The Housing Chronicles Blog: How many people would actually walk away from mortgages?

Thursday, March 5, 2009

How many people would actually walk away from mortgages?

Almost 8.3 million people are 'underwater' on their mortgages, leaving many pundits to think they're just all going to walk away. Only it's not that simple. A story at profiles several people and why they're planning to stay, walk away, or undecided:

A basic cost-benefit analysis predicts that these people will abandon their homes and accept foreclosure. But there is little data measuring whether that logic holds true.

In fact, Eric Johnson, a business professor at Columbia University, believes it doesn't. After years of studying behavioral economics - essentially the economics of choice - he argues that people will simply not make such rational decisions.

"There are two effects that suggest [walk aways] won't happen so easily," he says. "The first is the endowment effect. People tend to value their own house above its market price. Owners don't want to sell at a loss. They have what we call a loss aversion."

The second is that people weigh the importance of immediate outcomes more heavily than long-term effects. Walking away involves upfront expenditures of time, money and effort, while the benefits of walking away are back-loaded. "People are impatient and weight present costs and benefits more, so they will walk away less often than we might think," Johnson says.

Click here for the individual stories of these buyers.


Larry Roberts said...

I guess this guy is saying that homeowners will not walk because they will remain in denial about how bad their situation really is. He might be right.

IMO, the walkaway phenomenon is going to be driven by future expectations. As long as people believe they might not be underwater in a year or two, they will hold on. Once they fall way underwater, or if they come to believe prices will not come back for many years, a great many borrowers will walk, particularly if they can rent the same property for much less than their mortgage. The best thing that the government and the lenders can do is to continue to foster the fallacious idea that prices will rebound quickly; otherwise, people are going to walk away in very large numbers.

Anonymous said...

O.B. said the stock market is a great investment right before the market went down another 10%. First step, the govt is to stability the markets. They will assure you that the markets are sound right or my program will make it sound before the collapse. After the collapse that it's a great time to buy. Then repeat the first step.