Because the topic has been discussed so much in the last few days on this blog, I thought I’d pass along a link to a yesterday’s LA Times piece, Professor advises underwater homeowners to walk away from mortgages
In the article, Brent T. White, a University of Arizona law school professor, discusses his recent paper "Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis."
From the article, “too often people’s emotions get in the way of clear financial thinking about mortgages.”
If you’re interested in reading White’s 52-page paper, you can download a copy here.
55 comments
Guy,
I thought Mike covered this article and the implications on his 1 Nov 09 contribution “Shame and Fear”?
In fact, when I saw the article widely reported in the media yesterday, I scored a few points for the RRB for breaking the story 1 month before everyone else. FWIW.
FutureRenoHomebuyer,
Oops…I completely missed that. Thanks for the catch.
- Guy
…btw, thank you for scoring points for the RRB.
Guy, can I have my pony now?
guy,
How do I get a free house?
Doesn’t it make you feel good your hard earned money pays the salaries for such upstanding Americans like this idiot (and others like William Ayers and Ward Churchill)? I have as much respect for college professors as I do for Nobel Peace prize winners over the last 20 years.
Oh, please!
You compare this to Ayers and Churchill?!
I think Professor White has a good point. Ultimate responsibility for the housing crisis lies with both irresponsible banks and irresponsible borrowers. Why is it immoral for a homeowner to make a logical decision based on rational self interest to walk away from a home and accept the consequences of defaulting, and not immoral for a bank or a corporation to act in the same or similar way? As Professor White points out, such behavior is par for the course for banks and corporations - so why the double standard?
Either the bank will take its collateral back or the homeowner will take the loss by throwing money down a pit for years to come. Expecting homeowners to bear the brunt of the crisis is not fair, especially when their taxes are being used to prop up the very banks who sold the crummy mortgages in the first place. On this point, we are experiencing a prisoners dilemma on a massive scale. In my humble opinion, from a purely financial perspective, at the end of the day the sucker is the one who sticks with the underwater home - especially when such behavior is based on self righteous notions of morality, which demonstrability screw you in the end.
The only justification, if there is one, tends to be an emotional one. If said mortgage renter (not homeowner–just renting from the bank) would rather live in the home because of non-financial reasons–access to good schools, proximity to work, desirable neighborhood–then it might (and I emphasize MIGHT) make sense on a purely emotional level to continue to rent that home, albeit underwater.
From a financial perspective, it is difficult to justify. And I am purposely not speaking on the morality question, because there has already been enough commentary about it.
Sorry,
But I can’t let WillK’s comment go by without a response…
WillK, Do you use the health care system in any way? Take presciptions? Use bridges, buildings, or roads? Like to drink clean sanitary water from your tap? Eat reasonably priced food? Drive a car? Fly on a plane? Use a telephone? Watch TV?
College professors were likely involved in every single one of those actions in some way, and I could list many more examples where their hard work and effort has made you healthier and safer, increased your quality of life, and kept more money in your wallet. Just because a few outspoken faculty get some press does not mean that the vast silent majority of college professors educating our children and building our civilization also are undeserving of your respect.
tallguy, Your right.I shouldn’t have painted with such a broad brush. Allow me correct myself:
Doesn’t it make you feel good your hard earned money pays the salaries for such upstanding Americans like this idiot (and others like William Ayers and Ward Churchill)? I have as much respect for professors who want to destroy our society as I do for Nobel Peace prize winners over the last 20 years.
So, willk, did you get your Going Rogue book signed by Sarah Palin, or did she quit before she got to yours?
Transplant, Looks like Sarah’s decision to quit was a smart move afterall. By the way, how’s that “hope and change” working out for you?
Whats great about this blog is the topic- REAL ESTATE
One can get the same old partisan B S anywhere.Please dont ruin our blog!
Inept One - why don’t you contribute something to ‘our’ RE blog instead of complaining during a slow time. Most things have been hashed and then rehashed. At least a little Palin humor keeps the blog going during slow times.
BTW, if you don’t think politics have anything to do with RE you might want to check into a more remedial blog. IMO We SHOULD be arguing politics more since it has everything to do with RE prices.
I’m somewhere between Inept and DBNO.
