Americans get more sensible about housing

By Felix Salmon
September 16, 2010
Remember Fannie's Mae National Housing Survey? Well, Fannie has repeated the exercise, just six months later, and chief economist Doug Duncan tells me it might even become more frequent than that, in future.

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Remember Fannie Mae’s National Housing Survey? Well, Fannie has repeated the exercise, just six months later, and chief economist Doug Duncan tells me it might even become more frequent than that, in future.

The general upshot is that Americans might still be delusional when it comes to housing, but they’re less delusional than they were six months ago, which is a good sign.

Although 67% of Americans think buying a house is a safe investment, this is down 3 points from January 2010 and 16 points from 2003 – the largest declines among all tracked alternatives over both timeframes.

It’s also good news that 80% of renters think they would have to make a financial sacrifice in order to own a home, and that fully 90% of owners think that they’re making a financial sacrifice to own their home. Given that expectations for house-price appreciation are realistically modest, one can conclude that people buying houses today are doing so for pretty good reasons.

There are weirdnesses in the survey: 91% of underwater borrowers, for instance, say they’re satisfied with their current mortgage.

And in the Fannie Mae survey, underwater homeowners are significantly less tolerant of the idea of walking away from a mortgage than their more solvent peers: just 6% of them say it’s OK to stop paying their mortgage, compared to 10% of the population as a whole. That’s in contrast to the latest Pew survey, in which 18% of underwater borrowers — and 19% of the general population — say that walking away is acceptable.

That said, half of the population think that mortgage lenders are likely to pursue other assets, rather than just the home in question, if the borrower walks away. Americans think they’re living in a recourse world, and they’re wrong about that: statistically speaking, lenders almost never chase personal assets in such situations. This attitude is good news for lenders, since it gives borrowers more of a reason to keep on making their mortgage payments. But if borrowers ever waken up to reality, the consequences for banks could be brutal.

There are also interesting divergences between buyers and renters. The proportion of buyers who think that homeownership is important to the overall economy, for instance, rose two points to 82% in this survey, while the proportion of renters thinking the same thing fell a full five points to 72%. And more generally, says Duncan, there’s a divide between renters and delinquent homeowners, on the one hand — who are more pessimistic than the general population, and becoming more pessimistic still — and owners who not delinquent. They are not only optimistic, but becoming more so.

Duncan reckons, after spending a lot of time with the survey results, that a lot of people are putting off buying a home because they’re worried about the future direction of the economy. It’s not so much that they think house prices are going to fall, but rather that they don’t want to take on the huge commitment of making mortgage payments every month for the next 30 years, given the uncertainty surrounding their own personal financial situation.

That bespeaks a lot more financial common sense and responsibility than we saw during the housing market. And so while America is by no means a nation of would-be renters, it’s moving in the right direction.

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9 comments so far

That said, half of the population think that mortgage lenders are likely to pursue other assets, rather than just the home in question, if the borrower walks away. Americans think they’re living in a recourse world, and they’re wrong about that: statistically speaking, lenders almost never chase personal assets in such situations.

I think you’re flat wrong about this. The U.S. has never seen a scenario remotely like this one, where solvent households owe far more debt than the collateral securing that debt is worth. In the past, if you didn’t want to pay your mortgage, you could typically sell the house for a higher amount. If you could not pay your mortgage, then it was quite likely there were no assets that would make it worthwhile for the bank to pursue a deficiency judgment. I think some people with significant savings or income who choose to walk away are in for a rude awakening.

Posted by MitchW | Report as abusive

Unlikely that they are in for a rude awakening. Most mortgages are contracts that carefully define each side’s rights. Typically, the bank’s ultimate, and final, recourse is taking possession of the property. The bank typically does not have the right to go after ANY other assets. Both the banks and the buyers took the risk that home prices would go up and up and up. Now that they have tanked, the banks’ ability to avoid the pain is very limited, especially when the buyer is willing to walk away. Salmon is right, and more and more underwater buyers ARE walking away.

Posted by TheOracle | Report as abusive

“There are weirdnesses in the survey: 91% of underwater borrowers, for instance, say they’re satisfied with their current mortgage.”

Answer:

There must be a strong correlation between being underwater and being financially illiterate. If you used a no-money-down mortgage and/or bought in the peak, you probably don’t know what you are talking about financially. You ask a financial illiterate a money question and they give an irrational answer.

