Baby Boomers and Strategic Defaults - a Demographic Study: Why Did People Walk Away? Did They Struggle With Morality? Would they Recommend Walking Away to Others?
http://globaleconomicanalysis.blogspot.com/2012/09/baby-boomers-and-strategic-defaults.html
Mish
Baby Boomers and Strategic Defaults
By Mish Follow Fri, 7 Sep 2012, 12:03am 5,416 views 42 comments
Watch (3) Share
Quote
Permalink Like (1) Dislike « First « Previous Viewing Comments 3-42 of 42 Last » See most liked comments
|
Mish is moderator of this thread. |
Follow
Befriend (12)
141 threads
1,367 comments
Emeryville, CA
"I believe bank CEOs knew full well home prices would sink (not necessarily crash as I expected) but the lenders did not care because of their originate to securitize model. Of the loans that banks kept, the bankers probably hoped to make debt slaves for life."
That says it all.
Follow
Befriend (1)
4 threads
8 comments
Chicago, IL
Jeremy McMillan's website
It is understanding the probabilities vs. the psychology of loss aversion.
Banks' whole value proposition relies on the consumer lacking the former and having the latter.
Theme music for those who consider walking (motor) away:
http://youtu.be/meshV00_Jns
Follow
Befriend (8)
209 threads
4,521 comments
Davis, CA
The large portion who depleted their savings/retirement prior to default, were FOOLS!
You think a finance guy thinks that way? NFW!
Follow
Befriend (2)
1 threads
40 comments
I see the upcoming baby boom retirement (selling their houses) combined with the Gen Y's inability to purchase (student debt, poor work prospects) as something that will drive down house prices in the medium to long term.
But, I really see this as an excellent opportunity for those with the money to invest in property and make a killing as a landlord - purchase cheap property combined with a high supply of renters.
Follow
Befriend (1)
22 threads
478 comments
San Jose, CA
Jimbo in SF says
This is exactly in line with my investment strategy.
Follow
Befriend (8)
28 threads
1,350 comments
Redwood City, CA
#1) If housing starts dropping, many older people won't sell. They'll wait it out.
#2) Many older people don't need a larger house, many have great plans of moving, but in reality, as you get older, you become adverse to change and want to stick with what you know (your large home).
#3) Housing follows inflation over the long run, so it's unlikely housing will deviate much, regardless of what baby boomers say they're going to do.
What will likely happen, is housing near cities will get even more expensive as people shy away from cars and associated expenses with having cars. While many will state the telecommuting is the way to go, most will realize that living in the city will yield the best jobs still.
Follow
Befriend
19 comments
"I see the upcoming baby boom retirement (selling their houses) combined with the Gen Y's inability to purchase (student debt, poor work prospects) as something that will drive down house prices in the medium to long term."
Well my mom won't sell her house and why should she? She's lived there 40 years and likes her house. With Prop 13 she's paying about $2500 a year in property taxes on a million dollar house in Los Altos. She can move away or into a retired living facility and have all her expenses/needs covered with the rental income.
With Prop 13 that tax basis will also pass to us kid(s) who inherit the paid-off house. So there's no mortgage payment, negligible property taxes to pay, and the only real expense of keeping the house is the maintenance upkeep. Counter those expenses with the avoided costs of assisted living facilities or at least the potential rental profitability.
Why would any baby boomer sell in CA if they've got a favorable Prop 13 tax bill and no/minimal housing expenses? Quite simply "downsizing" could cost them MORE than staying in their home if they sell.
Just don't understand the premise whereby baby boomers would want to sell unless it's somehow in their financial interest. I think you're much more likely to find them staying place. Unless they're really bad at math, in which case they probably aren't home owners anyway. YMMV
Follow
Befriend (1)
22 threads
478 comments
San Jose, CA
pkennedy says
In today’s state of economy waiting out is, well… to death.
pkennedy says
Many actually move to Sun Belt states, especially where is no state tax on retires fixed income. Not all baby boomers have comfort of having houses paid off.
pkennedy says
If housing just follows inflation, so there is no appreciation in house value but in maintenance costs it is. E.g. Germany has no appreciation for decades.
Follow
Befriend
250 threads
2,915 comments
You Walk Away Demographics
Key Findings
48% depleted a good portion or all of their savings prior to making a decision to walk away.
