Why Don’t We All Just Walk Away?

When economists aren’t predicting the future, they spend a good deal of time studying behavior. For instance, they’ve been studying why individual borrowers don’t walk away as frequently from their homes as corporate borrowers walk away from their properties. They point to Tishman Speyer Properties and BlackRock Realty, which recently turned in the keys and defaulted on $4.4 billion in loans on their hopelessly underwater Stuyvesant Town and Peter Cooper Village residential properties in New York City.
The economists believe more of us should be acting as rationally financially as Tishman Spreyer and BlackRock, and when we do, the foreclosure numbers will spike.
There are at least three faults in extrapolating business behavior to individual behavior. First, individuals aren’t profit-maximizing firms. We, as individuals, value many things as much as money – happiness, health, continuity, and community comes readily to mind. Second, individuals suffer from the endowment effect: We tend to value things we own more than they would be valued in an arms-length business transaction. We get emotionally attached, in other words, and there are few things we are more emotionally attached to than our home. Third, individuals can’t hide behind the anonymity of a corporate aegis. Reputation and fulfilling obligations are ingrained characteristics, which is why we are loath to just up and walk away.

We say all that to say this: Individual motives differ from business motives. That’s why we are confident in saying that as long as we continue to see improvement in employment – the final determiner in fulfilling obligations – we will continue to see improvement in not only foreclosures but home prices and sales volume as well. It’s simply in our nature.

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