No surprise here:

“The well-off are losing their master suites and saying goodbye to their wine cellars. The housing bust that began among the working class in remote subdivisions and quickly progressed to the suburban middle class is striking the upper class in privileged enclaves like this one in Silicon Valley. Whether it is their residence, a second home or a house bought as an investment, the rich have stopped paying the mortgage at a rate that greatly exceeds the rest of the population.

More than one in seven homeowners with loans in excess of a million dollars are seriously delinquent, according to data compiled for The New York Times by the real estate analytics firm CoreLogic.

By contrast, homeowners with less lavish housing are much more likely to keep writing checks to their lender. About one in 12 mortgages below the million-dollar mark is delinquent. (emphasis added)

My best guess is, this is likely due to a more business-like, less emotional approach to home ownership by the top 10% of earners. Amongst the rich, any single home is probably not their biggest single asset — the way  it is for most Americans. Hence, any buy or sell decision is more likely to be more rational and less sentimental. CoreLogic suggested that “many of the well-to-do are purposely dumping their financially draining properties, just as they would any sour investment.” That would be consistent with a more rational approach.

It is not a coincidence that Bloomberg reported:

“Demand for U.S. luxury vacation properties may be fading along with prospects for faster economic growth, after an early 2010 rebound. The government last week reported slower growth in private-sector jobs and manufacturing and a decline in factory orders. While rates on jumbo mortgages used for many expensive homes have dropped, it’s harder to qualify . . .

There’s no official sales gauge for vacation homes, or a set price range that defines a luxury property. Such purchases often are financed with jumbo mortgages, which are used when borrowing exceeds the $417,000 to $729,750 caps set by the government for loans bought by Fannie Mae and Freddie Mac, the nation’s largest mortgage-finance companies.”

This is more ammo for my longstanding thesis that we are looking at another leg down in Housing . . .


click for larger chart

courtesy of NYT


Biggest Defaulters on Mortgages Are the Rich
NYT, July 8, 2010

Luxury Vacation-Home Sales Fade With Pace of Economic Recovery
Kathleen M. Howley
Bloomberg, July 8 2010

Category: Credit, Legal, Real Estate

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

38 Responses to “Wealthy: Most Likely to Walk Away from Underwater RE”

  1. JustinTheSkeptic says:

    C’mon BR, your too pesstimistic, we will pull out of this with our “american ingenuity!” Did you happen to read the Intel’s founder article on, “America has lost its ability to “scale-up?” But don’t get me wrong, I’m optimistic that we will turn it around, but not anytime soon.

  2. wally says:

    “My best guess is, this is likely due to a more business-like, less emotional approach to home ownership…”

    That, and the fact that a high percentage of wealthy people got that way by being a-holes.

  3. Petey Wheatstraw says:

    I’m sure the right will use some Rube Goldbergesque variation on the Six degrees of Kevin Bacon gambit to tie this to the CRE.

  4. IS_LM says:

    I expect a full-throated condemnation of such irresponsible and reprehensible behavior by every libertarian. Don’t the rich know that they entered into inviolable contracts? Have they no respect for our system of laws? I bet ACORN is involved in this.

  5. KidDynamite says:

    borrowing a million dollars (or having a million dollar mortgage balance outstanding) is not the same as being rich.

    is it really a shock that people with massive outstanding mortgage balances have more trouble paying than people with smaller outstanding mortgage balances…

    as CR put it: “Were these borrowers really “rich”? Or did they just buy more home than they could really afford?”

  6. Paul Jones says:

    Those of means are less likely to be emotionally attached to any one asset.

    Only the schmucks that are stupid enough to do real work believe that “their word is their bond” and other naivetes.

    Spend one minute in the modern business arena and you know that, as in war, force and fraud are the two cardinal virtues.

  7. Robespierre says:

    “home is probably not their biggest single asset”

    To actually think that the home you live in is an “asset” is the biggest joke perpetrated on the American middle class. Or where do people go to after they sell this “asset” to live under a bridge? BTW many of these rich people were actually rich in debt to support the life style of the Jonses.

