What is a “Responsible” Homeowner?

Many American families bought their homes at or near the peak of the house price boom. “Through no fault of their own” (individually, not collectively), house prices collapsed. Many of these families are now “underwater:” what they owe on their mortgage exceeds the market value of their home. Some have lost their jobs and can no longer afford to make their monthly mortgage payment. Others can afford it, but are walking away from their obligations. Still others seem to be doing the “responsible” thing: they continue to service their debt. Shouldn’t we (the rest of society) do something to help “responsible” homeowners?

Perhaps so. But first we have to ask what exactly constitutes a “responsible” homeowner? President Obama has someone like Val and Paul Keller, of Reno, Nevada, in mind. Diana Glick talks about their situation here: Obama’s “Responsible” Reno Homeowners: Are They?

A quick summary. This couple bought their Reno home in June 1988 for $127,000. Their home is currently valued at $100,000. They currently have a mortgage worth $168,000. At first blush, this seems strange. Assuming a normal down payment and paying off the mortgage for 14 years, shouldn’t the current mortgage be much lower? Indeed, should it not be lower than $100,000 (in which case, they would not be underwater)?

In 2007, the Keller’s home was assessed at $250,000. Like so many other families, they did a cash-out finance at that time for $178,000. They used $51,000 of this to pay off a debt, allowing Paul to retire. We are not told what happened to the remaining $127,000. (Did they spend it? Is it sitting in an account somewhere?)

Are the Kellers “responsible” homeowners? I am not sure that anyone is in a position to pass judgement on how they chose to manage their wealth. I am happy to label them “responsible” homeowners. I’m just not sure why society should necessarily be obligated, in this case, to enact a wealth transfer in their direction (away, for example, from yours truly, who foolishly chose to rent a small town home 2000-2009, instead of living the American dream).

Some people may argue that a wealth transfer is in order because, well, because why bail out only the banks and not the regular folk? Sure. (But on the other hand, note that the banks have essentially repaid their “bailout” loans.)

Another argument might be made on the “debt overhang” theory of “deficient aggregate demand.” Evidently, people like Val and Paul Keller cannot spend as much as they would like on consumer goods and services because they are instead “responsibly” paying their mortgage (presumably out of retirement funds, since Paul is retired).

Yeah, well, I don’t know about that (and I still can’t help wondering what happened to that $127,000).

I’d also like to know how the Fed adopting a NGDP target is going to help Val and Paul in their retirement years.

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About David Andolfatto 95 Articles

Affiliation: Simon Fraser University and St. Louis Fed

David Andolfatto is a Vice President in the Research Division of the Federal Reserve Bank of St. Louis. He is also a professor of economics at Simon Fraser University.

Professor Andolfatto earned his Ph.D. in economics from the University of Western Ontario in 1994, M.A. and B.B.A. from Simon Fraser University. He was associate professor at the University of Waterloo before moving to Simon Fraser University in 2000.

His current research is focused on reconciling theories of money and banking. His past research has examined questions relating to the business cycle, contract design, bank-runs, unemployment insurance, monetary policy regimes, endogenous debt constraints, and technology diffusion.

Visit: MacroMania, David Andolfatto's Page

2 Comments on What is a “Responsible” Homeowner?

  1. This is why journalists should not write about finance. The author inquires as to what happened to the remaining $127,000. If the author knew anything about finance, he might have guessed that the remaining amount went to repay the original bank loan utilized to purchase the property.

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