More Than Just Numbers

Economic commentators often ignore, dismiss or downplay the human side of the various data points, trendlines, and policy responses they analyze and comment on.

For many of them, it seems, rising unemployment simply means that the economy is slowing and the Federal Reserve may have to cut rates. They tend not to talk about the collateral damage of fear, suffering and broken lives.

However, in "The Scars of Losing a Home," Robert J. Shiller, a professor of economics and finance at Yale University who called the top of the stock market bubble with the publication in 2000 of his book, Irrational Exuberance, makes the point that, ultimately, the current crisis is about more than just numbers.

ACROSS the United States, there were 243,353 foreclosure filings in April alone, nearly three times the total in the same month just two years ago, according to RealtyTrac, a company that follows the numbers. The trend is unmistakable, and suggests that, without government intervention, many millions of American families will be losing their homes before long.

What would this mean in human terms? Picture a line of moving trucks extending for hundreds of miles: they are taking the furniture of countless families to storage lockers. Picture schoolchildren saying goodbye to their classmates. They aren’t going on vacation: they are being abruptly moved to the other side of town.

It’s easy to take a stern view of this spectacle. The arguments go something like this: Foreclosure is not the end of the world. There are valuable lessons to be learned from such a life experience. After all, we live in a capitalist economy that thrives on the sanctity of contracts. The founders of our nation put the contract clause into the Constitution to make it clear that people need to live up to the documents they sign.

This stern view may, in fact, be winning the battle of public opinion. On May 9, the House approved legislation aimed at helping some of the people facing foreclosure, but the president has said he would veto it.

This legislation, sponsored in the House by Representative Barney Frank, Democrat of Massachusetts, and in the Senate by Christopher J. Dodd, Democrat of Connecticut, is the only substantial proposed fix for the foreclosure mess that has gone anywhere. It would guarantee up to $300 billion in mortgages of troubled owner-occupants. But, right now, the bill’s prospects are bleak, and the troubled homeowners may be left with virtually no help at all.

Now, let’s take the other perspective — and examine some arguments against the stern view. They have to do with the psychological effects of strict enforcement of a mortgage contract, and economists and people in business may need to be reminded of them. After all, too much attention to abstract economic statistics just might make us overlook what is really important.

First, we have to consider that we cannot squarely place the blame for the current mortgage mess on the homeowner. It seems to be shared among mortgage brokers, mortgage originators, appraisers, regulatory agencies, securities ratings agencies, the chairman of the Federal Reserve and the president of the United States (who did not issue any warnings, but instead has consistently extolled the virtues of homeownership).

Because homeowners facing foreclosure must bear the brunt of the pain, they naturally feel indignation when all of these other parties continue to lead comfortable, even affluent lives. Trying to enforce mortgage contracts may thus have a perverse effect: instead of teaching homeowners that they should respect the contracts they sign, it may incline them to take a cynical view of the whole mess.

But instead of having sympathy for these homeowners, many people blame them for their predicaments. That isn’t surprising. It’s an example of a general tendency that was documented by social psychologists decades ago.

In his 1980 book, “The Belief in a Just World: A Fundamental Delusion,” Melvin Lerner, a social psychologist, argued that people want to believe in the inherent justice of the economic system in which they live, and want to believe that people who appear to be suffering are in fact responsible for their own situations. He provided empirical evidence, derived from experiments, that after an initial pang of sympathy, people tend to develop negative views toward others who are suffering. That negative tendency seems to be at work today.

Second, it is important to consider the psychological trauma of foreclosure. No one is likely to starve or sleep on the streets as an immediate result of a foreclosure, and the authorities no longer dump a family’s furniture on the sidewalk when it happens. Nonetheless, there is deep trauma.

Homeownership is fundamental part of a sense of belonging to a country. The psychologist William James wrote in 1890 that “a man’s Self is the sum total of all that he CAN call his, not only his body and his psychic powers, but his clothes and his house, his wife and children, his ancestors and friends, his reputation and works, his lands and horses, and yacht and bank account.”

Homeownership is thus an extension of self; if one owns a part of a country, one tends to feel at one with that country. Policy makers around the world have long known that, and hence have supported the growth of homeownership.

