about but there will be a lot more sliding down the slope of hope then this model is predicting.
Several factors the author did not take into account:
1. Walking away is easier than it used to be. No more IRS that will tax you for "income" on forgiven debt. The prospect of having the IRS on your butt made is less appealing in the past to default on your debt.
2. 20% down. In the not too recent past most mortgages required 20% down. Borrowers that put 20% down have a very different attitude than those that put zero down.
3. Flopped flippers. They never had the intention to hold onto the place for very long anyway. Especially not now that values are dropping.
4. Affordability. Back in the olden days banks qualified borrowers to make sure they can actually pay back the loan. During the recent boom lender were throwing money at borrowers with a big shovel, consequences be damned. No income, no problem.
All this looks very ugly from a bank's/specuvestor's perspective. In reality it's a good thing that housing gets affordable again. Nobody would complain if the price of gas would be dropping, right?
Could we just call negative equity 'debt?' Because the only way to have 'negative' equity is to also have a mortgage.
The word debt adds clarity in another way - when given the chance to legally lift a debt burden greater than several years' income, how many people won't take it? Especially when that burden is also associated with ever increasing ancillary costs.
So, either the laws are changed, or those structures built on debt with the assumption that such debt will be repaid will collapse. Or both - this is isn't a binary world, after all.
CR, good article.
I think it supports my argument that most won't walk without cashflow problems.
However, I agree with you that there are a number of factors in this bust that will mean that a higher percentage will walk.
I think the most important aspect will simply be the social awareness and acceptance.
I have always marvelled at how powerful social norms are even when it costs money. Tipping for example.
The fact that you have Paulson encouraging people not to do it, the fact that there are companies called "YouWalkAway", the fact that forclosure is part of the daily news coverage, and the fact that Bush moved to "protect" underwater homeowners from taking responsibility, all means that the usual social norms protecting against walk aways have been eroded.
How eroded?
That is the question.
Financial speculators are being blamed for volatile commodity markets and U.S. lawmakers are lashing out at regulators for not cracking down more vigorously.
Search - Global Edition - The New York Times
Home price speculation good - Commodity speculation bad
4 legs good
2 legs better
US May foreclosures rise 48 pct on year-RealtyTrac
| Reuters
Tub thumping
Anonymous writes:
Financial speculators are being blamed for volatile commodity markets and U.S. lawmakers are lashing out at regulators for not cracking down more vigorously.
Search - Global Edition - The New York Times speculate.php
Home price speculation good - Commodity speculation bad
4 legs good
2 legs better
FED and regulators are to be blamed for keeping interest rates artificially low during the last couple of years to 'encourage' growth.
And we are still on that path.
The speculators are just working the system, nothing more and nothing less. If there is no low interest rate regime, this would not have happened.
Now it looks like there will be an about turn as more 'regulations' come in the markets, especially for oil.
If they are not careful, the speculators will just move to other markets. In my opinion there is little they can do, besides i think it's a basic supply-demand issue here.
Still look for a short term sell off, as regulators must be 'seen' to be doing their job otherwise other regulators will be appointed.
However these people disagree about the supply-demand side :-
Oil Rally of 697% Surpassed Dot-Com Craze in Speculators' Mania
Oil Rally Topped Dot-Com Craze in Speculators' Mania (Update2) - Bloomberg.com
Am short term bear and mid-long term bull on commodities.
Let's see who's right on this, i hope i'm wrong.
Value = (rent1 - mpay1) + Smigma(b)
This corrected equation clearly shows that home values are positively correlated to the amount of banker smigma on Bernanke's lips.
"We are seeing a historic hydrological event taking place with unprecedented river levels occurring," said Brian Pierce, a meteorologist with the National Weather Service in Davenport. "We're in uncharted territory; this is an event beyond what anybody could even imagine."
