rational Default?

It says here that a third of all homeowners will walk away from their mortgages if the value drops 20% below what they owe. Why keep paying when something isn’t worth it? goes the reasoning and hence the term, “rational default”. This is probably a good reason to figure out the rental value of a house before you decide to buy it. If you do buy and the value drops but your loan payment is pretty much the equivalent of a rent payment, you won’t feel like such a chump.

But the gist of the article is that programs designed to forestall  home foreclosures won’t work if house values keep dropping. Seeming to defy that argument, Citibank and JP Morgan, bowing to government pressure, have announced a moritorium today on foreclosures.

I continue to believe that the key to fixing housing is to move people out of homes they can’t afford and I don’t think our government’s doing that. I also don’t see the logic in bailing out the improvident and unlucky while telling more fortunate homeowners who have seen the same price declines yet keep their obligations current that they’re playing a sucker’s game. Somewhere down the line, won’t we all pay for this lesson?

But whatever I think, no one asked me, so we’ll just sit back and see how this works out. Europe, if you care, experienced the largest economic contraction last quarter in recent history. Whatever.

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3 responses to “rational Default?

  1. W.

    Personally, as a potential buyer, so long as the gov’t tries to manipulate prices into staying artificially high, I will stay out of the market. they cannot do it forever and prices will arive at fundamental value when the manipulation is removed. As others have mentioned, this sort of thing just prolongs the agony.

  2. I agree that the GUV should not bail the folks that do not make enough to stay in their home. The GUV should purchase ost of the foreclosed properties and knock them down for Federally owned land

  3. But what happens to the neighborhoods with empty houses? The value of the homes in those neighborhoods drops even more, making homeowners who are current with their mortgage lose equity. It also decreases the tax income from those properties, which puts an even greater strain on local governments who are struggling to keep community programs afloat.

    By keeping people who are ‘on the bubble’ in their homes, it will help keep home values higher, and communities potentially recover. Obviously, those who are extremely leveraged can’t and should not be assisted since they are bound to fail. But for those who bought over-priced houses with sub-prime mortgages, there needs to be some effort made to help stabilize the home real-estate market.

    If nothing is done, those who have invested wisely will lose much more in the long run. It isn’t about bailing out your neighbor, it’s about shielding your own investment.