Will the housing market start to slip again as the homeowners' tax credit expires? The tax credit expires today and reflects a very public move in the government's really significant disinvestment in the market. The government's role in the housing market has undeniably kept it, and much of the economy afloat. Now that we let the market back into the driver's seat, will the center hold? Will we slide into the start of a double dip recession? Who knows.
I think one thing is for sure, though. The emotional financial decision-making that contributed to the first crash won't play a factor in driving a double dip if we experience another slide. Homebuyers who made poor choices, powerfully influenced by emotion, won't make that mistake again for a long time. And the lenders that skillfully plied these emotions - sometimes criminally - to sell bad products, got burned as well. The pain of those mistakes has radically altered the underwriting environment.
Once bitten twice shy?
There are particular psychological and sociological factors that are unique to the economic values of the United States, which profoundly influence the way Americans consider the institution of homeownership. The distinctly American ethos around homeownership is deeply anchored by emotion, in a way that is different from other investments that Americans make.
The joyous emotional highs that Americans felt upon achieving "the dream" of homeownership helped inflate our housing bubble. But I believe the equally emotional devastation for so many Americans losing homes will temper exuberance.
The most recent run up and down in housing values has taught us that it is a terrible mistake to assume that American consumers of homes always operate as rational actors. Human behaviors in finance, across the board, belie the notion that consumers, as individuals, tend toward making rational decisions. There is a growing body of research illustrating the way emotional attachment to ideals drives irrational decision making. New research on the human tendency toward comparing our relative wealth to those around explains why we've always tried so hard to "keep up with the Joneses".
It is impossible to separate emotion from homeownership in this country. There is no other asset that more intrinsically denotes having achieved the American Dream than owning a home. As we've witnessed over the past 10 years, Americans will pursue this ideal even when it is bad for their personal bottom line, and even when they know it's bad for their bottom line.
The emotional ideal of American homeownership has made the foreclosure crisis personally devastating for millions of Americans. Many people, especially those of us who search for ways to responsibly help lower income workers buy homes, fear that this crisis may irreparably harm the institution of homeownership - despite the fact that it remains among the greatest engines to drive upward mobility in the US, when done right.
In the short term, though, I believe the distinctly emotional elements of the foreclosure crisis will help prevent a double dip in the housing market. Ironic, isn't it?