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Strategic Defaulters, “Dummies,” Residential Foreclosures, and the Multifamily Market

Today’s WSJ notes that “[a]bout 30% of foreclosures in June involved homes in the top third of local housing values, up from 16% when the foreclosure crisis began three years ago.” The article notes that more of these top-tiered homes have negative equity combined with adjustable rate mortgages that are beginning to reset. The article, however, does not dig deeply enough.

Are people defaulting because of a strategic decision to do so, or are economic circumstances compelling them to do so?

The answer appears to be both.

As noted here before, strategic defaulters often go straight from perfect payment histories to no mortgage payments at all. They just suddenly stop. The only mortgages they have are the mortgages on their primary residences. People with the highest possible credit ratings are far more likely to default strategically than people in lower score categories. It certainly gives rise to the inference that the wealthier people know how to game the system better than poorer people, in no small part why they are wealthier to begin with. They better understand the rules of the system, and the repercussions of breaking certain rules by choice.

This, however, is only half the story.

The other half of the story is U-6. The unemployment numbers reported in the mainstream media come from the “U-3 number.”  U-3 just comprises the folks who are out of work altogether, but are still looking. The U-6 number, by contrast, comprises “total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers.” In other words, not just the unemployed, but also the underemployed, and those who have given up. That number is at 17%, up from 16.8% last month. We are getting closer and closer to one in five people not adequately employed. Besides the strategic defaulters, all the Wall Streeters and 1099′ers have taken enormous hits to their bottom lines. They are not strategically defaulting. They are just defaulting. They have no income, or what little income they have is not covering their nut. Their emergency funds have depleted. They are crash test dummies that lack the ability to step on the brakes before their brand new BMWs hit the brick wall.

Add to this potent mix these two ingredients: (1) seven million shadow housing inventory units will be coming online that are not yet factored into Case-Shiller numbers; (2) half of all residential homes will be underwater next year.

If rents continue falling, and vacancies continue rising, as they are in most major U.S. markets, the residential housing market will only get much, much worse across the board for a long time to come. With more vacancies and cheaper rents trending over the next few years in the residential housing market, the multifamily market would be a bloodbath…And that is before factoring in the collapsed CMBS market, frozen credit, and approaching 5% default rates on commercial mortgages.

Related posts:

1. Upscale Residential Foreclosures Delay Return of NYC Multifamily Market With the U.S. economy and financial markets showing signs...
2. Strategic Defaults: It’s What’s For Dinner Since I last wrote about strategic defaults, many people...
3. Shadow Housing Inventory and the Multifamily Market A growing supply of shadow housing inventory, housing stock...
4. Re: Housing Market: What Are They Smoking Over At Goldman? False alarm, everyone! New U.S. home sales may jump...
5. The Coming FHA Debacle & Another Kick in the Groin to Multifamily Valuations Fears are mounting that the Federal Housing Administration will...

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