Preventing Strategic Default

Abstract

Strategic default is driven in significant part by homebuyers’ expectations at the time of purchase. When individuals purchase homes primarily as investments, with the expectation of appreciation, they will experience marked anxiety when home prices decline. A significant number of homeowners will strategically default as a result. In addition, when investment rationales motivate the majority of homebuyers within a given market, housing booms will tend to be exaggerated and down markets will tend to be prolonged. Strategic default – and housing booms and busts – can be managed by setting homebuyers’ expectations ex ante at the time of purchase.

Keywords: strategic default, anxiety, expectations, homebuyers