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Builders See More Small Signs of Slowly Emerging Recovery
Builders who have been watching for signs of a housing recovery received one more small piece of encouraging news last week from the Chicago Booth/Kellogg School Financial Trust Index, which found a significant rise in optimism on the housing front among the more than 1,000 U.S. households it surveyed by telephone during two weeks in late June.
The quarterly index reported on July 13 that the percentage of people who think house prices in their area will decrease in the next year dropped to 26% last month, from 37% in March and 47% in December 2008.
“In only six months we’ve seen marked improvement in confidence toward home values,” said the report’s co-author, Paola Sapienza, of the Kellogg School of Management at Northwestern University.
“In fact,” he noted, “75% of the people who changed their opinion during this time period now think housing prices will remain stable, while the remaining fourth think house prices will rise.”
The index was created at the end of last year by Sapienza and Luigi Zingales, of the University of Chicago Booth School of Business, to track the public’s trust in America’s financial institutions. The researchers said they found a sense of optimism and less fear and anger in the latest survey, with growing trust in banks and government intervention in the financial markets.
Still, the index indicated that there is a long way to go in regaining the public trust, moving from 19% at the end of last year to 21% in late June.
The one negative uncovered in the analysis was related to the prospect of losing a job, an issue that continues to have a negative impact on the housing market. The researchers reported that respondents who think there is a chance they will lose their job during the next 12 months rose from 24% in December 2008 to 26% in last month’s survey.
The Financial Trust Index findings were mirrored in the latest 2009 National Housing Pulse Survey, which was released by the National Association of Realtors® on July 9.
Downpayment and Closing Costs the Biggest Obstacle
The Realtors® survey, which measures how affordable housing issues affect consumers, found that most Americans consider having enough money for downpayment and closing costs to be the biggest obstacle to buying a home.
The survey also found concerns over job security reaching their highest level since the research was started in 2002. Two thirds of those participating in the most recent telephone survey identified job layoffs and unemployment as a big problem, and eight in 10 pointed to the job situation as a barrier to homeownership.
The survey was conducted in the nation’s 25 most populous metropolitan statistical areas.
On other questions, the results of the survey were positive:
- Despite the challenges with the economy and housing market, 83% said they still believe buying a home is a good financial decision.
- Three-fourths of those surveyed also believe now is a good time to buy a home, a number that has increased steadily over the past two years.
- One-third of renters said they are thinking more about buying a home than they were a year ago.
- More than three-fourths of the households polled said they were concerned about the drop in home values, but nearly seven in 10 expect local home prices to remain about the same in the next three months. Only 18% expect prices to decrease further.
Just over half (51%) of the respondents in the Realtors® study said foreclosures were a problem in their area. And although 92% said that neither they nor members of their immediate family had experienced a foreclosure in the past year, one in five said they were worried that they would have difficulty in making their mortgage payments over the coming 12 months.
‘Strategic Defaults’ on Mortgages
On a policy issue related to current housing foreclosure woes, researchers Sapienza and Zingales of the Financial Trust Index joined recently with Luigi Guiso of the European University Institute to take a look at a new phenomenon: “strategic defaults” in which home buyers are deciding to simply walk away when the value of their home falls significantly below their mortgage amount — without fear of repercussion — even when they can afford to make the payments.
In a paper released on June 26, “Moral and Social Restraints to Strategic Default on Mortgages,” the analysts estimated that more than a quarter of defaults on mortgage loans in the last six months have been strategic, especially where home values have fallen by more than 15%.
The researchers cited a study of the Massachusetts housing market during the 1990-91 recession finding that very few people who could afford their mortgage chose to walk away from their homes. Consistent with that earlier paper, they said their new study shows that home owners refrain from defaulting as long as negative equity does not exceed 10% of the value of the home.
Beyond that level, however, they found that home owners start to default at an increasing pace, and walk away in massive numbers after decreases of 15% or more.
“Housing policy under the current Administration has focused on reducing households’ cash flow problems in response to the housing crisis, but no one has addressed the negative equity issue as part of public policy regarding housing,” said Sapienza. “We’re in a completely different economic environment today, where for the first time since the Great Depression millions of Americans have mortgage loans that exceed the value of their home.”
According to the researchers, moral and social variables play a significant role in predicting strategic defaults. People surveyed who said it was immoral to default were 77% less likely to say they would default, while people who knew someone who defaulted were 82% more likely to say they would do the same themselves.
“The most important barriers to strategic default seem to be both moral and social,” said Zingales. “Our research showed there is a ‘multiplication effect,’ where the social pressure not to default is weakened when home owners live in areas of high frequency of foreclosures or know others who defaulted strategically. In fact, the predisposition to default increases with the number of foreclosures in the same ZIP code.”
“Factors such as age, location, political affiliation and attitudes toward government intervention also impacted respondents’ responses to the morality of strategic default,” he added.
The data showed:
- People under the age of 35 and over the age of 65 were less likely to say it was morally wrong to default compared to middle-aged respondents.
- People with a higher education (by eight percentage points) and African-Americans (by 14 percentage points) are less likely to think it is morally wrong to default, whereas respondents with a higher income are more likely to think it is morally wrong.
- Defaulting is considered less morally wrong in the Northeast (by six percentage points) and West (by 8.5 percentage points).
- There was little difference in the moral view of strategic defaults among Republicans and Democrats, but Independents were less likely to say defaulting is immoral.
- Respondents who supported government intervention to help home owners were 12 percentage points less likely to say strategic defaults are immoral.
“As defaults become more common, the social stigma attached with defaulting will likely be reduced, especially if there continues to be few repercussions for people who walk away from their loans,” said Sapienza. “This has an adverse effect on home owners who do pay their mortgages, and the after-effects of more defaults and more price collapse could be economic catastrophe.”
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