MAYBE that’s why President Bush’s “Ownership Society” theme had such resonance in his 2004 re-election campaign. People instinctively understand that homeownership conveys good feelings about belonging in our society, and that such feelings matter enormously, not only to our economic success but also to the pleasure we can take in it.

But we are now seeing the president’s Ownership Society plan operate in reverse. Already, the homeownership rate has fallen — from 69.1 percent in the first quarter of 2005 to 67.8 percent in the first quarter of 2008. That’s almost back to the 67.5 percent level where it stood when Mr. Bush took office in 2001. And it is likely to fall further.

The pain of this reverse movement could leave a psychological scar that will be with all of us for the rest of our lives.

Comments

[Independent Accountant]

Stern view? Nonsense. All I see is where is the pain going? Will fall on banks and homeowners, or holders of US dollars? Wall Street and Washington's contempt for small savers is disgusting. Imagine, these idiots want to know why the US saving rate is negative. Fools, or knaves?

[Melanie]

Even people who aren't losing their homes are feeling the crunch. I know several people who have had the credit limit on their home equity lines of credit reduced suddenly, without any warning. Some of these people were counting on the funds to pay for important repairs on their homes, or school tuition for their children. It doesn't seem right that the banks can give someone access to funds and then turn around and say "Sorry, just kidding!"

[Michael]

"Homeownership is fundamental part of a sense of belonging to a country."

That attitude is part of what created the housing mess in the first place. Too many people bought the realtor line that "if you don't buy now, you'll never have a house! The price is climbing faster than you can possibly save."

There's nothing wrong with renting. In fact, I think the ideal solution for the current mess would be if banks (or some other organization) bought the houses for the face value of the mortgage, and then rented it back to the current owners at market rates. The banks would have some income, the owners would not have to move, and the house would not rot for months waiting for foreclosure paperwork and a very slow sale.

The owners turned renters would be better off financially than they are now (since rents would be market rate, and lower than their mortgage payments.) The banks would be taking a loss, but they are going to do that eventually anyway. The owners would no longer own the house, but that's a small penalty considering that they bought more than they could afford in the first place.

Too bad banks just don't want to be in the property management business, at any cost.

[Jo]

What amazes me through all the clamour of who is right and who is wrong is when fellow American's don't side with each other. Rather often they take the stance of the high and mighty as if they would ever be in the top 10 percent of the richest in this country. By whom many were a big part of the problem but will still walk away with plenty of cash to last them a couple of lifetimes even if their business folds.
Even more than that is that in this big mess..it seems everyone is in it for the same reason. At least that is what I keep reading. It's because they lied about their income or they bought more than they could afford. That's pretty narrow minded. Many bought just what they could afford with no lies and lost a job they couldn't replace. Or medical problems changed their lives and there was no insurance to help. Not everyone losing their home is losing for the same reason. These fellow American's should be careful how they judge, someday they may face the same type of situations, then will they understand? If President Bush would have regulated TILA the bad loans with the lies behind the securities and hedge funds would not have been a problem today. What hurts your fellow American hurts you, so why don't you wish your brother the best and pull for him. In other words..I think these words came from the bible. Be your brother's keeper. As for the problems the White house is having helping the average American, these same people who used religion to get into office. Jesus said, whoever takes care of the weakest of my people takes care of me. I suppose when you are spouting morals it's easy to pick and choose on what suits your purpose at the time.

[On the losing End]

How can one ignore the hypocrisy in all of this. While JP Morgan buys the now defunct Bear Streans, backed by tax dollars paid by the very same people they now seem to be saying "tough luck", too, while they are shouting they are "to big to fail".
"To big to fail, how convenient, sounds to me like this was the plan from the outset of all of this.
Privatize the gains, socialize the losses. The average Joe, takes it on the chin again!

[Marc Authier]

You could call this banking marxism. Karl Marx, Lenin, Trotsky and Stalin work at JP Morgan. Scumbags! And these crooks will get away with their crime because ALL your politicians are whores. Washington scumbags sleeping with Wall Street scumbags.

[KW]

This is a bizarre commentary. This country is in trouble, not because of the generic "family" having to move and suffer, but this man and others insane sociallistic view. What has happened in the last decade was financial insanity. Schiller thinks that this was how capitalism works, and needs to be fixed with more easy credit and no down payments, artificial price controls, government bailouts. I continue to shake my head in disbelief at what lenders and borrowers have been up to the last several years, like teenage children trying to get away with wreckless behavior. The entire world financial system is now at risk. The best minds in government say that we need more of what got us where we are. Just read that Fannie is going to scrap the down payment requirements. Here we go again $500,000 mortgage $10,000 down or less, no other collateral, and income statements that can change in 1 day.