One difference between Boston in the 90's and now is the issue of cash flow. With a standard fixed rate mortgage, cash flow is based on having a job. If you keep your job you continue to have sufficient cash flow. With all the exotic mortgages, and the high percentage of them in certain markets, you can continue to work but have cash flow issues due to changes in the mortgage. Is a comparison available of the percentages of adjustables in the 90's sample compared to CA, NV, FL etc.? A better comparison might be New Hampshire in the 90's and now. NH had substantial numbers of second homes owned by MA citizens. The crash was worse there because homes were sold in order to hang onto the primary homes in MA and the price declines were often more severe than MA. My apologies for not having time to search for the relevant data.
Death,Disability,Divorce. A lot of these things can happen in a long downturn.
Your sell short order cannot be processed. Short sales in this security are not allowed, as we were unable to borrow the shares
hmmm...
Lots of people will have to abandon their homes if they are in their 40's or later and are underwater. The reason is that the negative equity void will suck-up their retirement savings.
If you want to retire, will you delay that in order to pay your way out of a mortgage hole? Lots of people will not if they do the math.
What are financial advisers saying?
The wildcard is the change in additudes towards homeownership. We've spent the last few years convincing everyone that it's more than a home, it's an investment!
People are more likely to walk away from an investment gone sour, than a roof over their heads. The question is, which one do they think they have?
Regulator criticizes banks, Hope Now for not providing adequate data about foreclosures:
Data on Housing Relief Questioned
3 things:
In 2 above, if real price drops were 30% but nominal was only 15-20%, there may not have been many instances of Negative Equity.
Today, with 100% mortgages and 20-30% Nominal price declines in FL and CA, there is some serious Negative Equity potential...
I think that there's general agreement here that most owner/occupiers are unlikely to walk away absent cashflow problems. And that crazy lending means that the percentage of people with cashflow problems is likely to be higher than in non-plantclosure type real estate declines in the past.
One factor that people in the ivory towers tend to forget is that we live in a world of imperfect information. Most homeowners don't realy KNOW how underwater they are unless they are trying to sell. Until life-changes or cashflow problems force people to try and sell, they don't really know what their house is worth. Even then, houses sitting on the market for extended periods of time with high wish-prices mean that their estimates of the worth of their house in inflated.
By the time you get done with all the caveats and equations and high falutin' stuff in the article, you would conclude that you really have no idea how many will walk away. It probably depends upon the kind of person they are and you don't seem to have an equation for that. LOL.
Crapy assumptions from the Boston Fed. Get rid of them and outsource.
jim a writes:
I think that there's general agreement here that most owner/occupiers are unlikely to walk away absent cashflow problems. And that crazy lending means that the percentage of people with cashflow problems is likely to be higher than in non-plantclosure type real estate declines in the past.
One factor that people in the ivory towers tend to forget is that we live in a world of imperfect information. Most homeowners don't realy KNOW how underwater they are unless they are trying to sell.
I beg to differ. For the low-end total suckers, no, but people riding the bubble to Real Estate Riches (tm) have come to imagine themselves to be quite the little operators. They know all about their house's value, just nothing about economics.
As many have said in one way or another, totally different scenario today vs. New England early 90s.
In bubble states, the majority of loans written in 2004 to 2007 were DESIGNED from day 1 to have both negative equity AND cash flow problems. Zero down purchase has neg eq immediately once you factor in selling cost... we know that the assumption was for future appreciation, but by a strict definition on day 1 of home ownership the buyer was down 5% after selling costs.
Adj rate and neg am build in cash flow probs from day one, and this is on top of a DTI that was stretched.
For the first time I know some who are stretched and in trouble. CC bills spinning out of control. Stopped paying on car loan. Still paying on house.
The puzzler to me is the credit card companies. When do they wake up and cut someone off. THis family has close to $100k on many cards. They are not going to pay it back. Why weren't they cut off a long time ago?
Weren't these sort of equations the type used to predict how many people would default and thus told us how all the MBS was AAA based on the equations?
And is it "walking away" if you were buying to flip or rent? Or is it just a business decision? How big does your loan have to be so that when you default it isn't considered walking away?
Downey Savings and Loan DSL has 1/7th of its loans as non performing. Maybe credit issues along with mortgage issues and therefore different than previous times.
Hmm inflation is up. But not high enough. Look for more jawboning but no actual raise.