Broad-based financial literacy education sure would be a good focus for Obama. It marries much of what he cares about: education, the economy and the rich/poor divide. Every year American high schools churn out more easy marks just begging to be on the short side of a bad deal.

Posted by DanHess | Report as abusive

TheOracle, while there are SOME “non-recourse” states, I believe there are also many that permit the banks to pursue the borrowers further. The fact that they have rarely done so in the past is no guarantee that they won’t in the future.

I’m a little more hesitant than Dan Hess to assume people are stupid. If they were buying a HOME rather than buying an INVESTMENT, then they might be perfectly happy with their mortgage whether or not it is technically underwater. If you finance a new car it is likely underwater the moment you drive it off the lot, when the value plummets 20%. Does that make people idiots if they are happy with their car loan?

The real fools in the process are those who insist on treating home ownership as a market investment. That applies to those people who counted on rising prices to bail them out of an unaffordable loan, to those banks who counted on rising prices to secure their notes, and to those analysts who conclude that people are idiots if they don’t daily check whether their mortgage balance is more or less than the present market value of their house.

Posted by TFF | Report as abusive

@TFF and @DanHess – There is a certain segment that may be financially illiterate, and another that were in it for the investment. But I feel for a third segment, those who may have been buying their first house, or moving after a long period in the same house, and were told by the so-called “real estate professionals” that this was the way it was done today, and there was nothing to worry about because houses have never lost value. These people trusted their agent to help them through the process, and the agent (and mortgage broker) gave them unconscionably bad advice.

Now, you can argue that the agent and mortgage broker are sales people out to make a buck, and buyer beware, but if it’s all new territory to you, the natural inclination is to rely on their advice, especially if they’ve successfully established that bond with you. I know better today, and I got my first mortgage at a time when you actually had to meet with the bank VP, but I could see a younger me falling into this trap.

Posted by Curmudgeon | Report as abusive

As a realtor for over 25 years on the North Shore of Chicago (one of the Midwest’s most expensive places to live), I offer the following perspective, as seen through the eyes of someone who lived through the housing bubble.

Despite what many appear to believe, most buyers I worked with who purchased in the last decade and either locked in a no-interest, low-down-payment or ARM mortgage thought at the time that they were making a rational decision. (Buyers in these parts do not rely on their real estate agents for ANY advise on which mortgage product to select. There is virtually zero discussion on that topic between realtors and buyers.) Between property taxes (pretty high here), insurance and monthly mortgage servicing, most buyers who elected not to go with a standard 15 or 30-year fixed product put that extra monthly income (what they would save by not going with a conventional loan) to work in our economy (private school tuition, perhaps, or tuckpointing their old house) and this, too, seemed like a rational act at the time. For the most part, their total monthly housing nut did not total more than 30 percent of their after-tax income—again, by most standards at the time, a rational amount.

Fast forward to today and many of those same people have lost their high-income jobs and the lucky few who have found new ones of course have taken big pay cuts. Clearly, that 30 percent number no longer applies. So, to my mind, the looming question that I grapple with each day is what should they do now? Is it rational for someone out of a job to simply walk away in this recourse state and take the hits to their credit, etc. that they deserve? I think it is rational but that requires that they must believe that, once the dust settles and they somehow have regained their footing, they will be able to restore their credit, pay their monthly bills, etc.—in other words live a rational financial life. However, most of the North Shore residents who are now underwater on their mortgages continue to try to save face (do not to take the credit hit or the stigma that comes with a foreclosure) and thus pay monthly mortgages that they can no longer rationally afford. Yet, as someone who lives near them, I am grateful to them for doing so, and my reaction is rational.

Bottom line: in my long life of 65 years we as a society are in uncharted waters here. We need the federal government to take the lead here and figure out the rational way to get all of us out of this mess. These are challenging times indeed that deserve to be dealt with as such. I have no faith that the lenders know how to act rationally from my perch here on the North Shore.

Posted by Susaninchicago | Report as abusive

This is a response to Susaninchicago. Thanks for your insight into the microcosm of Chicago’s North Shore. As it happens, I was among those who bought a massively overpriced home in this neck of the woods near the top (2004). Like your “typical” profile families, our monthly expenses were commensurate with income and expectations. But we have since lost half our income, and the house we put 25% down on is underwater about 40%. So last month we negotiated a deed-in-lieu with our lender, moved out, and moved to a rental in a nearby town. Was it easy? Not at all. Our friends were shocked. This new town is much less prestigious than our old one. But the numbers didn’t make sense for us, and we could not remain shackled to the old mortgage.

