David Streitfeld in NYT:
No need for tears, but the well-off are losing their master suites and saying goodbye to their wine cellars.
The housing bust that began among the working class in remote subdivisions and quickly progressed to the suburban middle class is striking the upper class in privileged enclaves like this one in Silicon Valley.
Whether it is their residence, a second home or a house bought as an investment, the rich have stopped paying the mortgage at a rate that greatly exceeds the rest of the population.
More than one in seven homeowners with loans in excess of a million dollars are seriously delinquent, according to data compiled for The New York Times by the real estate analytics firm CoreLogic.
By contrast, homeowners with less lavish housing are much more likely to keep writing checks to their lender. About one in 12 mortgages below the million-dollar mark is delinquent.
Though it is hard to prove, the CoreLogic data suggest that many of the well-to-do are purposely dumping their financially draining properties, just as they would any sour investment.
“The rich are different: they are more ruthless,” said Sam Khater, CoreLogic’s senior economist.
Were these borrowers really “rich”? Or did they just buy more home than they could really afford? The “movin’ on up” theme for distressed properties is something we’ve been discussing for some time. We’re all subprime now! Obviously more distressed sales will put downward pressure on prices in these areas.
It’s a bit hard to comprehend that this housing/foreclosure crisis stuff has been going on for…fucking years already. As is so often the case, the maintstream media got it completely wrong initially, painting it as a “subprime” crisis due to bad behavior by unworthy brown people.
One has to be cautious in invoking cultural stereotypes. However, when the subject of defaults or mortgage mods comes up here and in other forums, almost inevitably some readers will start off on a bit of a rant: “I pay my mortgage/rent, why should these people get a break?” And these discussions often take a personal tone, as in they resent neighbors getting a break, or they claim to know someone who went hog wild spending on their home ATM and have now had their comeuppance (having never met anyone like that, I cannot verify if this pattern is anywhere near as prevalent as it is alleged to be). The problem is that their willingness to see their neighbors suffer, when it really is their neighbors, is cutting off their nose to spite their face, since foreclosures, particularly when homes sit vacant, drag all property values nearby down.
The perverse part is a New York Times article today indicates that the affluent are far less burdened by consideration of morality in their financial decisions, including their mortgages: “’The rich are different: they are more ruthless,’ said Sam Khater, CoreLogic’s senior economist.”
Default rates are highest among plus million dollar properties. The problem with the NYT account is that it discussion of defaults at the high end mixes apples and oranges. Defaults on second homes are mingled with defaults on primary residences. Second homes are the first to go when financial stresses become acute. And because a lot of borrowers claimed that vacation digs were primary residences to borrow on better terms, there isn’t an easy and obvious way to construct clean data sets (as in defaults on primary residences by income level or home price v. those on second homes).
First, are we talking about “the rich”, or just people who live in areas with expensive real estate? For anyone not from this continent (perhaps including the Times reporter), similar homes vary widely in price across the nation, as this CNN survey reminds us:
This [2009 Coldwell Banker Home Price Comparison] index, released Wednesday, is an “apples-to-apples” comparison of similar homes in so-called “move-up buyer” neighborhoods. It compares the prices charged for 2,200-square-foot, four-bedroom, two-and-one-half bath, single-family homes in more than 300 markets around the nation.
The overall U.S. average for such a house is $363,401, but in Grayling [MI], it sells for just $112,675, the most affordable market in the nation.
La Jolla [CA], on the other hand, is the most expensive; a comparable house there goes for a cool $2.125 million. That more than $2 million disparity is up from 2004, when the spread between the most expensive and most affordable towns was $1.5 million.
So – is this CoreLogic study making any adjustments for owner income and average local prices? Can we safely conclude that “rich” Californians in million dollar homes are defaulting more frequently than admirable proles in their modest $100,000 homes in the heartland?
Or (dare we ask) is it possible that the biggest mortgages are more likely to be found in the areas that saw the biggest bubble in real estate prices and have subsequently seen the greatest declines? If Core Logic is not controlling for regional variations in price than we aren’t really looking at “rich” versus “the rest of us”; we are looking at an inconclusive mix of rich v. poor and bubble areas v. rationally non-exuberant areas. Per this Housing Tracker data, a million dollar home in San Jose is at the 75th percentile of listed homes; in Cleveland, the 75th percentile value is $229,000 and a million dollar home (let alone mortgage) is off the charts.
