Home Buying: Burned Mortgage Borrowers Want to Rent

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Burned mortgage borrowers will more likely rent rather than buy another home, says the most recent nationwide survey released by Fannie Mae. Fewer Americans think the market has bottomed out and the idea of homeownership as a safe investment continues to drop.

Just 68 percent of Americans think it's a good time to buy a home, which is down 2 percent since June. The number of Americans who think it's a bad time to buy a home is up 3 percent, to 29 percent, since the June survey. Not surprisingly with these numbers, the overwhelming majority of Americans -- 85 percent -- think it's a bad time to try to sell a home.
"Consumer attitudes toward buying a home are more negative since last quarter," said Doug Duncan, vice president and chief economist of Fannie Mae. "Our survey shows that Americans' declining optimism about housing and their personal finances is reinforcing increasingly realistic attitudes toward owning and renting."

Delinquent borrowers, who grow more cautious about owning, express even less likelihood that they would buy another home. Fannie Mae found that the number of those among them who would buy declined by 11 percent, to 45 percent, since the January 2010 survey, and those who would rent increased by 10 percent, to 50 percent, since January.

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Americans also expect rental prices to go up more than home prices -- in fact, by a ratio of almost 4 to 1. (Americans expect rental prices to rise by 2.8 percent over the next year).

About 25 percent of respondents think that home prices will rise in the next 12 months (6 percent fewer than thought so in June), while 22 percent expect home prices to decline (4 percent more).

The news for those banks that are dealing with defaulters may even be worse, as an increasing number of Americans report that they know someone who has defaulted. Some key findings on this topic indicate that the stigma of default may be less than it used to be:
  • Forty-two percent of Americans, 63 percent of delinquent borrowers and 58 percent of underwater borrowers (up 3, 7 and 10 percentage points since June, respectively) know someone who has defaulted on a mortgage.
  • Someone who knows defaulters is more likely to have considered defaulting themselves. However, delinquent borrowers are nearly three times as likely to have considered stopping their mortgage payments completely if they know someone who has defaulted on their mortgage. They also are more likely to know a strategic defaulter (i.e., someone who stops making mortgage payments despite having the financial capacity to pay them) than they were in June.
  • Fifty-five percent of underwater borrowers, 51 percent of all mortgage borrowers, and 43 percent of delinquent borrowers (up 11, 6, and 6 percentage points since January, respectively) think their lender would pursue other assets in addition to their home if they defaulted on their mortgage.
It's the fear of recourse -- that the mortgage lender would chase them for any shortfall -- that's probably preventing more people from defaulting, especially if their house is underwater. Others may be concerned about the tax bill for any shortfall, which can be considered income.

The Mortgage Forgiveness Debt Relief Act of 2007 allows people to exclude income from the discharge of debt on their principal residence through 2012. As that deadline approaches more people may have to make a decision if they want to take advantage of this exclusion.

If the sentiment of Americans proves true, we likely will see more renters than homebuyers over the next year. But if house prices again start rising, which seems very unlikely, these negative sentiments could turn.

Lita Epstein has written more than 25 books including "The 250 Questions Everyone Should Ask About Buying Foreclosures" and "The Complete Idiot's Guide to Personal Bankruptcy."

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