What’s the upshot? Our kids are HAPPIER in their new school (where social pressures are much more sane and the teachers are every bit as good), we are adjusting, and our credit rating should be repaired within a year or two to the point where we can buy a new house for a great deal less money.

We did not need any government intervention, just a lender willing to help us find a way out (they made out pretty well too, as our house will sell for less than the mortgage but undoubtedly more than the paper is trading for). All we needed was the courage to trust our instincts and the gumption to “trade down” in plain sight.

When this crisis started I didn’t think it would impact me too much. Boy was I wrong. Then, when it did impact us, I was sure The Powers That Be would find a way to handle it before things got out of control. Wrong again! Finally, we took action as individuals to save ourselves, and it seems to be working out better than we could have anticipated.

Save yourselves, people. The Cavalry is not coming for you. You are stronger and more capable than you imagine.

Posted by LadyGodiva | Report as abusive

Superb points everyone. It was a joy to read such thoughtful posts! (even though the font italics posted in the first comment have become embedded for some reason)

If there are no ties to the mortgage of course people will walk away, but if you are strategically defaulting, why wouldn’t a bank use all recourse to get back any monies whether by deficiency judgments or whatever is stated in your state’s mortgage agreement clause.

From West’s Encyclopedia of American Law, edition 2. Copyright 2008 The Gale Group, Inc. All rights reserved.

“Legislation enacted during the Depression still restricts the availability of deficiency judgments in several states. In some jurisdictions, deficiency judgments are proscribed in certain situations, while in other states, they are limited to the amount by which the debt exceeds the fair market value of the property. Waiver, the intentional relinquishment of a known right, of the benefits conferred by antideficiency legislation contravenes public policy and is ineffective.”

If someone walks away and yet(as the riche and financially savvy seem to be doing) they were able to make payments and but did not diligently show inability to pay. As rationally financially adept someone may think that a strategic default (living in the home for over a year, making no payments, then walking away just as you are about to be kicked out, use money saved to buy another home in 2 years) solution may be, you are in essence and ethically, robbing from the bank.

And about financial savvy and behavior that is irrational, I should have moved into a smaller home that is closer to my son’s school to save gas as well. But he loves his friends here and we know and love the neighbours, the community and what it offers, the house, yard and the location.

We speculated, but decided it was better to be financially impractical but happy then to move to an area we do not know well or like as much, with strangers for neighbours and no close friends. Happiness over economic rationality… that make us pay rather then walk away. Those danged emotional decisions are the reason economists can’t figure us out.

@Dan Hess,I do agree that some people are literally Stymied by their situation and may well be waiting to be kicked out or bailed out, but some may truly just need the security that their homes offer over the further devastation to their future and day to day lives that defaulting may bring them emotionally. I can really feel for them. And as much as it seems irrational, they are helping stabilize the economy by not defaulting.

The lenders had a hand in appraising the homes and taking lending risk and their own responsibilities so they should be making provisions for homeowners to prefer to not default

The Goverment needs to provide accurate and affordable law advice and make Fannie and Freddie help clean up the mess and help those who truly need it. (not another hamp helping stabilize the lenders position and not the homeowner’s) Sadly there are lawyers happy to give bad advice for thousands of dollars and add to the calamity.

The Government needs to keep the greed in check not offer incentives for more… so reintroduce reform, legislation and the means to police and stop it to garner confidence. If none of that happens, mark my words, the whole country will be absorbing the repercussions of the ‘sensible’ strategic defaults for many more years (decades) to come.

Posted by hsvkitty | Report as abusive

Agreed, Curmudgeon. There are many people who stretched a LITTLE to purchase their home (as SusaninChicago decribes) but got hurt badly when they lost income in the recession. They weren’t being greedy, they just didn’t anticipate the turn in their financial situation. I sympathize with those families.

The 30% figure is aggressive, though. I would personally be uncomfortable with anything over 25%, and a keeping a 12-month emergency fund is more important than maxing out the downpayment. But of course these more conservative rules seriously limit what you can theoretically afford, making it likely that you’ll end up in a neighborhood with people making less money.

Posted by TFF | Report as abusive
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