And how old are these defaulting mortgages? Imagine Sally buys a modest California home for $800,000 in 2004. Harry, with a similar income to Sally, buys an identical house next door a few years later for $1.2 million, with a $1 million mortgage. A few years later, both houses are worth $750,000.
Harry defaults, making him rich and a ruthless scoundrel; Sally continues to make her payments, making her a stalwart and a princess of virtue (whose mortgage is also above water.)
Has Core Logic adjusted for any of the likely timing effects of the bubble? Only the Times reporter knows for sure.
Finally, dare we ask for a baseline? The Times presents charts stretching all the way back to 2005, from which we learn that defaults were few when prices were rising. Thanks for sharing. How did larger mortgages look versus smaller mortgages back in the real estate swoon of the early 90’s, hmm?
The Times could make a start by putting the study online.
LEST I FORGET: There may also be an institutional quirk to consider. Anecdotally, I know a chap with a balloon mortgage coming due soon enough that the market will never recover in time. He can keep current on the payments, but will never be able to refinance at current prices, and doesn’t have the cash to bring his equity up to the new lending standard. He would like to negotiate an extension with the bank to defer the day of reckoning, but they won’t even talk to him until he is in default. So, any day now he is going to start missing payments just to get their attention. It all sounds dumb, but that may well be going on elsewhere.
Streitfeld’s piece is bylined Los Altos, California, a town where the median home is $1.5 million. In such towns, you don’t need to be a millionaire to find yourself in a multi-million-dollar home. Let’s say you’re a tech geek who found yourself with $200,000 for a downpayment on a house over the course of the dot-com bubble. So you buy a million-dollar home, and then start up a series of companies. You need to live, of course, and you can’t afford to pay yourself a salary, so you do two or three cash-out refinancings on a home which by 2007 was worth $2.5 million. Before you know it, you’ve got a $2 million mortgage, no way of paying it, and a home which is worth significantly less than the mortgage. Realistically, you have no choice but to default.
Even after accounting for your initial $200,000 downpayment and a series of mortgage-interest payments along the way, you still took out of the house much more money than you put in: the cost of living there over the past 10 years has probably been negative to the tune of well over half a million dollars. Essentially, the house has paid you $50,000 a year — money which is easy to spend, and is now long gone.
In any event, these were jumbo mortgages when they were taken out, and they’re jumbo mortgages now — none of this has anything to do with Fannie or Freddie, except insofar as the homeowning majority of the population might yet wake up and, emulating the rich, default on their underwater homes. And so the GSEs are desperately, and unconvincingly, trying to persuade them not to do so:
Knowing the costs and factoring in the time horizon, some borrowers have made the calculation that it is better to purposely default on the mortgage. While I understand how that might well be a good decision for certain borrowers, that doesn’t make it good social policy. That’s because strategic defaults affect many other families and communities. And these costs – or as they are known in economic jargon, externalities – are not factored into the individual borrower’s calculations.
Well, sure, it’s not good social policy to strategically default. Fine. That doesn’t stop the rich, and it shouldn’t stop the rest of us either. I think it’s pretty clear which direction we’re headed in, and moralistic exhortations aren’t going to turn the tide.
“CoreLogic data suggest that the rich do not seem to have concerns about the civic good uppermost in their mind, especially when it comes to investment and second homes. Nor do they appear to be particularly worried about being sued by their lender or frozen out of future loans by Fannie Mae, possible consequences of default.”
This is just nonsense. The CoreLogic data tell you how many people are in default. They do not tell you how concerned those people are about the civic good, nor what may or may not be worrying them in those 3 am moments when they contemplate the wreckage of their housing dreams.
We don’t even know that these people have more resources to draw upon, as Mr Khater implies. All the data I’ve seen show that millionaires–aka “high net worth individuals” are not particularly likely to live in million dollar homes. Who are? People who live in areas with expensive real estate. And where is the expensive real estate? Why, often in the areas that experienced the biggest inflation during the housing bubble.
Those are places where homeowners are much more likely than the national average to owe more than the house is worth. And being underwater on your mortgage is very highly correlated with default–much more tightly correlated than the local unemployment rate.
