Tuesday, July 29, 2008
U.S Housing - Just Walk Away...
Well if you’re in the market for a house in Las Vegas or Miami they all just went on sale for 28% off. I’m not suggesting that they’re good value, just cheaper than they were. Compared with the previous year house prices in both Las Vegas and Miami dropped a whopping 28% last month. These markets sagged a full 12% lower than the national average, which saw declines of approximately 16%. With declines like these it is no wonder that the delinquency rate is rising. In many markets it’s now cheaper and faster to simply default on your mortgage and walk away from the house than it would be to pay off an inflated mortgage. In the amount of time it would take to pay off the value that you’ve lost on your home you could have saved enough money for another house and rebuilt your credit. For example, if you purchased a house last year in Las Vegas or Miami for $350,000 you would now be down a whopping $98,000 in equity. At that point the only financially responsible thing to do would be to default on your mortgage. Why not just walk away?
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It might be the right financial decision, I don't think it is the best ethical or moral one.
Personally, I'd lose respect for any one I knew who walked away from a mortgage they were financially able to honour.
I think in a truly free capitalist market you are morally obligated to walk away. Cutting your loss is the best thing to do. Doing otherwise would be considered socialist at least not-capitalist in the sense that you are no longer motivated by profit. If you are no longer motivated by profit then the "invisible hand" that lifts society and the economy is "tied down".
So killing someone for profit is OK, if you can get away with it??? If you are only motivated by profit, all sorts of terrible things can happen.
Let the weak perish, lets get rid of charities. If your children get a terrible illness and the insurance company can wriggle out of paying - that's a good thing.
Adam Smith may have talked of the "invisible hand" but he also said that "whenever men of business congregate, the conversation turns to ways of disadvantaging the consumer of goods", which is an argument for regulation, not total free markets.
I don't think it's even the right financial decision since you are rendering the whole concept of a contract pointless, which would devestate everything from fiat money to stock ownership to credit markets. If this is a good financial decision, then why don't we allow the lenders to forclose on the house when value goes up even when the buyer has lived up to his part of the contract? After all, why should the buyer get all the reward and the lender bear all the risk?
The ultimate result of this will be lenders refusing to lend because of this situation. This will lead to a LOT fewer home buyers, which will result in lower prices for houses across the board, destroying the housing equity of everyone who did the absolute right thing and followed through on their contract.
Of course, it will cause such havoc that I suspect long before that point you'll see the bankruptcy laws changed so that it isn't so easy to walk away from your debt.
Wouldn't walking away from a mortgage and house destroy your credit rating? It is hard to believe you could walk away with no Consequences.
Geez these comments are a complete muddle.
Ethics? Morals? Are you kidding? Do you think your lender considers itself to have a moral or ethical obligation to YOU?
Lenders often write off bad debts. It's why different types of loans to different borrowers have different interest rates, and why purchasers of securities rely on grading agencies to rate certain types of debt they wish to purchase in order to appropriately value them. It has a lot to do with the risk of default. Your credit card charges 19 percent, because they are often faced with borrowers that can't pay and either restructure their debt to pennies on the dollar, go bankrupt, or simply f*ck off. Normal course of doing business.
Lenders are not aghast at the moral implications of default. Happens all the time. Doesn't mean "fiat money" or lending contracts are meaningless -- it's what courts are for.
In the end it's purely a rational decision. In Canada I believe mortgages are recourse, meaning you can be sued for any deficiency post-foreclosure. (Though perhaps CMHC insurance covers off a certain portion.) Anyway walking away may not leave you off the hook. Plus the devastation to your credit rating. But if you are seriously underwater and can't keep up with payments, well, bankruptcy may be for you!
(and steve -- uh, lenders only get the value of the loan plus interest, not a percentage of the sales price of the property. Why would they foreclose when you are making payments? Then they forgo the interest. It makes sense if they are no longer getting payments, but makes no sense otherwise -- why lend in the first place?)
Not only are some walking away from houses in Phoenix. They bought them as investments and they strip them as they leave! Counter tops, cabinets, light fixtures- even wiring in some cases.
Walking away is the way that society shows that the community means nothing.
I am glad I moved from Arizona to Kansas.
