Panicked by rising foreclosures, banks and the government are willing to do just about anything to stem the tide. More regulations, rules, bailouts (primarily directed to the banks themselves) may slow the reckoning, but ultimately doesn’t the market need to do what the market does?
We’ve discussed this before here… The catalyst to the current economic crisis was real estate and although there are many other fundamental problems with the US economy (debt, trade deficits, weak dollar, etc.), real estate is the primary problem.
The trouble with realestate is that prices went up so much so quickly. Naturally, nobody complains when the market is driving prices up at an absurd rate. When things go the other direction (even falling just 5% so far), regulators and politicians act as though the sky is falling.
The tipping point: Walk Aways (AKA MilkWalkers)
Fact is things can, and probably will, get much worse. Right now, a number of market forces are doing their thing… correcting the market and driving down real estate values. These forces squeeze even the non subprime homeowners. Putting their biggest “investment” in the red.
Adopting the Milk And Walk Strategy
Underwater on their homes, reasonable, responsible homeowners must ask themselves if it’s worth sticking it out. At some point, more and more homeowners who could afford to pay their mortgage will simply stop. They’ll stay in their home not paying the mortgage for as long as they can. And when the bank says they need to leave, they’ll just walk away. This Milk and Walk strategy is shockingly effective. As more people discover it, it’ll become widespread.
In fact, I know two people that are doing this right now. One hasn’t paid a mortgage payment in 11 months. He’s still in “his” home that he “bought” two years ago for 2,500,000. He’s stalling the bank through a variety of strategies. At the end of the day, he’ll simply walk using a years worth of mortgage payments to fund his future rental home.
Barriers to Milk Walking…
As prices plunge there’s only a few things keeping people from pulling the plug on the mortgage payments and voluntarily going into foreclosure.
- Future Prices Psychology: If the homeowner believes that things are bad now and only going to get worse, they’re far more likely to stop paying, milk the clock on the bank then just walk away. Each individual does what they think is best for them and their family.
- Social Stigma: If homeowners think they can cut their losses and walk away from a bad investment without being looked down upon by other people they’re far more likely to do it. There might still be some negative view of people who walk away from their debts, but more and more it appears that homeowners are being cast in the role of victim. This makes it far easier for them to walk away from the “injustice of unscrupulous brokers, banks and appraisers.” As more people turn to a Milk the clock then take a walk strategy, others will follow in greater and greater numbers. The “social proof” that Milking/Walking can be done and that others are doing it will cause numbers to increase massively.
- Availability of other options: Homeowners truly struggling probably won’t be too picky about the housing they’ll be in after they decide to walk, but better heeled homeowners will. If there are good rental housing options at reasonable prices then these folks are much more likely to make the decision and pull the plug. Given the available inventory of unsold homes on the market, I’m guessing many will have to be converted to rental. If this happens then these “MilkWalkers” might be able to walk away from a mountain of debt in their old home and actually UPGRADE to a better home as a rental saving thousands of dollars along the way.
Quite frankly, if this trend picks up I don’t see what can stop the downward spiral in the economy. It could be bloody. The trillions of dollars “lost” in this scenario would make the losses to date look like a rounding error. I think if the trend picks up, government officials might step in with a carrot and stick approach to solving the problem perhaps going to the extreme of making it a crime to walk away. That would certainly be a frighteningly high level of government intervention in our “free markets”, but so far they’ve indicated they’ll do just about anything.