This has often been advanced as evidence that strategic default is popular, but I’ve seen no compelling data backing up this conclusion. There are other reasons that being underwater makes you more likely to default. For one thing, it makes it quite likely that you took out a loan in the bubbliest years, when bankers were allowing eagerly encouraging people to take on too much debt relative to their income. For another, it means that if you need to relocate, get divorced, or have some sort of an income shock, you can’t take the otherwise obvious step of selling the house. From what I’m hearing, most banks won’t even consider a short sale until you’ve already missed some payments.
Shouldn’t people with million dollar homes have more resources to fall back on? Absolutely. The best you can say about people in that situation is that they were probably living beyond their means well before things got to this point. But the bubbly areas–especially California–were characterized by a grim competition in which the houses in the good school districts went to the people who were most willing to overstretch themselves. Those people didn’t build up a big reserve of savings that might allow them to meet the mortgage payments while they find a new job, because they were pouring everthing into securing the best possible education for their children.
And in some ways, people with those jumbo mortgages are less able to adjust in crisis. If your mortgage payment is $1000 a month, shaving $200 off a $700 monthly grocery bill and quitting smoking probably gets you close to halfway towards keeping the mortgage current. If your mortgage is $10,000 a month, and one spouse loses their job, no manipulation of other basic expenses will help much.
I’m still more sympathetic to anyone with a $1,000 mortgage who loses the house, of course. And I still think it’s more likely than not that the wealthy are leading whatever trend their may be in strategic defaults. But that’s just a hunch, because, like the New York Times, I don’t have any data to back up that belief.
Ross Douthat in NYT:
The rich are different from you and me. They know how to game the system.
That’s one interpretation, at least, of last week’s news that Americans with million-dollar mortgages are defaulting at almost twice the rate of the typical homeowner. It suggests an infuriating scenario in which the average American slaves away to keep Wells Fargo or Bank of America off his back, while fat cats and high fliers cut their losses and sail off to the next investment opportunity.
That isn’t exactly what’s happening, most likely. Just because you have a million-dollar mortgage doesn’t make you a millionaire, and a lot of the fat-cat defaulters probably aren’t that fat anymore. Chances are they’re more like Teresa and Joe Giudice from “The Real Housewives of New Jersey,” tacky reality-TV climbers who recently filed for bankruptcy after their decadent lifestyle turned out to be a debt-enabled fantasy.
Still, watching the Giudices sashay through their onyx-encrusted mansion, and knowing that thousands of similarly profligate homeowners are simply walking away from their debts, it’s easy to succumb to a little class-warrior fantasizing. (Pitchforks, tar, feathers … that sort of thing.)
The trick is to channel those impulses in a constructive direction. The left-wing instinct, when faced with high-rolling irresponsibility, is usually to call for tax increases on the rich. But the problem, here and elsewhere, isn’t exactly that we tax high rollers’ incomes too lightly. It’s that we subsidize their irresponsibility too heavily — underwriting their bad bets and bailing out their follies. The class warfare we need is a conservative class warfare, which would force the million-dollar defaulters to pay their own way from here on out.
Consider the spread that the Giudices currently occupy (pending potential foreclosure proceedings, of course). The first million of its reported $1.7 million price tag is presumably covered by the federal mortgage-interest tax deduction. Intended to boost middle-class homebuyers, this deduction has gradually turned into a huge tax break for the affluent, with most of the benefits flowing to homeowners with cash income over $100,000. In much of the country, it’s a McMansion subsidy, whose costs to the federal Treasury are covered by the tax dollars of Americans who either rent or own more modest homes.
This policy is typical of the way the federal government does business. In case after case, Washington’s web of subsidies and tax breaks effectively takes money from the middle class and hands it out to speculators and have-mores. We subsidize drug companies, oil companies, agribusinesses disguised as “family farms” and “clean energy” firms that aren’t energy-efficient at all. We give tax breaks to immensely profitable corporations that don’t need the money and boondoggles that wouldn’t exist without government favoritism.
James Joyner on Douthat:
He’s right, of course. None of these policies make sense when looked at in terms of societal cost-benefit analysis.
Of course, that’s not how these things get into the tax code. They’re either sops to lobbyists who simply care more about the issue than those who pay for the subsidies or, in many cases, an unintended consequence of buying the votes of the middle class with tax dollars only to see the benefits going to those who don’t need them.