  8. Bruman says:

    I read that article and said, “Barry’s going to post this one; I wonder what his commentary will be.”

    I think people outside the top 10% think: “If I default on my mortgage, where the heck am I going to live.” In the top 10%, it’s “I bought a mortgage with an embedded option, why not exercise it.”

  9. Rescission says:

    Whew, a lot of political venom on this topic! Class warfare I guess.

    The wealthy are no different from anyone else. If they can’t afford to make a mortgage payment, or if its bleeding them dry, they have to make a decision to either gut it out or let it go back to the lender. This is happening all over the good ole USA. The real estate boom and re-boom was so out of control that not only were taxi drivers flipping houses but people were stretching for those second homes too. Debt is a dangerous thing. Easy credit is a VERY dangerous thing. We are all learning that lesson, even the wealthy.

    Just because you are wealthy doesn’t make you smart.

  10. The Curmudgeon says:

    Remember in the 80′s we had as the image of an entitlement society a welfare queen driving a cadillac?

    The rich are our welfare queens now. There is a positive and direct correlation between wealth (or illusions of wealth that actually are created by debt) and a sense of entitlement. So, wait for the next government program for saving underwater homeowners. It will be specifically aimed at keeping these poor rich people from walking away from their homes.

  11. Arequipa01 says:

    Some may find this interesting as an exercise in compare and contrast:

    An excerpt:

    “In the traffic congested city streets, an advertiser was busy handing out flyers for the newly constructed condos. “Beautiful homes, starting at 29,800 yuan per square meters”, one flyer ended up in the hands of a cab driver who was waiting in traffic. He looked at the flyer and thought “It takes 125 years in order to buy this home”. That made his nose bleed.”

    See, some things are universal. Years ago when I looked at the amortization table for a loan I was considering, my nose bled as well.

  12. KidDynamite:

    The typical million dollar plus mortgage is made to a person with an income assets, and credit rating. There were not many, to the best of my knowledge, NINJA mortgages or Liar loans for $1,000,000 +.

    These were real mortgages made to people who elected to jump intp the RE market, using cheap available leverage (aka credit).

    We should not confuse what the wealthy can do, with the merely well off or the rest of us unwashed masses . . .

  13. globaleyes says:

    Healthy: Most Likely to Swim Away from Underwater RE.

  14. vine2wine says:

    “My best guess is, this is likely due to a more business-like, less emotional approach to home ownership…”

    Ironic article considering you “summering” in the Hamptons right now :-)

  15. impermanence says:

    The elite (in finance) forgot to tell the American people that the only way you make money via debt, is with other people’s money, not your own. Opps, sorry about that people.

  16. spudvol says:

    Petey Wheatstraw Says:
    July 9th, 2010 at 10:33 am

    I’m sure the right will use some Rube Goldbergesque variation on the Six degrees of Kevin Bacon gambit to tie this to the CRE.

    I think that is called the Seven Cycles of Kevin Bacon now.

  17. VennData says:

    What did they do with their tax cuts? …bought real estate from each other. ….and art… and other things. Now their bailing?

    Remember how it was “their money” and they wanted it? They didn’t invest it or they’d have something to show for it. They blew it.

    They may be able to walk away from their loans, but not from the US debt they demanded, voted for and or now blaming Obama for. They are the selfish, solipsistic vanguard of the GOP. …Adam Smith’s invisible jerk offs.

  18. nemo says:

    “Were these borrowers really “rich”? Or did they just buy more home than they could really afford?”

    Felix Salmon, commenting on the same NYT article, sketched out how easily that could happen in California:

    “Streitfeld’s piece is bylined Los Altos, California, a town where the median home is $1.5 million. In such towns, you don’t need to be a millionaire to find yourself in a multi-million-dollar home. Let’s say you’re a tech geek who found yourself with $200,000 for a downpayment on a house over the course of the dot-com bubble. So you buy a million-dollar home, and then start up a series of companies. You need to live, of course, and you can’t afford to pay yourself a salary, so you do two or three cash-out refinancings on a home which by 2007 was worth $2.5 million. Before you know it, you’ve got a $2 million mortgage, no way of paying it, and a home which is worth significantly less than the mortgage. Realistically, you have no choice but to default.”