Markets will rally on this news as the dollar strengthens too.
"Stigma for many of these homeowners really depends on if it becomes socially acceptable for middle class Americans to walk away"
but people riding the bubble to Real Estate Riches (tm) have come to imagine themselves to be quite the little operators. They know all about their house's value
I would change this to "they THINK they know all about their house's value".
I think duration of downturn does play a role here. I know very few people who honestly think this will last for more than a year. when I bring up the fact that it could easily last until 2011-2012, people stare at me like I'm insane.
I'm assuming Sigma has some time-dependent variable associated with it? where the value of Sigma falls as time increases? another way to think of it would be to rate people's forward expectations of home price ap/depreciation.
we see this with the credit analysts as well. Early in the downturn they didn't even believe a downturn was possible. then when it was clearly going to happen we got the "soft landing" theories. Now that it's been a while we're getting the "it'll turn around next year" stuff. and finally we're starting to hear some squawking about "this is going to be a while".
i've got some fancy data from UBS that shows the % of borrowers currently in default (defined as 60+ DQ) by current CLTV across mortgage products. the numbers for current CLTV > 120 are:
subprime: ~60%
alt-a: ~42%
option arm: ~40%
prime: ~15%
CR: I believe it is like that a majority of homeowners with negative equity will not walk away from their homes. But I believe we need to know the number of homeowners deeply underwater, and try to understand their probable behavior.
Yes, definitely. Prices have fallen maybe 10% from the peak in Massachusetts this time, and the peak here was three years ago. No one is going to buy a house across the street and default on their present house because of a 10% difference.
In the downturn in the 1990s prices fell 22% in Massachusetts over five years. Yet even that isn't in the same league as the 40-50% drops in areas of CA, and in just 18 months.
Well, in the part of the ivory tower I haunted, we would have been asking some pretty stringent possibly even nasty questions about some of the apparent statistical assumptions in this paper (a full-rushton in staff seminar is not a pretty sight). I've not had time to read it yet but there are indeed some real basic issues with the whole behavior in MA during the 90s extrapolated to behavior in entire US during the naughts. They're geographic, they're temporal, they're behavioral, they're just bloody basic statistical, e.g. what reasons do they put forward to support that this "unique" dataset they've got is a representative sample? I furthermore find it wildly amusing that "Second, we show that this failure to default en masse is entirely consistent with economic theory." because generally, I was taught that our job was to prove our theory measured up to reality rather than the other way around. And, as my final pre-reading rant (and I will read it to the best of my ability), I think they're making some bloody big assumptions about the static logic of human behavior for a field that on its practical ebony-tower side tatoos itself with "Past performance is no guarantee of future performance." Geeze. /rant
Sorry if this has been mentioned earlier:
Do these wankers even LOOK at their own words after they write them?
"...they will always prefer to sell their homes rather than default, as long as equity in their homes is positive so they can pay off their outstanding mortgage balances with the proceeds of the sales."
Hello!? What if, as in a great many cases, the home owners outstanding mortgage balance is MUCH higher than the value of their home?
The authors of this paper probably went to Harvard. Bush went to Harvard. 'Nuff said.
Random observations:
Didn't modeling like this help get us into this mess?
[To see this intuitively, consider a borrower with a million dollar
mortgage on a hundred thousand dollar house. How can it make sense to stay? Sup-
pose the borrower has a zero-interest, interest-only mortgage.]
Where can you get a zero-interest, interest-only mortgage? And what exactly will my payments be? Will I get to the closing table only to find that I "didn't qualify" for those terms?
[The house is worth
pH and we assume that it costs (lambda) dollars to foreclose on the borrower, so the lender
recovers pH − (lambda) dollars if it chooses to foreclose on the borrower.]
Lambda dollars... are these the dollars we'll be using when our US dollars become completely worthless?
the numbers for current CLTV > 120 are:
subprime: ~60%
alt-a: ~42%
option arm: ~40%
prime: ~15%
bacon dreamz | 06.13.08 - 9:03 am |
bd,
Quick question
CLTV > 120....
