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Strategic default: A fool's game?

Posted by Scott Van Voorhis August 22, 2012 08:01 AM

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More than a few desperate homeowners, stuck with underwater mortgages, chose to walk away during the darkest days of the real estate downturn.

Soon a whole cottage industry quickly sprang up, with the term "strategic default" coined by boosters eager to give the whole trend an aura of respectability and intelligence it certainly didn't deserve.

Yes, the strategic defaulters were simply smarter than the rest of us. And they certainly saw themselves as superior to all those poor chumps who chose to hang in their, making payments on homes even though the market value had temporarily dropped amid a national economic crisis.

But with home prices finally stabilizing in Greater Boston and soaring in once hard-hit markets like Phoenix, Las Vegas, San Francisco and even Detroit, who will have the last laugh now?

Better yet for the stability of the real estate market, the tide of public opinion also appears to have decisively turned against strategic default.

A relatively overlooked pair of Zillow surveys last month uncovered a startling shift in attitudes.

The first  found that 70 percent of economists say they would not consider walking away from their homes, even if they were underwater on their home by more than 40 percent.

It's not a random number - nearly three-quarters of all underwater homeowners are underwater by 40 percent or more, Zillow reported back in the first quarter.

But more importantly, average homeowners are also turning against the idea of strategic default as well.

The second Zillow survey found that 59 percent of homeowners also said they would not consider walking away from their mortgage, even if they were underwater by 40 percent or more.

Of those who said they would not walk away, 37 percent cited moral reasons while 35 percent said they bought their home with plans to live in it over the long-term, according to Zillow.

I call it common sense, but here is what Zillow's chief economist had to say in a press release.

"We were initially surprised that so few economists would be willing to strategically default, since when you do the math, it can often be the best economic choice, if you leave aside moral and ethical considerations," said Zillow Chief Economist Stan Humphries. "Of course, strategic default is not just a mathematical decision. The most common reason for avoiding strategic default cited by homeowners was that it is a moral issue. That likely comes into play with economists and analysts, as well."

This blog is not written or edited by Boston.com or the Boston Globe.
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About boston real estate now
Scott Van Voorhis is a freelance writer who specializes in real estate and business issues.

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