  19. Rescission says:

    The GOP blames Clinton. The Dems blame Bush. The GOP blames Obama. I hate politics.
    I pray that one day we can have some leadership that rises above and doesn’t blame all the time. That’s what professional politicians do. Anyway my friends, President Obama is a professional politician.

    I think GWB was one of the worst Presidents we have had in a long time. But if this is a blog where truth can be debated in a civil manner, I do have a point to make. GWB spent money like a drunken sailor. However, I never heard the man criticize a former President. His father was the same way. Neither would ever publicly say anything derogatory about Clinton or Carter (I know others did, but I am talking about these two guys). I recently heard GWB give a speech to a small group of people at a college. He addressed this and said he would not criticize Obama (said Obama has a tough job and its not his place to criticize him), adding that he thinks its bad for the country. He said Carter used to publicly criticize him and it makes the Presidents job much tougher.

    I am ready for Obama to stop publicly criticizing GWB and show some class and responsibility of a real leader. The blame game makes him look small. My two cents.

  20. Bruman says:

    Recission said: “Just because you are wealthy doesn’t make you smart.”

    …tell that to the Wall Street crowd. ;-)

  21. Thor says:

    Folks seem to be jumping to a rather large conclusion here I think. I grew up very near Los Altos and I can guarantee you that the vast majority of the people who live there (even today) are very wealthy.

  22. louis says:

    Herd Mentality in reverse, keep it coming until they are forced to look at their creation.

  23. “my longstanding thesis that we are looking at another leg down in Housing . . .”

    that Thesis should be in the next ed. of the “McGuffey Reader”

    (it’s Correct, and, yes, even ‘the kids’ should know it..)

  24. Tony61 says:

    “My best guess is, this is likely due to a more business-like, less emotional approach to home ownership by the top 10% of earners. Amongst the rich, any single home is probably not their biggest single asset…”

    Maybe I’m arguing semantics but just because you are in the top 10% of “earners” does not make you “wealthy” as the headline implies. Wealth = Assets minus liabilities, and if you have a million dollar mortgage on a house that’s worth $700,000, then you aren’t wealthy.

    I would argue that very few wealthy people have mortgages on their primary residence, except maybe for tax purposes. This article does not differentiate adequately between truly wealthy and merely high earners who are overextended.

  25. ToNYC says:

    Recission said: “Just because you are wealthy doesn’t make you smart.”

    …tell that to the Wall Street crowd. ;-)

    Arbitraguers and traders like Gekko with a lock on asymmetric information are only wealthy until exposed.
    Pirates are on Easy Street, rich, wealthy, until their “partners’ decide they are ready for sale.
    They created nothing but a hole to store what they stole from others in trade for their souls.
    Wealthy? Yes. Smart? … to their junior partners in crime and wannabees, maybe. But not wise.

  26. [...] recently referenced a fascinating David Streitfeld in the NY Times.  He beat me to the punch on it, but didn’t [...]

  27. in a related field..

    Via: USA Today:

    In the past few weeks, Ken Cage, who specializes in repossessing private planes, says he’s recovered two jets worth a combined $7.1 million.

    And while business has ebbed a bit compared with last year, it remains four times what Cage saw before the recession.

    “I think we picked up 15 (planes) that were $1 million or more, including one $20 million jet,” says Cage, president of International Recovery & Remarketing Group in Orlando, reflecting on the past 12 months. “We’d never picked up anything close to that before.”

    It shouldn’t come as a surprise that the nation’s steepest economic downturn since the Great Depression has also struck the rich. One indicator has been the number of private planes repossessed from owners who can no longer pay the notes or who are buried under liens stemming from unpaid maintenance and fuel bills….

