I’m not optimistic about housing prices in the intermediate term but I’m not as pessimistic as Mr. Hanson. I generally defer to Calculated Risk on this topic. He (Bill) looks at the big three drivers of supply and demand for housing: new residential construction (SFR and apartments), household formation, and the excess number of housing units based on population. Cutting to the chase, he sees equilibrium within 3 years, with up to 10% downside in prices from current levels. That’s not great, but it’s not the apocalypse either. While there are certainly plenty of foreclosures to come, some folks seem to forget that with the dearth of homes being built, the net number of housing units (at the macro level) is shrinking considerably every year… which is exactly what we need.
Where strategic defaulters are concerned, I’ve actually come across a couple of pseudo-strategic defaulters recently. I’m renting out a condo right now and got two emails from folks letting properties go (11 properties between the two). I spoke with both of them and both knew several others that had let multiple properties go (being in the business, that’s not surprising) and both felt that they had held on far too long. They both felt they were on the tail end of their peers in the specuvester (my term) camp. I also have a friend who’s letting a house go in Chicago, which wipes out a 2nd, but the 1st will probably be made whole. But, importantly, while these may look like strategic defaults on the surface – they aren’t. None of these folks could afford to hang onto these properties. They just appear as if they could on paper.
So, despite the big negative equity figures we see, I think only a relatively small fraction at this point are going to default on these properties going forward for the following reasons:
(1) The endowment effect guarantees that most folks underestimate the degree to which they are underwater. And they will continue to do so. So, if you’re 25% underwater, you probably only believe you’re 10% underwater because you overvalue your house in your mind. A lot of folks won’t default based on this faulty logic alone.
(2) There is a certain percentage of folks who just don’t care to what degree they’re underwater as long as they can comfortably pay their mortgage.
(3) There is a certain percentage of folks who are too tied into their home, social circles, schools, etc. to default unless their economic situation changes.
(4) There are a lot of folks in non-judicial foreclosure states that won’t default because they realize that they face recourse beyond the mortgage.
(5) There are a lot of folks who simply will not default because they feel it’s their moral obligation to pay. I know – that may sound crazy to lots of folks here – but plenty of folks feel this way.
I could go on…
My point is that while there are a LOT of folks underwater, most of these folks won’t default for the reasons above. But that doesn’t change the fact that we’ve still got a lot of bank-owned action coming down the pike.
Interestingly, rents appear to be increasing. Anecdotally, I had no problem whatsoever renting my unit out. And that’s positive for the market as a whole.
