Mood of the Market

More than one person I know is walking away from their home. Strategically defaulting — meaning, they can afford to make their mortgage payments, but have decided to stop, stay in the home, and allow the bank to take it in foreclosure, because the home is now worth much less than they paid for it — and much less than they owe on it.

What they once saw as unthinkable is more and more socially acceptable. In some cases and some circles, strategic defaults are even viewed as an admirable guerrilla tactic and smart financial decision made in denial of the core, emotional desire every human has to hold on to a home.

And these strategic defaults are socially contagious. I know one set of homeowners who recently reunited with several other couples they hadn’t seen in years, and realized that three of the four were in the process of walking away.

The data bears this out: a recent study conducted jointly by professors at the University of Chicago and Northwestern University found that homeowners who know someone who has walked away from their home become 86 percent more likely to also walk away.

At the same time, a number of people I know are buying homes now, trying to take advantage of rock-bottom pricing and mortgage interest rates. One of these couples is buying a unit, and asked my advice on what to look for in their homeowners association documents.

I briefed them on the woeful state of many HOAs right now, and the ripple effect an insolvent HOA can have, first making the units virtually impossible to finance, minimizing the available pool of buyers to those who have cash, and finally, decimating the value of the association’s units.

In her post-bubble voice, this uber-professional, responsible mother who earns six figures and has a 740 credit score, said, “We understand. We’ve decided to put 3.5 percent down, and we’re buying the place for a couple hundred thousand dollars below what we sold for three years ago. We plan to stay put for the next 20 years-plus, but if we need to sell and can’t because of HOA issues, we’ll just walk away.”

And as she said it, I had my own real estate awakening of sorts.

We can coin cute turns of phrase to lighten up the conversation, like calling frugal women “recessionistas” all we want, but let’s face facts: This generation of real estate consumers has seen and lived through a brutal market.

And there are elements of that brutal business that have changed the way they will view and interact with and make decisions about real estate — forever.

Data shows that walking away from a home and a mortgage is the very last resort, even for the most distressed homeowner. Yet this generation of real estate consumers now knows that it is a last-ditch option, if and when things do ever get that tough.

And, as the Chicago-Northwestern study found, consumers have seen people do it and not die, or get sued (banks can and do sue strategic defaulters, in a small number of cases and places where the law allows), or burst into flame from the immorality of it all.

On the upside, this reflects that this generation of homebuyers and owners is less bullied by corporate propaganda touting the immorality of strategic defaults, as put out by corporate entities that regularly, strategically default on their own loan obligations as a matter of good business.

This generation will be more prone to make financial decisions based on what is beneficial for their families and their financial futures than by the fear of a bad credit rating or the stigma of losing a home.

This generation’s concept of their home will be as a place to live, and an asset which — like all asset classes — can increase and decrease in value (rather than our now-cured national delusion that homes only ever go up, up, up in value).

Homes, while still playing a role in how we see ourselves and express ourselves and how we live, will not for this recession-honed era of housing consumers be overblown in our heads as the be-all-and-end-all of our identities.

This, I hope and suspect, means that real estate will be respected as an area of life in which decisions must be made as deliberately as any other business decision, and with sustainability as the aim, but has also been put back in its place, so to speak, behind a number of other things that are actually, truly more important in life.

This is what I hear as the subtext behind the woman’s statement that if forced to, she’d just walk away: I’m not willing to sink my family’s entire financial ship over this asset.

Of course, there are certainly some much more grim implications to this evolution in the way we think about real estate. Ask anyone in the foreclosure hot spots in California, Nevada and Arizona.

When home values begin to decline widely, jobs leave, and people start walking away en masse so that everyone knows someone who has done it — and lived to tell the tell — it becomes extremely difficult to stabilize the market and avoid a complete plummeting of the entire market.

Not only do home values drop, so does sales activity as buyers become more and more fearful of continued value declines after they buy.

One of the issues with developing a more mature, less extremely optimistic and emotional attachment to anything in life, including real estate, is that it is very hard to rewind these sort of awakenings.

You’ve experienced this sort of thing as you grow awake to not just the parts of an issue in life that you love, but also the warts and gritty elements that make up the whole picture — you grow, and are empowered to better assess and make decisions.

But some of those more informed, wiser decisions are painful. The outcomes, like the truth that caused you to evolve in your understanding, also have lovely and excruciating elements about them.

And so it is with America’s real estate awakening. Lovely. Mature. Wise. And occasionally, excruciatingly painful.