Homeowners in denial

By Felix Salmon
April 13, 2011
survey, only a minority of Americans think that their home has fallen in value since the recession began in December 2007.

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According to the latest Pew survey, only a minority of Americans think that their home has fallen in value since the recession began in December 2007. And the poorer and less educated you are, the less likely you are to think your home has fallen in value:


I don’t have hard statistics on this — I don’t know whether they exist or how they would be put together — but I think it’s fair to say that the overwhelming majority of US homes have fallen in value since the start of the recession. Which means, essentially, that most Americans are wrong.

What does this mean? During the boom, Americans were hyper-conscious of how much their homes were worth. During the bust, they’re in denial. This is probably good for national happiness, but it’s also bad for the future of the housing market — and partially helps to explain why houses sit on the market for so long at a price no one is willing to pay.

This syndrome also contributes, I think, to the relatively low rate of jingle-mail, or underwater homeowners simply walking away from their homes and leaving the bank with the house. It’s the economically rational thing to do — but only if you know that you’re underwater. And given that it’s non-trivial to work out how much your house is worth, I can easily imagine that a large percentage of underwater homeowners don’t know that they’re underwater.

While ignorance of depreciated property values seems to be prevalent everywhere, it’s particularly common among those who didn’t go to college and those who earn less than $30,000 per year. (I don’t believe Pew’s statement that “the recession-era decline in home values has hit those with higher annual household incomes harder than those with lower annual incomes” — not without further evidence, anyway.) It’s probably no coincidence that these are exactly the people who were most likely to be sold unsuitable subprime mortgages: if you’re looking to rip someone off, it’s a good idea to look for a mark who doesn’t have the education or sophistication to understand what you’re doing.

Now here’s the kicker: if you asked me the question in the poll (“Thinking about the recession, which began in December 2007, is your home worth more or less NOW than it was BEFORE the recession began, or is it worth about the same?”) about my own place in New York, I’d probably say it was worth more. I don’t honestly know: I wasn’t particularly following the East Village property market in December 2007, and I’m not doing so now, either. But hey, that tide of money sloshing out from the New York Fed has surely had some effect, no? And it feels nice to think that I — just like everybody in Lake Wobegon — am bucking the national trend. Evidently a lot of other Americans feel much the same way.


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And that’s why we have the Case-Shiller S&P Indices… to illustrate cognitive dissonance of the average American.

Posted by GRRR | Report as abusive

The wise man frets over matters that the simpleton takes in stride. This is one of those cases.

The simpleton leads a very simple life. He wants a house to live in. He doesn’t see it as something to flip for a profit. His house is worth just as much today as it was five years ago — more if he has made any minor improvements.

The wise man obsesses over the sale value of a house he never intends to sell, wastes time on Zillow, and is more concerned with his net worth than with what he has in front of him.

Naturally, the wise man looks down on the simpleton. But equally, the simpleton looks down on the wise man. I live my life with one foot in each camp, dealing with some highly educated wise men and some simpletons. It isn’t at all clear to me that wisdom brings happiness.

Posted by TFF | Report as abusive

I think it’s in large part due to the fact that we’ve been carefully trained by real estate agents and the personal financial media that housing prices never decline. We’ve heard it all of our adult lives.

It may be that those with higher education and income are more willing to believe their homes have lost value because they’re more mobile and have been confronted with the reality when they’ve tried to move. I have a friend who insisted for two years that he bought his house (in Phoenix) before the bubble started, and it was still worth more than he paid for it. It wasn’t until he lost his job and had to move that he had to accept the truth.

Posted by Curmudgeon | Report as abusive

Those who think their house is worth the same or more almost certainly have not listed their home for sale. One data point: I live in large Midwestern city and my house has been listed since late last summer at 10% less then I paid for it in early 2005. Ten showings in nine months, zero offers despite positive feedback from all.

