According to data released this week (CNBC), 23 percent of US borrowers (over 11 million families), were holding “underwater” mortgages. That equates to over $750 billion of negative equity. That amount of mortgage debt is staggering. Taking a step back and contemplating the shear magnitude of this number, I was thinking about just how bad housing would need to tank before we just walked away.
A Home vs. an Investment
During the prior 2 decades, people became accustomed to their homes “making them money”. On paper, as home equity increased in value in a leveraged fashion (put down 10% of total sale price and a 5% gain on the home is a 50% return annually!), people started to think of their homes as an investment vehicle, even an ATM of sorts with cash-out refis. Now that the housing market corrected, still not even at the historical trendline, paradigms have shifted. I’ve always thought of my home as simply an alternative to renting. I never wanted to be a renter. I want to be able to upgrade my home, be proud of where we live, do stuff to the yard, etc., as opposed to investing nothing as a renter while the landlord invests the bare minimum to keep the place livable and rentable. I guess much depends on where you fall on the spectrum – investor or “owner”.
Do You Need Flexibility to Move
I’ve been fortunate enough to be able to eek out a decent living with the same company. While it’s rare these days, it’s concievable that I could live in the same home for the next 30 years and enjoy gainful employment with either my employer or any of a few competitors within a 45 minute commute. So, I’m not in a position where I need to be “mobile” throughout my career. Many people don’t have this option. For them, the ability to be able to move on a moment’s notice is key. So, when home prices were rising every year, this didn’t matter – cash out and move on. But if sitting on a $60,000 loss and requiring the ability to move, I guess it would a serious factor in the equation. Keep paying that mortgage or move to the work?
These days, behaviors and attitudes are more often reflected by “what’s legal” as opposed to “what’s right”. Everything from parents fighting to get their kids out of trouble instead of holding them accountable to the strategic default movement, people increasingly find ways to justify behavior that just a few generations ago would have been unthinkable. There are factors at play here from the Recency Effect to watching what others around you do. And finally, it’s tough to judge a man ’til you’ve walked in his shoes, right?
So, I can say with assurance that I’d be personally ashamed and embarrassed to up and leave my home with an outstanding mortgage and just disappear into a new life – especially if I could afford to pay (strategic default phenomena). But if I were to lose my job and I had to choose between continuing to survive or retain mobility as a renter versus just trying to “do the right thing” while draining our savings and entering into a lifetime of debt slavery, I guess I might think about it differently. Even historical low refi rates (see this week’s refi rate table) can’t help you if you have negative equity and no bank will work with you.
Would You Walk Away Under Any circumstances?
How Bad Would Housing Have to Drop? 10%? 20%