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.