Posted by david3 | Report as abusive

I don’t know if it has to do with education, or how much money one earns. I deal with both ends of the spectrum and you can make a case for both sides. Both parties still are in denial I believe. And during the sub-prime days, I had both sides also asking for sub prime loans. Especially more educated borrowers who had large, jumbo loans. Loans where self employed borrowers just had to produce 12 months of bank statements to show income. I see the lesser income, less educated borrowers now asking for nothing but 30 year fixed loans, while higher end borrowers still asking for ARMS and interest only loans, which is not bad, as long as you are savvy enough to understand what you are assuming.

Some, did not have much of a choice. My best friend bought a condo in Vegas about 5 years ago. He wanted a 3 year, interest only ARM. He knew what he was getting and he knew that he had to refinance in 3 years. He is highly educated. He practices law in Arizona, Nevada, and California. When he went to refinance, he found out we was $150,000 underwater. He short sold his condo 8 months later for $90K.

My point is, during the crash, it really didn’t matter how smart you were, how much education you had, or how much money you made. The average everyday homeowners never saw this crash coming until it was too late.

Posted by MBD72 | Report as abusive

What TFF and, to a lesser extent, david3 said: most of the houses in the US are not worth noticeably less than they were to their owners because they don’t intend to sell them, and if they do have to sell them, well, they’re paid off or close to it or the least of their problems. (You can always find a place to live if you have a job.)

Posted by klhoughton | Report as abusive

Well, they may or may not be wrong, depending on the local economy. If rents are still high, homeowners may still be saving money by owning rather than renting. Or they might be losing it hand over fist.

Posted by DrFuManchu | Report as abusive

I think some of the posters are unnecessarily complicating the issue. The only relevant question is: is my home worth less today than it was in 2007? The answer to that, regardless of your city or your equity or your personal sense of well-being–the answer to that one question is just about 100% “yes.”

Posted by LadyGodiva | Report as abusive

I think the more alarming question is who is the 5% that thinks there is a fourth option “other” than increase, decrease, or stay the same?

Posted by DrewF | Report as abusive

Exactly, kl.

* If you don’t sell, it doesn’t really matter whether your home is worth more or less.

* If you sell and buy another house, the only thing that matters is the RELATIVE valuation of the two properties. And in any market, some properties will gain more than others. This is probably a pretty good time to be trading up, since mortgage rates are low and higher-end properties in many markets have taken huge hits.

* If you die and the executor of your estate sells your house, you might end up with the short end of the stick. But you’re probably more upset about dying than you are about selling your house for 30% less than it was worth a few years earlier.

The people most adversely affected by the housing decline are those who are underwater — they may be able to buy a property at a similar discount, however they will first need to pony up enough cash to clear their old mortgage. You can comfortably owe $350k on a house that markets for $300k, but if you sell that house and buy another for $300k you can’t roll over the $350k loan.

Besides, the market is dead. Even if the valuation is reasonable when moving, you can have a very hard time selling in a reasonable length of time.

Posted by TFF | Report as abusive

I don’t have data, but I believe Pew is correct, at least in New York; the more expensive real estate whipsawed up and down more in the last decade than the cheaper residences did.

An under-informed blog commenter is surely a better source for the assertion than people’s self-reports of what has happened to their homes’ values.

Posted by dWj | Report as abusive

You clearly do not live in a town where property valuations and local taxes went through the roof over the past decade. If you did you would recognize that it DOES bloody well matter whether you sell your house, when your taxes are based on wholly fictitious valuations.

Moreover, if the market is dead, as you point out, how is one to trade up without taking a massive loss on one’s current home OR turning it into a rental property, which presupposes a wholly independent source of the large down-payment you will need for the new, bigger, better place?

Posted by LadyGodiva | Report as abusive

In California and Oregon, and I suspect elsewhere, property valuations got delinked from property taxes in the early 1990s (this is a large part of why California has such budget problems now — public services didn’t benefit proportionately from the rise in property values).

The decision to sell one’s home, unfortunately, isn’t always based on whether or not it’s held its value. Many people sell because they have lost jobs, need to move, are getting divorced/married, lose health etc.