68% cited property values as the key reason for walking away. Only 5% cited health issues and fewer still (4%) cited loss of income.
53% said they would have walked away if they were 20 years younger while 23% said they would not have. The remaining 24% said the question was not applicable (they were not old enough to have a house).
30% said retirement was a factor in their decision.
22% made the mistake of tapping retirement accounts before walking away and another 16% considered doing so but decided against it. 63% never considered it.
88% readily admitted they were "strategic defaulters". 12% said they were not. This result is consistent with the 9% citing health or loss of income as reasons for walking away.
75% struggled with the morality of walking away. 25% did not.
97% said they would recommend walking away to family members if they were in the same situation.
Follow
Befriend
3 threads
98 comments
Walking away from underwater property is not morally wrong because that is one of the possible outcomes when you and bank signed the mortgage contract.
Principle reduction is morally wrong, because it is breach of the contract. It is extremely wrong in morality if government get involved. It is as bad as stealing money. The tax payers should not be responsible for the business decision made by the lender and borrower.
Squatting is also morally wrong. It is equivalent to stealing money to pay rent. It is also morally wrong if government allows and even encourages banks to delay the foreclosure so to delay the loss reporting. It is cheating to the public.
Follow
Befriend (2)
1 threads
40 comments
pkennedy & Erikintx:
I can totally see why folks who want to pass on their house to kids in Cali might not sell.
I'm also thinking about those with 2nd homes, those that have to sell to finance an old folks home or serious medical bills as they age.
"They'll wait it out" ... I was thinking medium to long term, where waiting it out would mean death.
With price being set at the margins, there may be enough movement to still reduce overall housing prices.
What I typically see in my neighborhood (SF), is that the older folks die and the house is split between 2 or more Gen X kids (or late boomers).
- They don't want to be landlords
- They have moved away to different cities
- Financially they could really do with the couple of hundred grand that their share of the sale of the 'old home' will provide.
This is not always the case, but this scenario seems pretty common to me.
I even agree with you, a mortgage free house with a prop 13 basis is like a gift from God.
Follow
Befriend
3 threads
98 comments
One more on morality:
Prop 13 is definitely wrong in morality. The property owner takes the same public service but pay much less. It is extremely unfair to other property owners. It is worse than stealing your neighbor's water to irrigate your garden.
Follow
Befriend (8)
209 threads
4,521 comments
Davis, CA
BobMSN says
+1
Nicely stated.
It's not a "gift from God" but simple tax-code thievery.
"Don't tax you, don't tax me, let's tax that fellow behind that tree".
Follow
Befriend (12)
141 threads
1,367 comments
Emeryville, CA
pkennedy says
Old people may sell because they're old, need assisted living or to get away from the cold, etc.
2) Old people also don't feel like maintaining a large house with STAIRS, and the resultant broken hips, shoveling, yardwork, etc which is solved by group-living.
Follow
Befriend (1)
22 threads
478 comments
San Jose, CA
BobMSN says
People with petty thieve often go to jail.
Follow
Befriend (1)
22 threads
478 comments
San Jose, CA
Erikintx says
Do you think 3% return on a $1M house is the best use of resources???
Follow
Befriend (14)
821 threads
2,811 comments
63 male
Las Vegas, NV
bgamall4's website
Premium
Mish has his own morality problems. First he says in another article that the borrowers were at fault for the housing bubble. But that absurdity is carpeted over by this article. It makes Mish look like he is ok with strategic default. But if he thinks the borrower is at fault, which he isn't, then he has to be ambivalent about strategic default.
Truth is, the lenders set it up, and as Mish says, knew the prices would decline but didn't care because they were getting rid of the loans through securitization. So while he is apparently not seeing it, he put his finger on who to blame for the housing bubble, the creators of securitization.
Follow
Befriend
1 threads
1,055 comments
CL says
It does NOT matter what other people "thought" what matters is that 1. No one had a gun to anyone's head to take out a loan. 2. The borrower took the money! THEY OWE IT BACK. 3. If YOU were the one who lent the money I find it hard to believe you would have a bleeding heart when they didn't pay you back.
It was obviously fun for sucker fools to live like ghetto lottery winners buying all this shite they did not need to pretend they were "rich" and they gloated in all this aspirational garbage until the curtain fell on them, then in typical fashion it was go crying that they were victims.