Policy discussion bearing on the economy or real estate — I’m all for it. Tax credit, insane Fed money printing policies, ineptitude of Reno and Nevada to get their respective houses in order, thus execerbating this historically depressed market — I believe that’s all fair game.
But I don’t need to hear how you support Sarah the quitter, or hate Obama, or love Ensign and all of his girlfriends. Save that for some other blog.
“But I don’t need to hear how you support Sarah the quitter, or hate Obama, or love Ensign and all of his girlfriends. Save that for some other blog.”
You don’t see the problem with this statement?
Reminds me of all the liberals who whine about there being too much division and we need someone to bring us all together (as long as it’s someone on the left).
Getting back to RE (but still off subject) I have a question about the photos used on listings for the internet. Why are they so bad? Not just the quality but the subject too. People are using the internet to shop for a house more than ever and half the time the photos look like they were taken by a kid with a toy camera. My wife and I always laugh about all the pictures of someone’s bed. Is this done on purpose are the realtors just being lazy? Sorry, I know this should have been asked on the forums but they don’t appear to be used.
DBNO- I have enjoyed reading “your” blog for awhile now and it is both entertaining and informative. I know political policies have a lot to do with real estate and the market, but I dont think this is the place to bash each other because of political preferences. As far as I am concerned neither party has done anything to be proud of recently and more effort is spent on re- election than solving any problems we as a country have. I am sorry if my previous post was out of line, I just feel political bickering is a waste of time and blog space and will eventually run off readers and participants alike.
IneptOne - Boredom will run off readers, not a few sparks on various subjects other than the Real Estate market IMO. One reason BB is so liked/despised (take your pick) is he’s a character, and because he’s an informed character it works - many readers miss him when he doesn’t post. Same with Smarten to a certain degree.
Big deal about bloggers going off on tangents about politics or an opinion on lawyers or whatever. It not like Guy is limiting the space, and it’s not like you have to read it.
I just get tried of writers saying ‘this is a real estate blog, stop it’ without those saying it contributing anything themselves to the subject.
What has happened is that the blog is running out of new topics. It’s pretty hard to think of even one real estate topic that has not been discussed on this blog at some time or another. Many, if not most, of the best discussions happened 2-3 years ago. Many of the original commenters, the ones who made the blog so interesting, don’t come round much any more. People like RI, Grand Wazoo, Tom, Skrap Guy. And even BB and Smarten seem to have lost some of their enthusiasm, and post much less frequently.
And let’s admit it….even derrick made for some provocative discussions.
I think blogs have a life span, and this one, now almost 4 years old, may be into its maturity. New people have come round, but it’s been a long time since a truly new topic was discussed here. So it is understandable that topics sometimes turn into politics, because how many times can everybody offer their $0.02 on whether we are at a bottom, or whether it will be inflation or deflation, or when interest rates will rise, or whether prices in Arrowcreek are going to collapse?
Here is a an almost perfect example of the photos I see on the MLS (at least these are clear) that I talked about in an earlier post.
Of the 9 photos included one is of the base of the toilet, one is a bed (no part of the room are visible) and one of a recliner next to part of a TV with none of the room shown (which makes you wonder if this is really small family room).
The MLS# is 90017557
Sorry. It’s become a pet peeve with me.
Martin is right I think. The only time a thread gets more than about 20 comments now is when there is a pissing contest going on. When people feel the need to insult each other, then the thread can get up to 70 comments, or more.
Any thread that stays on topic tends to peter out fairly soon. Why? Because eveything that can be said about the real estate market in Reno and nationally has already been said. About a 1000 times.
Martin,
I find your notion that a blog has a lifespan intriguing. I had not considered that before.
I’ll admit I find it challenging at times to come up with a fresh topic.
Hopefully the blog will evolve with time and stay relevant.
Anyone have any ideas for threads they’d like me to start.
Yes Guy. I have a thread idea.
Appraisal Management Companies [”AMCs”]. Your lender requires you to use “X” AMC to select an appraiser; “X” is owned by your lender; “X” is not licensed in NV as a certified residential appraiser [appraisers must be licensed in NV]; “X” hires an independent appraiser to conduct the appraisal; “X” beats down the appraiser’s fee threatening to divert future lender business to the competition if the appraiser doesn’t cave in; “X” then charges the lender twice the amount of the actual appraiser’s fee for the appraiser [even though AMC is not licensed to charge an appraisal fee]; the borrower gets screwed; and there’s an apparent violation of RESPA’s prohibition against fee kick backs.