100k value on home currently and 120k is owed?? Am I correct??
Prime is already at 15%? Jesus.
Chris
I enjoyed the expected value model of home value and home cost presented in the paper. The mathematical model quantifies what we know intuitively: it all comes down to people's expectation of future home values and the level of stigma associated with "walking away".
I still can't understand why mortgage loans don't work like car loans. If you're upside down in a car, they'll chase you for years for that deficit balance. I know mortgages don't look work this way, but I don't understand why. I had a mortgage on a house in Florida years ago, and I signed about 20 times papers saying that I would pay the mortgage balance no matter what happened, even if the house were damaged and insurance didn't pay and even if the house went down in value.
It seems like a flaw in the structure of mortgages that not all states make the borrower liable for the deficit balance. "The collateral has gone down in value so now I don't owe as much money anymore" does not make sense to me.
100k value on home currently and 120k is owed?? Am I correct??
yes, that's right. those numbers are the average for all the above 120 buckets, though; they're slightly higher for 130+ CCLTV, and obviously substantially lower for CCLTV < 100.
Did a little more analysis on the data, and the nominal price decline peak in Boston was -16.67% from the high in July 1988 to the low in February 1992 using Case-Shiller. The real price decline peak was -31.48% in Boston from November 1987 to April 1993. Today, 10 of the 20 markets indexed by Case Shiller are already down more nominally than Boston, led by Vegas -27.89% through Minneapolis -16.88%. And they are going down further, probably by a lot in some areas.
There are so many assumptions by these authors that begin to crumble in the face of the extent of the decline and down payment/loan instrument differences that I'm not sure there is that much useful here.
FE (Fancy equations) + WA (Wrong Assumptions) = CRAP!
In defense of the authors of this paper, the Boston Fed will never publish a paper that tells its bankers the truth about the current market, which is that the bankers should kiss their a$$es goodbye. So the poor wonks that work at the Fed have to dream up theoretical feel good pablum in order to keep their jobs.
And of course specuvestors have a much lower value for Stigma than owner/occupiers. Just ask the Donald.
Charles G Gervasi, I would argue that the big differnce is simply one of magnitude. The amount that people are upside down on their cars by is small enough that there is some sort of chance that it can be collected on. With the amount that people are upside down on their houses, you might force these people into bankrupcy, but you're never going to see much of your money.
Wow, this is a really great paper, with a lot in it. I think that you're boiling this down to Value = (rent1 - mpay1) + Stigmai is a simplistic way of looking at the various moving pieces, but perhaps simplistic is better.
Having lived (and bought) through these phases, much of what is presented is familiar. It's interesting to see Stigma as a variable in the equation, and I think its weight is far greater than perhaps people think. Back in the 90's bust, the stigma lessened as we started to bottom out and many people just went BK. It was very acceptable if you were an investor. Not so much for your primary residence. That can be seen is the what happened to condo prices here at that time...they behaved like CA real estate today and went to less than half. Why? Because we can't build McMansions here or huge new developments, but we can condo to add stock.
But please understand Boston in this bust. Condos are NOT crashing, in fact, they are holding up. It's the burbs and marginal areas that are crashing. We are not over-built, so you can draw no parallels here to other areas. And in those more desirable areas there are no FCs, or they are few and far between. So that would imply that the stigma factor is greater than one might imagine. If you look at a map of Boston proper where the FCs are plotted, you will find NONE, and I mean NONE, in the backbay, beacon hill, or the south end, and very few in southie or charlestown.
"Did a little more analysis on the data, and the nominal price decline peak in Boston was -16.67% from the high in July 1988 to the low in February 1992 using Case-Shiller. The real price decline peak was -31.48% in Boston from November 1987 to April 1993. Today, 10 of the 20 markets indexed by Case Shiller are already down more nominally than Boston, led by Vegas -27.89% through Minneapolis -16.88%. And they are going down further, probably by a lot in some areas."
Great data. So if someone put down 20%, they were never Negative Equity. Even at 10% down they were only 7% underwater. So what.