JUST STOP WITH THIS CRAP.
Follow
Befriend
3 threads
98 comments
Reader says
If you can category yourself into one of the victims, you stand on high moral ground. You can squat, you can occupy, you can collect whatever entitlement, and ask for more.
If you happen to have saved some hard owned money, or debt-free, or owned a business, or profited from your investment, you are the guilty one. You should be so shamed that thanking people to “share your opportunity and responsibility”.
This is the USA today, maybe tomorrow too.
Follow
Befriend
1 threads
213 comments
Arlington, TX
REpro says
3% return beats what banks are paying for CDs nowadays.
Follow
Befriend
19 comments
Where do you get 3%? From a very cursory web search of homes in the Los Altos area between Foothill and 280 for a 4 br the minimum would seem to be $5K/month. That's $60,000/yr, which is about 6% assuming a house value of $1M. Granted, take off 25% of cash flow for vacancy, repairs, etc and you'd still have a 4.5% return.
As others say, that's better than you can get from dividend stocks, bonds, or banks. As opposed to those other investments if we have a total economic collapse you can live in a house, while your stocks, bonds, CD's don't keep much rain off your head...
Follow
Befriend
3 threads
2,564 comments
bgamall4 says
Mish is a hard core libertarian. If something doesn't fit into his viewpoint he simply ignores it. Mish is a good read usually as long as you can put up with his mental gymnastics to make everything fit into his libertarian world.
Follow
Befriend
1 threads
213 comments
Arlington, TX
Darrell In Phoenix says
How do you loose money on a free $1 million dollar house?
Follow
Befriend (12)
141 threads
1,367 comments
Emeryville, CA
Reader says
Did you read the article? The " and " mean I quoted the article.
Hope that helps!
In any case, you're wrong. The system was manipulated and corrupt. When I buy goods or stocks, I expect them to be on the level, not a giant trick to steal your money.
Follow
Befriend (14)
821 threads
2,811 comments
63 male
Las Vegas, NV
bgamall4's website
Premium
CL says
Goldman Sachs replaced good loans with bad loans, and no prosecutions or clawbacks for this thief.
Follow
Befriend (14)
821 threads
2,811 comments
63 male
Las Vegas, NV
bgamall4's website
Premium
Reader says
It was set up by the banksters. They never revealed that the easy money loans were by themselves driving up the prices of the houses. They never revealed that they would one day stop making the easy money loans.
Sorry that is RICO fraud.
While they did not break any laws of real estate, they broke RICO laws by failing to disclose.
Follow
Befriend
1 threads
1,055 comments
CL says
If you borrowed the money under the given terms and then didn't like it that is YOUR fault.
Follow
Befriend
1 threads
1,055 comments
BobMSN says
I agree with all you say and frankly being one who has pristine credit, bills paid before time due, and no auto loans and no mortgage debt, I am sick and fucking tired of these greedy morons (and the politicians who pander to them with their "you've been taken, you've been mislead, you've been xyz...bullshite,) who thought they were hot shite buying all kinds of crap on credit and loans then got burnt, and now with buyer's remorse they want to stick it to someone anyone else becuase they will not take responsibility for their actions.
This is an issue of maturity and financial responsibility that unfortunatley in today's world few know because they are so God damn brainwashed by telephones, technology and wasting their entire lives on social media they cannot see straight.
Follow
Befriend
1 threads
1,055 comments
Erikintx says
I hate to inform you a house is not to make a buck. The principles you outlined helped the simpleminded create this mess.
Follow
Befriend (8)
209 threads
4,521 comments
Davis, CA
Reader says
The "simpleminded" didn't create this mess. We were told OVER AND OVER that "sophisticated investors" were sold these fancy securities and therefore it's not the responsibility of say Goldman Sachs that things blew up later. I also recall being told quite a lot that we didn't need regulations any more because we had a brilliant self-balancing system that would prevent any real bubbles from forming.
Ooops!
Follow
Befriend
1 threads
1,055 comments
Vicente says
ROFL
Follow
Befriend (12)
141 threads
1,367 comments
Emeryville, CA
Vicente says
Even Greenspan later admitted he got that wrong. Business goons don't self-regulate---they just rape faster, and harder.
