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Tuesday, February 16, 2010

Possible empirical study on subjective value

A number of recent newspaper articles about the approaching end of several government programs that attempted to re-inflate the housing bubble (by subsidizing mortgages, buying up mortgage securities, etc.), and of the continuing phenomenon of "upside down" mortgages suggests to me the possibility of a great empirical work for property.

For many years, it has been commonplace in our profession to presume that there is a very large premium that people put on their home ownership. In the takings literature, we refer to this as the surplus subjective value, and it means the extra value that people attach to ownership/possession of their particular home, above and beyond market value.

Today there is huge number of "upside down" properties, in which the excess due on mortgages exceeded the market value of the houses. The number of upside-down properties will doubtless rise as the government reduces efforts to re-inflate the bubble. Since most states make mortgage loans non-recourse, owners of upside-down properties can voluntarily default on their mortgages and and wipe out the entire debt. In other words, we now have a vast number of cases where people have to choose between staying in the house (keeping the subjective value of the house) or walking away (losing the subjective value but getting the value of the wiped-out indebtedness, less the costs of lower credit score).

Collect the numbers, and compare. If you get a big enough database, you should begin to get some indications of how large the surplus subjective value is, at least on average. No, this is not a perfect measure. But it seems like a potentially interesting start.

Avi Bell

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We are studying the behavior of underwater borrowers in NYC, and should be able to shed light on this, but that study is backed up behind a study of who gets modifications, so it will be a while.


Posted by: Vicki Been | Feb 17, 2010 4:39:42 AM

I think we have to be careful here: the difference would not necessarily reflect the "subjective" value of the house only, but also the "option value." I write as an economist, not a lawyer, but I think the terms are not synonymous. We could define the subjective value of a house as something which is of value to the current owner (memories, unpriced amenities, etc.) but not to a prospective buyer. This is quite different from an option value. A holder of any asset may continue to hold the asset even if it's present value is less than optimal because (s)he beleives that the asset may rise in value over time.

I agree that the issue of "strategic default" is of tremendous concern. But explaining the differential as representing "subjective value" is, I think, overstated.

Posted by: Kurt Paulsen | Feb 17, 2010 8:12:15 AM

Vicki - I look forward to seeing the results when they arrive. Sounds interesting.

Kurt - Good point. It's certainly true that people may believe that housing assets will appreciate more than the market believes, and that owners therefore believe that it's worth holding housing until a later rebound. But unless you think that there's some unique reason why your house will be appreciated later by the market than similar ones in the neighborhood, there's still money to be made by walking away from your house, pocketing the gain from erased debt, and then betting on the option value in a similar house. As I said, a far-from-perfect measure. But an interesting one.

PS. Another factor to take into account is tax gains/losses.

Posted by: Avi Bell | Feb 21, 2010 10:29:30 PM

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