Oh, did I mention that “X” determines the fee it will charge the lender based upon the appraised value? And did I mention it’s unprofessional conduct and being an unfair business practice? And did I mention there’s no remedy available to NV because AMCs are not licensed?
Welcome to residential lending in NV!
Guy - Most of the blog lifespan talk is blown out of proportion. There will always be slow news times, whether in RE or mainstream journalism. Keeping this blog cutting edge when there is news is what will keep this one going for as long… well for as long as it works for you.
Keep this Real Estate blog honest, approachable and informative and it will produce a following that will continually replenish itself.
Now keeping lively, personable, interesting bloggers? Well that’s up to us.
Thanks, Smarten and DBNO.
http://www.freenevadamove.com/idx/residential/90017557/details.html
Appraisal management companies.
Now if that doesn’t whip up the ol’ blog, I don’t know what will.
Thanks renonewbie for posting that link to the listing photos but that link leaves out some of the photos. Go through this blog’s MLS search to see all 9 photos. Wouldn’t want anyone to miss the photo of the bed or the one of the toilet.
Willk,
Very nice pickup. I completely agree with you. There are hundreds more listings like it. Some of these moron agents that write up listings are not helping their clients at all. Did you see the writeup on your MLS listing?
“Here is agood oportunity….Dog in premisses.”
And whenever I see a photo of a chair or a bed or a desk, I think oh, small room — not good….next….
Are these people making money? Is there no manager in the office who proof-reads the listings before they hit the MLS? Guy must be eating these peoples lunches — no wonder he gets the $1M sales….some of these sellers would be better off with a FSBO.
Regarding the “question about the photos used on listings for the internet. Why are they so bad?” — I don’t know the answer to this, but I can tell you there are major difference between markets. If you look almost any of the photos in Seattle (try zip 98199 on redfin.com) and you’ll see that the picture are are all taken by professional photographers. Wow, what a difference this makes!
Take a house selling at the median price of $180K. Say there is an agent on each side. Say the commission is 6%. Each agent takes half of the commission and then has to split that with the broker. Each agent gets a $2700 payday. Not going to spend a lot of money and time marketing a house for a $2700 payday. Just take a few pics with the cellphone camera. Who cares if they are lousy? This is working on the cheap.
The decision to “just walk away” has potential catastrophic ramifications for the military member who might have a high-level security clearance or be in application process for same. A huge number of military families are in dire situation as they stuck with mortgages well above what a home is worth or would ever sell for in foreseeable future. These are people who were excellent credit risk and took on loans at sane levels for which they were truly qualified (VA loans and conventional). The relief is not there for these families, despite the supposed “relief” in the HAP program.
Our family personally sacrificed liquid savings of nearly $100,000 to get out of a house (on market nearly 300 days) at last duty station in the southeast.
We were lucky (and yes, smart) to have had that savings to bail ourselves out and save my husband’s career and potential after-military career as well.
Our family’s honor was paramount.
We enjoy this blog. Thanks for reading my comment.
~
AF Officers Wife,
Thank you and your husband for your service to this country. Sorry to hear of your monetary loss.
You raise a very interesting point that those we should be praising in society are being hurt by this mess. This mess per your example is not necessarily about flippers walking away from an investment, but also about real families taking it in the shorts (and lenders, and investors, and politicians).
Herein lies exactly why we are in this mess: homeowners ‘just walk away’ from their, yes, obligations. Banks lent money with ever lower credit standards because for the most part it was ‘other people’s money’ in form of 3rd party investors buying the paper. Politicians told the lenders to lend the money at ever lower standards so they could use their power of political persuasion to pursuade private enterprise to use OPM to lend to those who would eventually walk away.
This leads to a depression not recession in home values, which leads to AF Officers’ wives erasing $100,000 of savings for their family, among many others’ losses.
So, no, it is not right for homeowners to ‘walk away’ for the shear hell of it any more than it is right for the lenders to shift undue and often undisclosed risk to investors’ balance sheets, nor is it right for politicians to use their ivory tower positions to force irresponsibility upon the masses for thier personal gain of votes.
