IN THE HOUSING boom, Americans transformed home ownership into an uber-investment. In the subsequent bust, they reevaluated the return on that investment. The result has been a psychic change in American values about owning a home. The rise of “strategic defaulters’’ reflects that change.
For generations, Americans believed “home is where the heart is.’’ At least that is what buyers presumed. They signed onto a mortgage, expecting to stay in that home until a change in job or family forced them to move. While owners expected the value to modestly outstrip inflation, they did not check the Zillow real estate website every week or tap into their equity to finance Caribbean cruises. If they faced hard times, they struggled to keep their homes.
That mindset now seems passé. Over the past decade, as homebuyers became home-investors, many owners reaped double-digit returns when they sold. Others used their homes as ATMs, tapping into soaring equity. No surprise: people, regardless of income, family status, even job permanency, rushed to jump on this boondoggle-bandwagon. Nifty mortgages with variable rates and micro (or no) down payments made the jump easy.
But with plummeting housing prices, many have faced a new reality: their home’s value is worth less than the mortgage. Maybe these owners are still employed; maybe they can still make the payments. But why should they? Financial gurus on cable TV are advising them to walk away, leave the keys in the mailbox, bid adieu to the lender - in short, to default.
Owners can do the math: money saved on the mortgage versus money spent for rent versus costs of an abysmal credit rating for five years. If they do not want to make a major purchase for those years the decision is easy. Indeed, defaulters may end up renting a fancier house, at a lower net cost, in the same neighborhood. Some people net enough for vacations. The new term in this new world is: strategic default.
Strategic defaulters are a new breed of homeowner-economicus. Some critics bemoan the morality of these defaulters, who are reducing the value not just of their lenders’ portfolios, but of their neighborhoods. Homeowners who lose jobs and cannot make the monthly payments elicit sympathy, both from neighbors and the government, which has crafted home modification programs to help. But strategic defaulters do not want help to stay put. They want out.
Moral opprobrium is not helpful. In fact, I suspect the critics might do the same if they faced the same calculus. So long as value falls below debt, and defaulters can accept an abysmal credit rating, their decision is financially rational.
Strategic defaulters, though, threaten the larger economy. In 2001, 3.9 percent of owners of single-family homes had “negative equity.’’ In 2009, almost 25 percent had negative equity. If even half of those owners defaulted, there would be more depressed neighborhoods, more troubled banks - and, looking not too far into the future, stringent lending standards that would shut the doors of homeownership to the next generation. Lenders calculate risk: adding the risk of “strategic defaults’’ to their calculus would lead to higher down payments and higher borrowing rates.
Ironically, loan modification plans are now directed at the “home is where the heart is’’ owners - the ones willing to pay. But strategic defaulters are different: they could pay if they wanted to, but they do not want to - they are unwilling to pay.
In transforming a home into just another investment, we created a class of homeowners who treat their commitment to their homes much as they would treat any bad investment.
Unhappily, while their decisions may bolster their personal bottom lines, those decisions threaten the well-being of future generations of Americans, eager to buy homes, not as investments, but primarily as places to take root.
Nicolas P. Retsinas is director of the Joint Center for Housing Studies at Harvard University. 