Posted by SelenesMom | Report as abusive

Hmmm. I can type in an address in Zillow, say 512 E 11th #3A3D for sale for $575k and see the price curve for the East Village has fallen from $1.1MM to $765K over the past year though it appears to have stabilized. Now this is only a rough guide since the mix changes and prices likely change block by block as well as unit by unit in New York but it would be the starting point for any guess without considering any further information. That wasn’t so hard was it?

Posted by MyLord | Report as abusive

LadyGodiva, property taxes are APPORTIONED according to property value but they are DETERMINED by the town (often subject to statutory limitations). It is nonsensical to blame rising property values for rising taxes.

I freely admitted in my earlier comment that trading up (or moving) in a dead market is a chancy proposition. You will note, however, that this fact is ALSO independent of valuations.

But if you put your outrage in your pocket for a moment, and read Felix’ post, you’ll see that he was sneering at those idiot Americans who are blithely unaware that their home is worth less today than it was in 2007.

And my response to that stands — most Americans don’t care. A third of homeowners don’t even HAVE a mortgage, so they can’t be underwater. Half of the remaining mortgages (at least) are above water, so the weak turnover of the market is of greater concern than the valuation (and then only if they decide to move).

The remaining third of the country is in a somewhat precarious position. They can’t afford to sell at a loss (they have little or no equity in their house at this point) and so are forced to stay put. It is THIS segment of the population (along with the eggheads) that is most acutely aware that their house is worth less than they paid for it.

But the majority of homeowners couldn’t care less.

Posted by TFF | Report as abusive

http://thedailyrecord.com/2011/03/10/num ber-of-underwater-mortgages-up/

“About 11.1 million households, or 23.1 percent of all mortgaged homes, were underwater in the October-December quarter…”

Just a guess, but I would assume that this is still in the “steep” part of the distribution — thus the percentage of homes that are SIGNIFICANTLY underwater is likely much lower than 23.1%. You aren’t likely to walk away from an underwater mortgage over a difference of $10k or $20k. It isn’t worth impairing your credit over a small difference like that, and you could easily end up spending more on moving expenses and rent than you would “save” by abandoning the excess debt.

So how many homeowners are underwater by $50k or more at this point? And how many of THOSE are unaware of that fact? My guess — few and none.

If 23% of mortgaged homes are underwater (perhaps 15% of all homes), then there are 75% to 85% that are not. Compare against the survey results that Felix reports and it doesn’t require delusional behavior on the part of any underwater homeowners at all. And while the remainder may be mistaken, it isn’t likely to be a mistake that is relevant to their personal situation.

Posted by TFF | Report as abusive

On my street in California, in the last two years we had 4 foreclosures and 2 sales. All the foreclosures sold for dirt cheap and one for sale was sold. The other failed to sell for two years, so it was rented. My value is equal to 2004 values, but I bought in ’99, so I am still OK unless Obama continues to destroy America at his current pace.

Posted by EagleDriver | Report as abusive

No outrage, just umbrage. This is far too trivial for outrage.

As for taxes, do you know anyone whose property taxes went down to the full extent of the deflating bubble? I don’t. In my area they are about par with peak value time. This is non-trivial and unlikely to change, as local government does not want to give back the money it got used to spending during the heady days. In fact, as people lose homes and THOSE houses’ taxes go down substantially (the best argument for walking away that I know), their neighbors may pay more because, hey, the village manager isn’t giving up any salary or perks!

All of which goes to prove Felix’s original point (which I started out defending and will end up doing) that Americans do not really understand what a pickle they are in. And when you go on about how two-thirds don’t care (which is no doubt true) I have to ask if they are the two-thirds who are “safe” or if they are at risk in other ways, which you seem determined to ignore.

Still, no outrage.

Posted by LadyGodiva | Report as abusive

“As for taxes, do you know anyone whose property taxes went down to the full extent of the deflating bubble?”

