Will bright people really walk away from their homes?
Lots of people are looking at their homes these days and saying, "I owe more on this house than it's worth. Maybe I should walk away now, before it loses even more value. Just like I should have gotten out of my tech stocks back in 2000 when they were still worth something". You can bet that's what I'm thinking.
I heard this the other day from a guy returning to our area from another state, a state where property values are taking a real thumping. He's a bright guy, and I'm sure he's given this lots of thought. And maybe he will walk away from his home. It sounds like a great home, large and modern, on a quarter acre and in an upscale neighborhood. But he's being transferred to this area, and while his relo package makes up the shortfall between the rental income he'll get from his out-of-state home and what he'll pay to rent here, why should he hold onto an asset that's worth less than he owes now and may well be worth even less next year?
Certainly the idea of upside-down homeowners, even affluent ones, walking away from homes is a powerful article of faith, a comforting signal of the coming Apocalypse, for bubbleheads and other would-be market timers. But I can think of five good reasons why this guy, and other bright people like him, might not end up mailing their keys to the bank.
1. You don't live in your stock portfolio. You do live in your house.
Like this guy, not everyone will live in the house they own. But there's no physical need for anyone to be in the stock market and, until the 1950s, relatively few were. But people have always needed a place to live, and preferably not on a sidewalk or under a bridge. Sure, they can rent, but...
2. You can walk away from the stock market with impunity. Walking away from your home loan (or loans) has consequences.
A loan default stays on your credit history for seven years. That's not just seven years of being behind the eight ball if you want another home loan. That's seven years of paying higher interest rates for just about any credit, like a car loan or credit card, that anyone is willing to offer you. And these days, even prospective employers look at credit reports. Most bright people think about things like this.
3. Many of those high-flying dot-com stocks don't exist today. Your house does, no matter how little it's worth today.
What happened to the tech sector back in 2000 and 2001 might be likened to a meteor falling on an uninsured house on leased land—nothing left for the owner but a smoking crater. Your house, on the other hand, still stands, even if it's worth just 50 or 60 percent of its former value. Bright people know it's still an asset. It still has economic use.
4. Walk away from your house and you won't be around when it recovers its value.
This is one area where the stock and real estate markets are similar. Sell a stock, just because it (or you) is temporarily depressed, and you won't be there for the upside. Walk away from a house in an area with a decent long-term economic outlook and you've lost your stake in the real estate market when it recovers, and that's a big stake to lose.
And, yes, the real estate market will come back. Bright people know that every time there's a boom, some people say, "This time it's different. Prices will never go down again". And these optimists will be wrong. And every time there's a bust, some people shake their heads and say "This time it's different. Prices will never get that high again". And these former-optimists-turned-pessimists will be wrong again. Why don't they learn? For at least four reasons.
5. Most people get attached to their home. Because it's their home.
This seems to be one the most difficult concepts of homeownership for self-styled market timers to wrap their minds around: people put down roots in their home. Market-timers will assure you that when they see a house, they see "investment", not "home". In fact, they pride themselves on their detachment. It's all a game. The goal isn't to put down roots—that's for suckers—but to beat the market and be a hero. Many go out of their way to paint themselves as cold-blooded investors, and this may be the one time we should take them at their word.
Partly their detachment is a matter of temperament. Not everyone is excited by the emotional benefits of owning their own home. In fact, for some, these benefits are simply a snare and delusion foisted on the unwary homebuyer by the real estate industry. Emotional benefits don't exist to people who are unreceptive to them.
Partly it may be due to the fact that people wait out the real estate market by renting, and renters are often highly transient—there are exceptions, of course. In addition, renters aren't allowed to personalize their homes, make them their own in any meaningful way, even if they want to. I say this, not as a real estate agent who knows only buyers and sellers, but as a former property manager who for nine years managed hundreds of rental units and dealt with a corresponding number of renters.
The attitude may also exist because one apartment looks much like another, in the same building, area, town or state. If every apartment looks pretty much like every other apartment, what's to get attached to? If your next home will look like your current home, which looks like your previous home, then you'll never leave the home you never make. When you move out, only the spots on the carpet and the scuffs on the walls say that this was someone's home. A week later, even these are gone.
Next!
It's been my experience that most bright people, at least those who can afford a home in this area, don't see anonymous assembly-line living as their preferred lifestyle.
I should distinguish here between "bright people" and "smart guys". Smart guys are always looking for painless quick fixes to painful long-term problems. Smart guys are always jumping from the frying pan into the fire, then congratulating themselves on their clever escape.
So will bright people, as opposed to smart guys, really just walk away from their homes? I don't know, but I can think of five good reasons they shouldn't. And I think most of us will agree that there are lots of bright people around here.