Now, how to correct this? Let borrowers, lenders and politicians alike feel their respective pains as fast as possible, so we can get back to a normalized and correctly valued market. The sooner, the better.
I think if the government is going to help anyone out with their mortgage it should be military families who are forced to move every few years.
I own a lot in Truckee, CA that has lost over half of its value since I bought it. It would definitely be in my best financial interest to cut my losses and walk away. Will I? Probably not. As much as I would like to, I just cannot bring myself to walk away from my obligation.
I have been looking for justification to hang in there on this blog, and there are good arguments on both sides. I am in a very tough
situation and appreciate all input from this blog.
Inept -
If you believe all the doom and gloomers on this blog, your Truckee lot is essentially worthless because assuming it were improved, they’d be telling you:
1. The cost/square foot is less than today’s replacement cost;
2. In essence you have to give away your lot for free in order to sell the improvements constructed thereupon for less than their replacement cost;
3. Prices are going to “crash” another 30%-40% from current levels by 2013 [so if you’re underwater, get ready to be really underwater]; and,
4. Real estate in America is going to be just like Japan - your $500K fmv today is going to be worth $100K in a decade.
Stated differently, the construction industry is in essence dead because no one is going to build new [nor remodel] when one can simply purchase for less.
But I’m not a doom and gloomer.
So to properly answer your question, I think we need to know:
1. Where exactly in Truckee is your lot located [possibly Timilick, Martis Camp, Big Springs]?
2. I assume from your question you have a loan against your lot. How much; what are the rate/terms; what’s the LTV?
3. Are there similar lots surrounding yours that have been built out and if so, what are their improved values?
4. Why did you purchase your lot in the first place? What was your ultimate game plan?
5. Has that plan changed and if so, the particulars?
Thanks.
1)Grey’s Crossing
2)Worth 100,000?? Owe 150,000
3)A few have been built out but not many. The lot and home sales in the area are absulutely dead at the moment. Values are below cost to build.
4) When I bought the lot it eas a forclosure and the price I paid was about 1/3 the original price of the lot. I actually had some other lot owners mildly threatening the listing agent because the lot sold so cheap. I thought at the time it was a great lot and when the market came back I could build a spec house. BTW I am a contractor with a real estate liscence. OOPs
5) Building is out if the question for obvious reasons.
I am not here to wine about my situation. I made a BIG MISTAKE. I know that. Have seriously considered walking away, but my concsience wont let me, darn it.
When did you buy the lot, Inept One? I’m also wondering: as a contractor, though your purchase price was well below the peak, how were you justifying it? Do you guys never look at fundamentals like income? It seems like all of the contractors were building products for the wealthy. Did you guys think that everyone was all of a sudden wealthy, or was it a case that you were going to build something so special that the few wealthy that were buying were going to pick your product? Were you aware that the number of people who can afford a house which starts with a $150k piece of dirt is less than 5 in 100? Do you ever ask yourself such questions? I just want to get into the mind of a contractor to understand the decision making process. For those of us on the outside it seems a bit cloudy at best.
As an aside, I find the mls search feature on this site to be woefully inadequate. I cannot even find any Truckee listings. The closest thing I see is “All Lake Tahoe Areas” which does not include Truckee? This needs to be addressed if anyone is to take the search feature seriously.
BB, here is a good site for Truckee area:
http://www.idxcentral.com/idxsearch.cfm?idxid=jbrown
Very similar to this MLS search, with a few more features.
I have done pretty well over the years building spec houses on 150,000 pieces of dirt. At the time the numbers worked. I guess I was on a pretty good roll and wanted the good times to continue. Obviously, in hind sight it was a mistake. I bought the lot right at the beginning of the crash. It was priced 30-35% under anything on the market at the time.I dont need a lecture about how stupid I was, I already know.
In a lot of ways I am blessed. My last spec sold at a small profit and I know a few contractors that were not as fortunate and lost everything.
I sold my home here in Truckee and will soon be a Nevadan, hence my interest in following this blog.
Inept,
Why are you leaving Truckee? Seems like a great place.
Why are you drawn to Reno? I like it, too, but there are plenty of naysayers out there. Would be interested to here your views.
Inept,
What follows is just my opinion, act on it at your own risk!
