This NYT article caught my attention as a nice example of economic sociology. The gist of it, captured in the quotation below, is about the shift in attitudes and practices around home buying and ownership in the US. Traditionally home ownership is promoted by government policy and cultural norms because it is a means of encouraging personal savings, it boosts household credit ratings, and it improves neighborhoods by creating more local buy-in. However, When those laudable goals merged with the world of financial innovation, deregulation, and a rise in a particular portfolio thinking world view, we end up with a new set of attitudes and behaviors about home ownership. less than a Jimmy Stewart, feel-good, iron clad agreement between bank and homeowner, home ownership is a more fluid, transient financial deal that can be done or undone depending on the individual valuations of the players involved. Home-ownership is one more liquid and negotiable financial arrangement, like owning stock, buying futures, or being paid in stock options.
Facing Default, Some Walk Out on New Homes – New York Times
You Walk Away is a small sign of broad changes in the way many Americans look at housing. In an era in which new types of loans allowed many home buyers to move in with little or no down payment, and to cash out any equity by refinancing, the meaning of and foreclosure have changed, economists and housing experts say.
As the article points out, this change is made clearer by the foreclosure bulge (upswing? crisis? not sure which term is the most objective). As Todd Sinai, a professor at Wharton, points out, the very loans that made the housing market balloon set the stage for people to walk away. many marginal home buyers shifted from being renters to nominally owners. What actually happened is that they started renting from the bank with the chance to won if the value of the home increased faster than their repayment obligations. If it doesn’t, quite rationally, they walk away from a mortgage that costs more than the underlying value of the house. For the purchaser, he says, its a Heads-I-win-tails-you-lose situation.
Of course, banks could sue in some states, but what bank is going to sue someone who can’t afford the mortgage? Seems like a bit of poetic justice to me.
The article also focuses on You Walk Away, a company that somehow (I don’t get the business model) makes a profit on people walking out. There seems to be another interesting tension over the knitting together of economic and moral realities. Traditional auxiliaries to the home buying process don’t want to encourage people to walk away due to the embedded assumption that home ownership is indisputable social good. Jon Maddux, one of the owners of You Walk Away responds:
“It’s not a moral decision,” Mr. Maddux said of foreclosure. “The moral decision is, ‘I need to pay my kids’ health insurance or my car payment so I can get to work.’ They made a bad decision, but they shouldn’t make more bad ones just because they have this loan.”
Mr. Zulueta said he felt he had let down the lender, himself, and his family.
“But you got to move on,” he said. “I know in a few years my credit’s going to be fine. If I want to get another house, it’s going to be there. I’m not the only one who went through this. I know I’m working the system, but you got to do what you got to do. There’s always loopholes.”
Zulueta is one of the homeowners who Walks Away (is that trade-marked? haha).
His line of reasoning seems good to me. The financial and home buying industries ravaged the marginal home buyers and waved their magic wands of financial innovation to off load the debt to other financial players. The unraveling of a social compact around home buying started among the banks and mortgage companies. Seeing the writing on the wall, the home owners are following suit and treating a mortgage as one more financial arrangement and not a “marriage contract.”
My interest in this was piqued by some work Jerry Davis is doing on “The Portfolio Society.” So keep an eye peeled for that.