  28. AGG says:

    From “rich are ruthless” article:
    “Whether it is their residence, a second home or a house bought as an investment, the rich have stopped paying the mortgage at a rate that greatly exceeds the rest of the population,” writes David Streitfeld.

    Streitfeld looks at the data and thinks that rich people are dumping their properties and walking away from loans that are underwater. It’s not so much that they can’t pay their loans, it’s that they won’t.

    “The rich are different: They are more ruthless,” said a senior economist at CoreLogic, the real-estate firm that provided the data to the Times.

    THE NUMBERS ARE: 1 in 7 million dollar home deadbeats to 1 in 12 for everyone else.
    TO THE 15% OF RICH DEFAULTING FOR GREED: Al Queda thanks you for fucking the USA by helping destroy the economy and the American way of life. Your selfishness and greed plays into all American haters’ propaganda efforts everywhere.
    As for the rest of us in the land of “shit flows downhill”, we are saddened by the incredible lack of patriotism in so many well off people that have had disproprtionate access to the American dream. Add to that the collosal stupidity of reptilian soprano logic as long term social conduct (Machiavelli instead of Noblesse Oblige) and you have the willful destruction of the most product country on earth. Have you no shame? This 15% equate in power and influence to easily 70% of the rest of the population. They include the highly educated and leaders in all fields. Is it any wonder that we are destroying the biosphere and dismembering the incredibly complex earth ecology with our crude scientific efforts at fertilization and industrialization. How can you be so stupid? We cannot duplicate the biochemical processes of a fucking amoeba! And you think our science is advanced and we can solve all our problems? This hubris is killing us. The most complex piece of machinery man has devised is a piece of shit compare with an ant! Stop believing your “power of positive thinking” propaganda. We are STILL cavemen.

    Hey, rich and ruthless, repeat after me: DON’T SHIT WHERE YOU EAT!

    It’s probably too late to save our species, let alone capitalism, but I am a prisoner of hope. Perhaps some real time metric, absent of hype and commercial propaganda, would wake these people up to the fact that ALL OF US live downstream. Something that would show the total number of species, how many have become extinct and irretrievable, and an estimate of what benefit to mankind has been lost (regardless of what some idiots in the scientific community will tell you, there is a point of no return and we have the destructive inertia to reach it). But some people refuse to learn. The picture I have is of a boat full of ants sinking in a pool of hydrochloric acid. The ones not drowning are, instead of bailing, throwing more ants overboard. They just don’t get it. The mocking tones used for anyone like me who wants us to pull together in mutual self sacrifice and good will are symptomatic of the prolification of stupid and greedy individuals without conscience who are a cancer on humanity. Their refusal to see the devastating contribution they are making to destroy all of us is mind boggling. For some things they are quite intelligent and resourceful. However, for the big picture they are walking extinction level event promoters.

  29. Casual Onlooker says:

    It’s funny how the consensus of sentiment runs…

    If you are rich and you run into mortgage troubles, then you must be greedy for trying to walk away.

    If you are poor (or poor’ish) and you run into mortgage troubles, then you must be stupid for getting there in the first place.

    Next cliché please…

  30. cognos says:

    Looks like this data series is topping and about to roll over and begin moving downward…

    I figured I would resurface for the “best week in over a year” in stocks.

  31. S Brennan says:

    Rich/poor, moral/immoral is just more “look over there” BS.

    Jobs folks, without a job, you can not pay.

    Employer supplied medical Insurance in the USA makes the worker in his/her prime earning years much likely to be laid off, or fired.

    Age discrimination laws were made unenforceable by the Supremos re-writing the evidence rules.

    US hi-tech workers must compete against 3rd world global labor prices while paying 1st world rents.

    Was there a housing bubble? Yes. Is there a beggar thy neighbor bubble? Yes.

    With one in five workers not working and a permanent class of 50 something’s unable to work.

    The moral failure does not lie with those reacting, but rather it’s due to systemic failure of our political/business elite to govern with a modicum of patriotism.

