60 Minutes profiles strategic defaults

I still see this phenomenon as a major risk to US growth due to the credit writedowns associated with it. However, the vast majority of house price losses are behind us. If house prices double-dip as they appear to be doing now, the losses should be much less than during the first dip.

It’s interesting to hear the first-time homebuyer psychology of not wanting to get priced out of the market during the boom, getting in before prices rise further. This is one of the self-feeding mechanisms of house-price bubbles. The flip side of that – not wanting to get in negative equity, afraid that prices will drop further – is what we witness on the way down. Again, this is a self-feeding mechanism that leads burst bubbles to overshoot to the downside.

Here’s a question for those people who bought overpriced homes at the height of the bubble like the last man in the video: didn’t you do a buy vs. rent calculation and realize you were paying a lot more to buy? Unless you were bamboozled by a teaser rate, you couldn’t have possibly thought this was a good economic decision except if house prices continued to rise.

 


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9 Comments
  1. Kirk Kinder says

    Edward,

    I don’t think most of these folks did a buy vs. rent calc. Or, they were slammed into a neg-am mortgage where the buy vs. rent looked good. Of course, the assumption sold by the mortgage broker or builder was the house gains enough value to refi into a conventional in a couple years.

    I am not as sold as the mainstream belief that the worst for housing is over. We still have more homes 90 days late or in foreclosure than at the peak of subprime. Also, no one ever mentions the effects of rising rates. I still believe we could see a deflationary environment with rates, but what if the bond market does demand a higher payment here in the US over the next year or two. If mortgage rates go from 5% to 7% without an accompanying rise in incomes, we could see housing drop considerably.

    Either way, this is the second big piece I have seen on walking away. I think the first was public tv. As these stories become more mainstream, I expect more folks to question the morality argument and walk away.

    1. Edward Harrison says

      I agree. Clearly, first-time home buyers were not doing buy vs rent calculations . If you rent and decide to buy, the mortgage payment versus the rent is an obvious financial comparison anyone should be making – purely out of liquidity concerns. In FL, CA, NV, DC, AZ, and a host of other states, people were engaged in Ponzi finance i.e. house prices never go down. Rent vs. Buy was so out of whack in these markets that there is no rational explanation for the buying frenzies except Ponzi.

      But, now things are looking MUCH better in the Southwest and CA. Any downside from here is the inevitable overshoot.

  2. Onlooker from Troy says

    Buy vs. rent calculations?! Ha! You know better than to think that the financially illiterate and irresponsible American public (though we’re not alone; witness Australia, Canada, et al) would actually analyze this in a objective way; even if they were capable of doing so.

    We’ve done nothing but continue to reinforce the idiocy of the credit bubble and hope to revive it. We’re doomed and someday it will truly unravel.

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