The Psychology of a Crashing Housing Market: Sending in Your Home Keys Just Got Easier.

28 01 2008

The Psychology of a Crashing Housing Market: Sending in Your Home Keys Just Got Easier.

Posted by: in Real-estate news

Well it shouldn’t come as a surprise to you that the market was expecting new home sales to come in at 645,000 but the actual number came in at 604,000. Being off by 41,000 isn’t a big deal given how horrible the establishment is at predicting the will of the people. Just a few short months ago, it was almost a given that the front runners in the 2008 presidential race were going to be Hilary and Rudy. It was hard to see anyone else in the race (that is if you only listened to the media). This past weekend we just saw how frustrated the public is with the status quo and following in the footsteps of the past. They gave a resounding vote to someone new and someone utterly different. Yes, we’ve heard a million times but people want change. Even Joe and Susie public realize that when they hear “tax cuts stimulate the economy” and watching corrupt corporation leaders get off with massive severance packages, they understand that somehow that does not translate to a healthier economy or better wages. In fact, many are starting to believe that the country is falling more and more into a plutocracy and looking at wealth correlations and distributions, this belief is well founded. Corporate welfare is alive and strong.The housing bubble just went mainstream with a cover report on 60 Minutes called “House of Cards.” You can click on the link and watch the clip if you did not watch it during the weekend. It is well worth your time and plays out like any bubble blogger post. Take a wild guess at what city was in main focus? Stockton California. In fact, they were showing folks going on repo bus tours to buy homes. Sort of like a Universal Studios tour except instead of Jaws coming out to eat you alive you have overpriced McMansions waiting to sink their teeth into your wallet. For any of you who have taken trips to the Inland Empire to what are now defunct new subdivisions, this will not come to you as a surprise. The piece didn’t really shed any new light of information in regards to numbers and economics that many housing blog readers wouldn’t know, but what it did is that it collectively cemented the fact that yes, housing is in a historical bubble for the entire nation. It is a good piece and is well worth your time.

The main thing that was telling is how willing people are to game the system. Learning from the best on Wall Street, many recent American homebuyers are giving the middle finger to lenders and are willingly going into foreclosure. They had two couples that bought homes with exotic mortgages. One couple talked about buying a home in a better area and not knowing the terms of the note and that was their justification for not fighting to keep the home. Yet another couple which gives us insight into the psychology of recent buyers, tells us they are allowing foreclosure to happen because “the home isn’t appreciating” and therefore isn’t worth it. If you think about the psychology behind this and dig deeper, we have a nationwide epidemic of free lunches. People from Wall Street to main street are expecting profits each and every time they take a huge risk yet when losses appear, they want society to bail them out. A reader sent in a piece about “Intentional Foreclosure” from CBS News in Sacramento:

“This is how it works. Bob paid $420,000 for his home. Then he notices the house across the street, with more upgrades, and is selling for $315,000.

So Bob, who has pretty good credit, decides to buy the cheaper house. He can’t afford both, so then he walks away from his original home, letting it fall into foreclosure. That will hurt his credit, but he’s willing to take the hit for a more affordable home.

“Is it wrong to steal when you’re hungry? That’s an issue that a lot of people are trying to figure out right now,” says Linda.”

I imagine that this strategy will become more and more pervasive as the market declines. A large number of people try to build up good credit to have the ability to purchase a home. For many this is the end-game of good credit. So if you can get out and buy another home while your credit is still good, lock in a good rate (thanks Boom Boom Bernanke) move into your new place and simply try to sell your previous home or let it foreclose then you succeeded. And you wonder why there is such an uproar about rate cuts. Suddenly that poor family being kicked out in the street is mixed in with a boatload of folks that speculated in real estate, got burned, and now want you to pick up the tab. No need to mince words, this is a bailout. You wouldn’t be receiving your $600 check in the mail and providing golden parachutes to these greedy companies and recent buyers. How do you feel about raising mortgage caps to $625,500 now?

The Psychology of Housing Greed

From Calculated Risk we get a glaring statistics summing up the current market:

“From the Fed’s Flow of Funds report, household real estate assets totaled $20.99 trillion at the end of Q3 2007. So a 30% decline in prices would reduce “housing wealth” by about $6 trillion (Merrill’s number).”

Let us run a few scenarios to see how much damage potentially can occur:

Merrill Lynch has already come out stating that it is very possible that we will see a decline of household real estate wealth by 30 percent. In Southern California we have already seen 10 to 20 percent drops in all counties. I would imagine simply by the sheer size of homes and extent of bubble prices, California will be a large percentage of that $6 trillion loss. Again, let us go back to the presidential polls a few months ago. The media was utterly off and even this past weekend, they were predicting Hilary losing by a few percentage points (10 points at most) but that didn’t come out exactly how they planned. And this was only a few days before the vote!

Anyone using current housing prices is going to get burned because once you enter into a major bubble and you try to use peak prices to measure your decline, you are using once again artificial price measures to predict the future. Did anyone see California housing going up nearly 200 percent in some regions over this decade? Of course not. Yet that is the definition of a bubble. Prices disconnect from fundamentals and it becomes a question of psychology, consumer behavior, and the frontiers of what is legal or moral. Add to this a corrupt industry that went from greedy speculators, brokers, agents, Wall Street, builders, politicians, and foreign investors and you realize that everyone wanted a free lunch. As the 60 Minutes piece highlighted, at each step of the process someone was getting a cut.

Yet now we have this pervasive mentality where people are not only willing to let their homes foreclose and let their debt obligations fail, we have people that border the criminal. In the piece we also hear about people taking out “some equity” before knowingly letting their homes foreclose. Think about the mindset that occurs when this is happening. “Hey honey, we signed a contract but that doesn’t mean anything. How about we tap into our HELOC and take out $50,000 and let this home go into foreclosure. By the time we buy our new home and have some cash, who cares how our credit looks. After all, Wall Street is corrupt and the lenders were more the willing to give us the money. Take that Wall Street!” I assure you this conversation is happening at many households in the US as we speak. That is why fierce regulation and enforcement is utterly important. Trying to rush to raise caps is a knee-jerk reaction to the deeper and more profound problems with the economy. People are willing to go to any length so long as they can get away with it. All these get rich quick books cater to this free lunch mentality. Once at the fringe of late night infomercials, now a majority of Americans think nothing down is a birth right. Ben Bernanke was surprised that a trader in France was able to milk $7 billion from the markets. Why is that so shocking? If you allow people to take out $2 million loans in California I assure you people will. Yet when will the Fed and politicians stop and think, does this actually make any sense? I guess that is a lot to ask in an election year.

Did You Enjoy The Post? Subscribe to Dr. Housing Bubble’s Blog to get updated housing commentary, analysis, and information