The real reason we buy real estate

Mood of the Market

By Inman News Feed
Add Comment Add Comment | Comments: 0 | Posted Jun. 6, 2011

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Mood of the Market

Tara-Nicholle Nelson
Inman News™

This column, many books, and some professors' entire lifetimes are devoted to the study of behavioral economics -- that place in our economy and our bank accounts and our minds where human psychology and financial decision-making intersect.

And it's complicated. The human psyche possesses a vast potential for rational calculation and logical thought. But it also possesses a vast potential for making business and financial decisions from a place of over-emotionality; illogical, flawed reasoning; and a wide variety of miscalculations, both overly pessimistic and overly optimistic.

Many of the decisions that wound individual homeowners and the collective of American homeowners in the boiling, roiling hot water of the real estate recession -- which scalded every other sector of virtually every national economy on the globe, to some degree -- were deeply flawed when viewed in that 20/20 vision that comes with hindsight.

So it doesn't surprise that in the last few years, the work of deconstructing, understanding, analyzing and predicting the psychology-driven behavior of real estate consumers has become a cottage industry.

It's a lot of very worthy work that holds the potential for impact -- both prevention and cure -- on a massive scale, considering the grave domino effect that American consumers' real estate decision-making has the power to set off.

Despite the fact that this is a core element of what I do, it has recently occurred to me that perhaps this uber-complicated exercise of understanding the psyche of the American homeowner and how it impacts its decisions can be distilled down to two super-simple, super-elegant tenets.

I won't personally take credit for 100 percent of this epiphany, though -- I was pondering two different data points I'd seen when the thought struck.

First, for another piece I was writing, I found myself reading the 2010 National Association of Realtors Profile of Home Buyers and Sellers. Before they got around to teasing apart the minutiae of financing vehicles used and buyers' future plans for their properties, the trade group asked first-time buyers this question: Why'd you buy?

One response was overwhelming: Because I wanted a home. Not because of the tax benefits, or even the tax credit. Not because of the space. Not because of a job change and relocation. The primary reason people buy homes is that they want a home of their own.

And mind you, these responses were given during the deepest depths of the housing recession, when the values of homes in most markets were approaching a double dip.

While I personally belong to the school of thought that views buying near the bottom of the market as a wise move, I am also well aware that anyone who has bought a home in the last few years has likely had to override a chorus of internal angst and external voices of friends and analysts who say the free fall is not over.

And these people did so, first and foremost, because they wanted homes of their own.

Another data point sparked the inspiration that perhaps the opposite behavior -- homeowners' retention of homes that are decreasing in value and are worth significantly less than the corresponding mortgage debt -- is also simple to understand.

We've talked a lot in this column about how strategic defaults on upside-down homes are on the rise, decreasing in stigma, and likely to continue increasing through social contagion -- the phenomenon that renders homeowners who know someone who has walked away from their home 86 percent more likely to walk away themselves.

But the core truth around walkaways is this: Far, far fewer owners do it than "should," from a pure financial perspective. About 23 percent of American homeowners are underwater -- as high as 77 percent in Las Vegas.

And though somewhere around 35 percent of foreclosures are believed to be strategic, the fact is that the vast majority of homeowners facing even crippling negative equity don't walk away. They don't default on their mortgages. They just keep working, keep paying and keep on keeping on.

And why? Because they want to. Study after study shows that people simply want to keep their homes. Sure, the deeper underwater a home gets, the more willing its owner becomes to walk away. But most homeowners -- almost 90 percent -- think strategically defaulting is immoral and unfair. And others are simply attached to their home.

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