Contrary to Smarten, I am a doom and gloomer. And I think you are justified in whining. The system broke down because of macroeconomic forces that are way beyond your control - irresponsible lending, Alan Greenspan’s ideological bent etc. However much we would like to pretend that we can control our economic destinies, such choices exist at the margins of the big decisions made by the fed, which I think is an underlying point of White’s article.
On the topic of Japan’s quite similar, but more spectacular real estate bust, Lester Thurow wrote an excellent analysis of what happened before the crash called “Fortune Favors the Bold.” His hypothesis was that Japan was unable to lift itself out of the crisis because it was unable to let go of all the bad debt because the moral obligation to repay debt is so pervasive in Japanese culture. I happen to agree and think that the crisis here will persist until folks like you do a cold hard accounting of what is in your interests and then act on the right conclusion. The fact that Americans are rats who will jump ship is actually a virtue for our economy. We clean things up and move on - at least we used to.
You bought the land based on a contract. If the consequences of breaching the agreement are less than the consequences of sticking with it, and it sounds like they are, I accept the consequences and bail. The notion that the downside risk should be the exclusively the domain of the buyer and not the bank because of “honor” or “morality” is bs in my book. The bank would leave you for dead on the side of the road if it could. Its a machine that cares about one thing, and it should be treated accordingly. I would do whats best for you and your family.
ARS- ‘If the consequences of breaching the agreement are less than the consequences of sticking with it, and it sounds like they are, I accept the consequences and bail’
Then ‘I would do whats best for you and your family.’
Yeah, screw everybody else, and maybe the next time you need to breach a contract it will be a little easier to do. Who knows, you might, after a few contract breeches see your way to suing those that made your coffee too hot.
After all, the banks do it why shouldn’t we.
DBNO,
Yes, essentially thats what I am saying. As Adam Smith said, “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” The aggregate of everyone acting in their own interests is what capitalism is all about. Those who are encouraging you to “take it in the pants” are merely acting in their interests, at your detriment. As for the connection to suing because your coffee is too hot, I’m not so sure I get how that follows.
So your saying that as long as it is advantageous to yourself it’s OK. That’s what I thought. Screw anyone else and let’s let profits dictate our behavior. We’re on the same page, don’t worry.
As for the coffee reference - remember the women that sued McDonald’s? Probably not.
RE: “His hypothesis was that Japan was unable to lift itself out of the crisis because it was unable to let go of all the bad debt because the moral obligation to repay debt is so pervasive in Japanese culture. I happen to agree …”
As do I.
That won’t stop the self-appointed guardians or morality from lecturing the rest of us, though.
I have lived in Truckee for the past 18 years and would not leave if I could afford to keep my house. Long story short, my contracting business went into the tank, my income was cut in half and I have been living on my savings for the last year. Luckily my house sold recently and we have a house in Reno in escrow. My reasons for moving to Reno instead of staying in CA are numerous. Housing is cheap, taxes are relatively low, less snow than Truckee, I can still work in the tahoe basin, Close enough to Truckee…
that I can visit my daughter and grandson often.
I have also come to like Reno because it has all amenities of a big city but you can usually drive from one end of town to the other in about fifteen minutes. I know (from reading this blog) that I should probably wait to purchase, but I needed a place to live and renting doesnt interest me. Long and boring , I know but thats my story.
Thanks to all for the input regarding walking away from my lot. Its going to be a tough, painful decision either way.
Good for you that you got out whole, Inept One. I suppose a different moniker is in order. My questions in response to your post were somewhat rhetorical, and not all directed at you but your profession as a whole. I guess I just wonder how seemingly all of the builders, collectively, ran after the high end customer without questioning the over saturation of the market.
If I want to open up a grocery store, but I see ten more open in town, I’m not opening a grocery store. Did the builders ever consider this? The sheer volume of “high end” spec homes sitting vacant right now is astronomical. There are not enough high income people to fill these homes. It’s astounding to me. I just wonder where the market research was. It seems like everything was on a wing and a prayer.
human nature BB
contrarians can’t understand manias……way back before i completely exited the stock market i used to look at the fidelity select sectors and shift my money in the previous years worst performing sectors (i remember paper being a big winner for me)
one a contrarian…………