BIG POINT -- Much of the theoretical support for Subprime came from looking at the experience of Texas when oil collapsed in the early 90's. They looked at the small percentage that were subprime and said if it works for a little it must work for a lot. LOL. So they applied it all over the place and guess what? It didn't apply!
If we'uns is gonna throw around 50ยข words like Stigma then ah gots anuther; Incentive. You know where lax enforcement of foreclosure rights and even cash payments for defaulted borrowers to leave all peaceable like. $2500 I've heard for the latter and up to a year rent free for the former.
CR, if you think there exists some remaining vestige of Stigma then you have got to acknowledge the Incentive.
[There, I said my piece without incurring the wrath of those who just won't admit to our having a created a morass of moral hazards.]
First time homeowners will default more readily--especially those in subprime neighborhoods. Also, too much tree inspection, not forest understanding. Housing prices cannot go up if income doesn't, eventually people have to afford their home. By neutering unions in the 1980s, Reaganites guaranteed an eventual housing bust. Timber!
"Stigma for many of these homeowners really depends on if it becomes socially acceptable for middle class Americans to walk away"
If you are $200,000 underwater for five years you would have to be a saint not to invent a crisis which requires a change of house.
But please understand Boston in this bust. Condos are NOT crashing, in fact, they are holding up. It's the burbs and marginal areas that are crashing.... ~ ipodius
The Boston condo market has been more resilient than the surrounding burbs, but there are cracks developing.
Yesterdays Globe had this:
One of the world's premier hotel operators, Regent Hotels & Resorts, is abruptly pulling out of the $300 million luxury Battery Wharf development on Boston's waterfront just before the hotel's scheduled opening this summer.
Regent's departure not only leaves Battery Wharf without a signature operator for its 150-room hotel, but the developers have also lost their provider of top-shelf concierge services to the buyers of the multi-million-dollar condominium units in the building. Without Regent, Battery Wharf may have trouble selling its remaining units, priced from $1 million to $4 million.
..........
Battery Wharf's difficulties are another sign of a slowdown in downtown Boston's high-end condo market. Previously that market had defied the national downturn in housing by continuing to quickly sell condos at higher and higher prices. In recent years, Boston has experienced a boom in the development of modern, luxury condo buildings that typically offer a level of service associated with fine hotels.
.............
Hotel operator leaves luxury waterfront project - The Boston Globe
mojo, that is a tiny slice of Boston's condo market. There was another recent article about high-end vs. mid to low end and the story was that the high-end has come to an abrupt stand-still. I mean, how many people in this area can afford and WANT condos in the city? So there is considerable softness in this segment.
On the other hand, the bottom and mid-price level are being snapped up. That's keep the prices more bouyant than they probably should be, as these areas are still very limited in size. So you have the tale of two cities here. And things aren't looking good for the luxe end.
Magnitude is definitely a key distinction. At the height of Boston's previous bubble what was the highest ratio for median price vs. median income? I would (safely) suggest that the leverage is much higher this time around.
It's one thing to be underwater $20K when you make $30K; it's quite another to be underwater $100K when you make $50K.
On the other hand, the bottom and mid-price level are being snapped up.
That would be the knife-catchers.
On the other hand, the bottom and mid-price level are being snapped up.~ ipodius
I think that you may be mistaken on this. Here's some recent data:
'The once-invincible condominium market in downtown Boston is weakening.
Sales of condos in the 12 core markets of Boston, from the North End to the Back Bay, the South End to South Boston, plunged 22.3 percent in the first quarter of this year, while median prices declined nearly 1 percent, to $475,000, according to the Listing Information Network Inc., a real estate firm.
"It's a huge decline" in sales, said Debra Taylor Blair, president of Listing Information Network. "Downtown is slowing down," she said.
........
Just 513 condos sold in the first quarter this year, well below the 700-unit quarterly pace during the peak years, 2004 through 2006.'
Condo sales in Boston drop off - The Boston Globe
The Boston condo market is not immune to the negative pressures.