I’m guessing we live in different states? Property taxes in Massachusetts rise by precisely 2.5% every year (barring a voter-approved override which is rare). If assessments skyrocket, then the rate is forced down. If assessments plummet, then the rate is forced up. There are minor adjustments as the balance of commercial/residential real estate shifts, and as state aid changes, but it has literally nothing to do with property values.

Did your local government increase its revenues by 10%+ annually during the housing bubble? If so, you need to find some new local politicians. That would be an outrage! But again, it doesn’t really have anything to do with the rising property values. They could have voted a lower tax rate (and maintained stable revenues) if they had wanted to do so.

“I have to ask if they are the two-thirds who are “safe” or if they are at risk in other ways, which you seem determined to ignore.”

People are plenty concerned about jobs, health care, jobs, their savings, and jobs. Why is it important that they worry about whether their house could (theoretically) be sold for more than they bought it for? If the market were booming, they wouldn’t be any richer. You can’t eat your house (or at least you can’t live in it after you’ve eaten it). So why should they be concerned about whether or not it has fallen in value.

People don’t care whether THEIR house has risen or fallen in value unless it is relevant to THEIR personal situation. If you ask them whether the broader real estate market has risen or fallen, you might get more sensible answers.

Posted by TFF | Report as abusive

Speaking of which, I asked my wife the question in the survey. Her answer was, “Yes, No, Yes.”

Yes — the market has fallen.

No — she philosophically objects to valuing our house according to the market since we will not be selling any time in the next ten years.

Yes — she finally decided that the property has depreciated/deteriorated marginally over the last five years. Which is true, but not the interpretation that Felix is interested in.

She is educated and generally aware of the real estate market swings, just philosophically inclined to value our house according to its utility rather than by the market. Wonder how many of the survey respondents answered along those lines?

Posted by TFF | Report as abusive

TFF “gets” it… and has answered the why. It may be denial for a select few, but house value is more then market value … unless you are about to sell.

Value is where they are financially on their homes… not ignorance or lack of intelligence. I am quite sure there are still many of those who are happy in their home and spent more money in and on it to ensure its value and also pay off the mortgage that feel they are better off then those renting who put their money in the market.

The ones who were in denial are those who bought too high, didn’t do homework, bought above their means and are inclined to move often, etc. They are in a pickle… but also by design, especially if they become unemployed for any length of time. They are likely also house buyers as opposed to home owners. (but I would think those that were should also be more aware of the market)

Plus, perhaps the older among us still remember their parents telling about those who lost everything in the stock market became drifters who worked for farmers and homeowners. (People like me who save, always have emergency funds, pay off debt, have owned homes, understand the housing market, put down solid down payments, and have gardens, apple trees and children … and only move when we have to and when the market is right)

Posted by hsvkitty | Report as abusive

“…and have gardens, apple trees and children…”

Note to self — remember this year to plant the apple trees in the garden, plant the children in the bathtub.

Glad we agree on these points, hsvkitty. I do have some sympathy for the people who trapped themselves, and there are certainly many thousands of those, but the numbers suggest that many more homeowners have maintained a sensible outlook throughout.

Wanted to throw an idea out for discussion…

If we back away from low-downpayment loans, do houses become MORE affordable or LESS? I’ve been arguing that low-downpayment mortgages push prices higher (since there is more borrowed money sloshing about) thus making housing more costly. Hasn’t this been our experience over the past decade?

Which is more affordable, a house selling at $500k with a 5% downpayment (typical for my area at the peak of the bubble) or one selling at $250k with a 20% downpayment (we aren’t there yet but could be in a few years)?

Posted by TFF | Report as abusive

I find it difficult to speak to the question because I see the 5% down as a vulnerability and when you show a weak underbelly, it can be easily torn apart. In good times or bad, 5% makes everyone else’s homes vulnerable as well and I agree can push prices up artificially.

Affordability can’t be determined until you see stability and you won’t see it for a couple more years at least. (And don’t bring any sharp objects into our housing market for those 2 years, please)

Posted by hsvkitty | Report as abusive