Guys, not sure how ethics got in the way, but a mortgage is at its core the right to the property. A bank has the right to take the property if the holder doesn't pay up (if they choose not to or can't).
The bank signed the deal, that is their collateral, if they get stuck holding the bag, that is the risk taken.
It is simply a contract, if one walks away consequences happen (bank takes house, bad credit rating etc.)
I'm sure you can find an excuse to do just about anything, but only an idiot would walk away from their house just because the value declined over a very short time period.
I will prove this with an example. Say you bought a tv for $400. You financed the tv. Shortly thereafter, but at a time when you can no longer return the tv to the store for a full refund and when you no longer have price protection on the purchase, the store lowers the price of the tv.
What should you do? Throw out the tv and buy another one? When something you bought at the grocery store goes on sale do you throw out all the like items you have in your pantry because they are now worth less?
You're much better off waiting out the market to see if values come back up than walking away from your home and ruining your credit.
Presumably you did not buy your house as a short term investment that you planned to sell in a few hours, days, weeks, or months. If you did, you are also an idiot. If not, then stick to your long term strategy and you will be fine.
Buy real estate for long term appreciation - buy and hold.
In real estate, you make money when you buy (that means you need to buy at the right price and not pay too much) and you won't lose money unless you sell at the wrong price.
A key factor behind this global financial crisis is the blind race for profits by the lenders,banks and other financial organizations..So there is no question of ethics and morality.Waiting for more articles on how these institutions have played their part in this global crisis.
Thanks for this very informative post. This is a nice blog and will be looking forward to read more from you.
Here in Detroit we are upside down $50k on our home. It is very tempting to simply walk away.
I would suggest that the majority of banks do not mind it when someone walks away from a mortgage..
Why?
Because the bank can find someone else to take the mortgage on ... and keeps whatever mortgage payment they have received on the property.
Sounds like a sweet deal to me.
Of course this proves to be a problem when millions of people do it .... but that is a risk lenders take when they sell to hobo's working at arbys.
I would caution anyone that is thinking about responding to the decline in any long term asset with short term action. Consider the long-term view:
I bought my first house in 1990, it pretty immediately went down in value and stayed there for 3 or 4 years. I kept living in the house and paying the mortgage. I sold that house 8 years after I bought it for double what I purchased it for.
Since then we've upsized 2 times and purchased a vacation home, each time with help from the increases in equity from the previous properties. I view it as one big long-term asset, the home I'm going to live in, even if I have a few "down" years.
Like your blog. very interesting posts
forex guides
Like your blog. very interesting posts
forex guides
The real estate market is the barometer of the world economy. If we all defaulted at the first sign of negative equity, the world economic situation would be disastrous. Property prices is cyclical, and although some may be experiencing 28% losses, the best solution is to look at property investment as a long term investment. Otherwise the solution is either disastrous or a poor credit rating. There is no one size fits all scenarios around this type of decision.
Retired Syd has the right idea!
I had four investment properties as well as my own. I predicted the property cycle coming to an end in 2005. By the end of 2006 I had sold all bar my own home, with over £1M in the bank. I have now bought 6 new properties at bottom prices (or very near). If I had sold these six in 2006, it would have returned me £1.3M minimum.
In all this time my own home of 10 years was bought at £140K, went up to £450K, now around £370K, and in 10 years will probably be worth £700K.
Look at your own home as a long term investment, and become educated about the real estate market in regards to your investment portfolio. If we all ask ourselves, we probably all had concerns about the economy in early 2007.
While some of us learn others wish to ignore. I think we have all had an education in the last 18 months.
It is ridiculous to me that US banks have established a mortgage system which is other than a sub-species of personal loans - securitized on the person. Instead, US mortgages appear to be an isolated, and high risk, real estate investment arm of banking whereby the mortgages are securitized on the real estate alone.
In Canada, our banks rightly treat any loan, be it a mortgage to buy real estate or a loan to go on vacation, as a personal loan with all possible security required (personal and property). The only way to "walk away" from such loans is to declare bankruptcy because wages and all personal assets are on the line to the lender, not simply the real estate.
Surely the shareholders of any bank would expect no less than this - it reflects basic banking principles (BANKING 101) in that the business of banking is to loan a principal amount while ensuring that amount is returned and, hopefully, making a profit on a charge for the loan.
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