    FYI, I lived in Silicon Valley in the 90′s & early 00′s, I was offered a very high paying job by a company I was working as contract engineer to. The cheapest I could find within commuting distance was a two bedroom for 750,000 next to an autobody shop and a freeway ramp. The US worker is paying high rents and demanding a salary commensurate with their rent. Housing and medical are the two biggest gougers.

  32. andrewp111 says:

    The decline in value should be a much greater % for expensive homes vs cheap homes. There are simply fewer rich around to buy really expensive houses, so the existing stock drops in value by huge amounts. A simple matter of supply and demand. If your house cost 12 million, lost 80% of its market value to be worth 2.4 million, and you owe 10 million on it, wouldn’t you want to walk away too – if you could get away with it?

    And the rich get divorced at at least the same rate as everyone else. What does a divorcing rich couple do with a house that has 10 million in negative equity if not walk away or short sale? Burn it down to collect insurance, perhaps?

  33. insaneclownposse says:

    Kid Dynamite has it right here in my opinion. A root cause of the U.S. economic woes is that over the past couple of decades folks started confusing “most levered” with “wealthy.” A million dollar mortgage does not qualify one as wealthy. It just means that someone got a million dollar mortgage and the credit bubble caused a lot of these nutty loans to be made. Here’s an anecdote for ya to illustrate.
    My stepmother owned a regular townhouse in a nice zip code outside D.C. It was not a large place – 2000 sq. ft.. At the height of the bubble in 2006, she sold the townhouse to an FBI AGENT for $950,000!!!! He got a jumbo loan to purchase it but I have to admit I’m not sure what his down payment was. There is no way I’m considering the FBI agent a wealthy person. However, he managed to qualify for a monster mortgage. I’m sure there are millions of folks just like him who overreached and are getting smacked for it.

  34. johnborchers says:

    This means these rich had a lot of extra money to spend if they weren’t paying for the house. I’m starting to see further evidence a double dip is in the cards but I’m still not completely in that camp. Although I remember the post Barry previously showed which showed the majority of consumer spending over the year came from yoy trend changes in the weathly and retired.

  35. Nancy Miller says:

    The luxury real estate market in Nantucket sees a resurgence

    THE FOG IS LIFTING OVER THE luxury real-estate market on Nantucket just as the high season begins. Island insiders say that one beach-front property went to contract last week for about $28 million, a Nantucket record.

    The market has “gone bonkers,” says Brian Sullivan of Maury People Sotheby’s, especially in the $15 million-plus category. In fact, Nantucket’s first-half sales volume more than doubled from a year earlier, to $246 million.

    It’s a welcome change for this storied haven off the coast of Massachusetts. America’s housing crash hit Nantucket hard, and prices are still off 25% from their peak, says David Callahan, president of the Cape Cod and Islands Association of Realtors. Nantucket has seen some 20 foreclosure sales just this year.

    Last week’s megasale illustrates both the progress and the problems. The seller, former Goldman Sachs honcho Jon Winkelried, listed the 5.75-acre spread two years ago for $55 million. But the deal price was far above the $7 million he paid 11 years ago, and close to his latest asking price.

    Bargain hunters are clearly coming out of the woodwork. Jacquie and Bill Colgan of Summit, N.J., picked up a 10,000-square-foot house near the center of town in a foreclosure sale for $1.17 million–a steal.

  36. Rescission says:

    People confuse wealthy with high income earners. It’s all about the balance sheet, friends.
    Folks were making a lot of money and went out and leveraged up to buy the big, expensive monument to themselves. When the income dropped, they couldn’t afford it anymore.
    The real wealthy have a balance sheet and many don’t even have mortgages. High income earners who spend what they make aren’t wealthy. It’s all about the balance sheet.

  37. mikaeel says:

    This seems like rewording of another post in which it was stated 10% of the people walking away from mortgages weren’t delinquent and could afford them. Now we know who those 10 percenters are.