Don't know if many of you saw the article at the Guardian website about commercial jingle mail. It demonstrated the lack of Stigma with respect to defaulting on commercial non-recourse loans. Wonder how long it might take for that attitude to get to the homeowner. Here's a link that will get you there. METROPOLITAN | Property Management & Real Estate Investments
mayhem my ear spock that is what will happen
credit cards
Is the equation supposed to represent the situation of a single home owner, or of the average home owner?
Obviously for any individual, the reality is that one of those items will be zero while the other is one at any given time, but you can't determine that until you decide which individual to look at.
It's quantum economics.
One factor in the walk away equation is the custom of cubans who buy houses for their relatives, who intend to live there until their credit gets better, or forever, and they refi or sell, and meanwhile make all the mtg payments. Typically the relative in whose name the house is couldn't possibly pay the loan, even tho they so qualified.
Those people feel an obligation to their relatives to make the payments. Doubtless they lied about who was going to live there. But I think the liars are MORE likely to make the payments, because people who qualified on their own and own in their own name are only ruining their own credit, not someone else's whom they love.
Good is bad, bad is good
I'm with CR; the data doesn't seem very useful without factoring in the LTV rates and the speculation vs live-in differences. There's no way you can use the past data to make definitive judgments about the current situation if the fundamental assumptions have changed. It doesn't mean their conclusions are necessarily wrong, just not supported by any evidence they presented.
Also-- they failed to consider the ratio between home price and household income. If I'm 20% of my annual salary underwater on my home, I'll stick with the home. If I'm a year or more's worth of salary underwater on my home--- given the choice between "stigma" and one year of my limited mortal existence---well, you can guess what I would pick...
Can they really have no money whatsoever?
Most of these comments assume that the borrower has no money or assets. Maybe that's more common than I realize. It's hard to believe that someone in a nice house, like those we're talking about that have fallen $100k lately, could have no money to speak of. You'd think they'd have a brokerage account, a bank account with 20,000 bucks or so to handle things like repairing a car or furnace, a little retained earnings if they have a business, a retirement account, and maybe an HSA for medical expenses. How can they just have no money whatsoever yet be living in a nice house? I guess that's the crux of the mortgage crisis, but it's still hard to imagine. Maybe some of these people just don't want to sell some stock to cover their real estate mistake.
If they truly are absolutely broke, they probably lived from one crisis to the next anyway. Their furnace going out, car breaking down, or losing a job would be as bad for them as house prices going down. This is just happening to all of them at once so it's more noticeable.
While theorists make a living trying to predict complex systems, like homeowners defaulting or not en mass, they will fail to predict the future.
If they get close to the actual outcome, that will be only luck, and nothing else.
The past does not predict the future consistently, only somewhat in probability.
But here, not only are the negative equity amounts large, but also a ver new, new factor is affecting outcomes.
The idea of walking away, spread on the internet, etc.
So the prediction is only of interest in a vague way.
My cousin who has $1.1M in debt (on IO only loans) for two houses has already stopped paying on one (some months ago now), and cannot really afford the other either ($600K+ home on less than (bite me, html) $100K income? I can do math well enough to know this is too much house), so it's just a matter of time before they walk away or are asked to vacate by the bank, I figure.
There are a lot of 20-30 year olds who are not yet exiting the walk away pipeline...
BTW - that paper is an exercise in delusion containment.
The 90s did not have rampant zero-down no-income-verification house price speculation....this set of parameters has never happened before. Past data will not be predictive, but it will permit the authors to pump sunshine.
Also another point to be factored in is whether one is in a fixed-rate mortgage or a balloon/ARM type where one is going to get clobbered with a nasty increase to pay off something that everyone knows is 40% too high. Add to that the factor that California real estate has been completely out of whack with people's salaries for years and I predict we will be seeing much more walking away down the road....but determined geographically.
(Am in a condo right now in the suburbs of Chicago and you're not going to pry me out of here until the proverbial six-figure salary comes down the pipeline, even if I did overpay slightly. Do wonder how the Chicago real estate market is going to sell all those overpriced condos in our newest tribute to an architect's masculine insecurity thrusting its way up on the shores of Lake Michigan? Dr. Freud, we need you....)