8
children (more children, the higher the relocation cost), whether the children go to local schools,
and whether s/he has bought the house more than five years ago (the longer the tenure, the
stronger the attachment to the house and thus the higher the relocation cost).
2
In the presence of moving costs, relocation is a (partially) irreversible investment with an
uncertain payoff. Thus, there is some value in waiting. With uncertain house prices, the option to
wait is more valuable because the higher the volatility of house prices, the higher the
expectations that they will recover. Since the survey asks about the long-term expectations about
house prices, we will use those.
In addition to relocation costs, when an individual defaults his credit rating is very
severely affected, reducing his future chances to buy a house or more generally to borrow. It is
not entirely clear for whom this cost should be higher: for young people with a marginal credit
rating, which will find it very difficult to restore it or for richer people with a good credit rating,
since they lose more. Unfortunately, we do not have data on the credit rating, but we have other
characteristics (such as income and age) that should proxy for that.
If the mortgage is a recourse-loan, an individual faces the risk of being forced to pay the
remaining amount, if the lender comes after him with a deficiency judgment. More risk-averse
people, thus, should be less likely to default. Also richer people should be less likely to default.
As a proxy for income, we have a self-reported income bracket and a self reported assessment
whether they had more than $50,000 outside of their home. We chose this level because a
rational lender is unlikely to sue a borrower who has less than $50,000 in wealth.
In addition to these pure economic reasons, individuals may have moral considerations
that affect their willingness to default. Default can be perceived as morally wrong and as such
something to avoid if not at all costs, at some significant cost. Moral considerations, if
widespread, may strongly mitigate the likelihood that Americans households will default on their
mortgage, even if the value of housing continues to depreciate. Non-economic incentives to
default and obedience to moral norms, in turn, may be affected by what other people do and by
economic policies that may undermine a sense of fairness.
Finally, even amoral people can choose not to default when it is in their narrow economic
interest to do so because of the social costs this decision entails. In a society where the vast
2
Ideally we would like when they bought the house, not when they refinance it, but this is the only variable we
have.