Follow
Befriend (5)
10 threads
2,329 comments
Mish says
No worries. Current tax payers will foot the bill for their defaults. I mean why not? so far all of the troubled banks,home owners have been rescued by tax payers. Soon Fed,states,cities will dip in to tax payer $ for rescue. What a fine democracy we have. We will not quit until we go down like the Roman empire. Damn it!
Follow
Befriend (5)
25 threads
1,324 comments
Premium
The bubble popped.
No more money was available to loan for homes.
First to default were the subprime; those that never should have had a loan. They depended on refinance to enable paying bills. On an annual basis they cashed out equity to catch up.
Then there were the piggy people. Boats, trips, and motor vehicles, these people robbed the banks to pay for their toys. They too depended on the refi to stay in the life they had become used to.
There are always the unfortunates. They lose a job or lose their spouse and can no longer afford the bills. They are a minority and have always been foreclosed upon.
The bank will crush who cannot pay.
Then there are the strategic defaulters. They bought at the top, sometimes within their means, sometimes into more house than they could afford; many were move up buyers who brought equity to the loan. They are all under water. They can all afford their loans.
A little underwater is ok. Amortization and appreciation SHOULD allow you to catch up if 10% or 20% behind.
When the loan you own is worth more than 200% of the houses value it is irresponsible to your familys future to keep paying, even if you can afford it.
Why should anyone spend any more money on an overpriced "investment"? Recognizing themselves as previously unaware dupes of a huge ponzi scheme why would they continue to pay into it?
Strategic defaulters are the ones left holding the house after all of the fees were squeezed and the "investors" jumped ship at the right time.
According to Zillow, in Contra Costa County there are currently 1871 homes for sale by agent, 36 for sale by owner, 72 new homes, and 4640 under the category of foreclosure which includes REO. This does not include all the people like us who have not paid for over a year but have yet to make it to foreclosure.
We have been "working with the bank" for over a year since they said they told us to stop paying so they can offer us a modification.
The demographics suck. Many mini mansion owners are just waiting in vain for the market to come back so they can cash in their "investment" and live out their golden years. Good jobs and and lack of creditworthiness makes their post boom target market out of reach.
More strategic defaults are in the pipeline
Follow
Befriend (14)
821 threads
2,811 comments
63 male
Las Vegas, NV
bgamall4's website
Premium
Squatting in East CoCo says
Hot money pulled out. The securitization of mortgages stopped, which caused the money to dry up as the banks were stuck with the mortgages. It all went away because it was not sustainable. It was a SCAM.
Follow
Befriend
1 threads
213 comments
Arlington, TX
Darrell In Phoenix says
Yeah, your right. Thats why there are no houses for rent and everyone lives in a tent.
Follow
Befriend
1 threads
1,055 comments
Squatting in East CoCo says
In this case, the bank clearly had no underwriting standards BUT the borrower knew damn well (unless there were, on a case by case basis, mental issues precluding them from knowing better) that going deeper in debt may not solve anything but make things far worse.
My grandmother used to have a saying, "If your circumstance remains as is and you cannot pay your bills one month how are you going to pay two the next?!"
Follow
Befriend
1 threads
1,055 comments
bubblesitter says
Why is it that only a handful of people see this so clearly? Have they brainwashed the public with meds and technology and all this social shite to the point that they do what they want without understand outcomes?
It is like living in an episode of the Twilight Zone for Christ's sake.
Follow
Befriend
1 threads
1,055 comments
bgamall4 says
WE HAVE A WINNER. You outlined and nailed the entire God damn thing. Thank you.
And all the while we had that creep on June 9th of '05 Fed Chair Alan Greenspan telling Congress he saw local housing as “froth” not a real estate “bubble” on a national scale. Any of you remember that one!?
Hopefully, these brainwashed morons will get this before November.
Follow
Befriend
1 threads
1,055 comments
Squatting in East CoCo says
It is not just mini-mansions but many outright mansions meaning over 10K sq ft (of course this is not old money but greedy whores who built or so-called remodelled to cash in on the scam.)
You tell me how a buyer buys a the lot for under 700K around 2000 builds their gaudy version of a palace on the cheap, and then now tries to get 75M for the same? Yes, nearly 100M. You tell me where a 700K piece of land in less than ten years becomes a near 100M property. The place has been reduced and is still not sold. I see this kind of shite from coast to coast and it makes me want to puke.