[roger]

from my experience going way back to before world war 2, in good times every body is a CAPITALIST when things turn sour everybody is a Socialist even the super rich scream for government aid ,sad but true!

[Sackerson]

In the case of housing, I think more blame attaches to the lender than the borrower. Inflating the money supply over the last 5 years (and here in the UK, too) pumped-up property prices. When that happens, rents tend to go up too. Potential buyer thinks, "If I don't buy now, I'll never be able to afford to, since prices are running up faster than my earnings". So I do blame the bankers and regulators for the cynical abandonment of their responsibility for maintaining relatively sound money.

[andrew]

While I tend to be sympathetic with many of these views, the facts are the facts, and presented nowhere more starkly than in California. Housing at current prices is unaffordable. Affordability is improved with ultra-low interest rates, but these will not last - not with their obvious current inflationary effects. Housing prices need to come down. Propping up current prices does not address this issue. So we'll just see a continued decline in prices.

Bottom line: house prices must continue to decline. Or, inflation must drive up wages.

[2cents]

Robert J. Shiller says "Trying to enforce mortgage contracts may thus have a perverse effect: instead of teaching homeowners that they should respect the contracts they sign, it may incline them to take a cynical view of the whole mess."

Robert has now qualified himself as a wingnut. Clearly most of these people were all to happy to go along in order to get more house than they could possibly afford under normal circumstances. Sure, many people are involved, and the homeowner is probably the least to blame, but you don't reward them with a discount for their boldness! No, you work with them to get them into a smaller more affordable house. This is what the plan should be about cascading defaults down to a more affordable level.

I'm not out to roast my fellow citizens, but I'm also not out to underwrite their risktaking either.

[Dr. J]

Excellent article. Everybody else seems too big to fail, except for the homeowner who was told by his real estate agent that prices will keep going up, so it's the best time to buy. Do whatever it takes to get into the house.
Now, the real estate agent is working at a coffee shop, the mortgage broker is laid off, while the loan got securitized away to Europe or Japan by a Wall St. fat cats who now get bailed out by the Fed. So, the little guys suffer while the fat cats get their bonuses.

Hell, Jesus, through the money changers out of the Temple.

[FB]

I don't know what's happened to Shiller. He seems to be going downhill rapidly. The calculatedrisk and nakedcapitalism blogs have covered his editorial too.

Losing a job is more stressful than defaulting on a loan made to you. How about guaranteed life employment for everyone? "Socialism refers to the goal of a socio-economic system in which property and the distribution of wealth are subject to control by the community."

Would you rather have a job and not owe money on a large loan? Or would you rather have no job and owe money on a large loan?

[Brian]

I have no pity for these fools. They all wanted a piece of the action. They saw their friends and neighbors all "moving on up" and wanted the same. They were driven by human greed, and social status of home ownrship. I can hear them now, 1 month into homeownership.. "Oh you must come over to the house". Acting like they have been homeowners for years. Idiots. Its all a front to keep up with the Jones. Fools. Many of them could not even furnish these homes. "Oh, were waiting, not sure what to do with the room". Yeah, right.

I have played by the rules all my freaking life. I live beneath my means so I can save to rainny days etc... Like I said, No pity for these fools.

[FB]

"I just have to eat a lot of beans."

Rising food and gas prices are taking a toll on Meals on Wheels
http://www.cnn.com/video/#/video/us/2008/05/18/holmes.meals.wheels.cnn

[Deron]

I have no sympathy at all for the argument that people are losing "their" homes. Overwhemlingly, those folks never owned anything but a gigantic mortgage that would never get any smaller (I/O and negative amortization loans being very common). They also had little or no equity that THEY put in as a down payment. Thus they were permanent renters - or to put it more harshly, debt slaves.

Cheap and irresponsible credit enabled the ILLUSION of homeownership but there was never any substance - merely form. Those walking away are simply recognizing that fact, now that it is no longer masked by an asset mania.

There is a reason that homeownership in the US remained in the low 60s percentage-wise for 50 years.