The study found that 26% of the record numbers of home mortgage defaults across the country are "strategic" -- that is, calculated economic decisions to bail out of loans by owners who actually have the money to make the payments but can't handle the negative equity they're carrying caused by local property value declines.Homeowners are simply weighing the costs associated with foreclosure alongside the benefits of holding the home on balance; and in many cases, the costs are winning out. And as more and more homeowners foreclose, the banks will be faced with new losses. All else equal, this reduces the available (i.e., willingness and ability to lend) credit to potential homeowners/consumers, which then depresses potential sales. It is a vicious cycle.
Among the study's sobering findings:
Moral precepts keep large numbers of financially struggling homeowners out of default, but only to a point. Fully 81% of household heads said they believed intentional defaults on mortgages to be "morally wrong." But that high percentage begins to crumble as negative equity grows increasingly larger.
When negative equity rose to $50,000, 7% of those who consider strategic defaults to be immoral said they'd walk away. At $100,000 negative equity, 22% would do so. At negative $200,000, 37% of those with moral objections would nonetheless default, and at $300,000, 38% said they would.
Zillow.com relates the percentage of homes that go into foreclosure each month across state and metro areas here. Nationally, 0.07% of all homes were foreclosed upon in the month ending 4/30/2009. If that rate holds over the next year, then roughly 1 foreclosures would be added to over the next year based on the Census' 2007 127.9 million estimated stock of homes. The bad news is: the monthly foreclosure rate is 8% higher than it was last year. The good(ish) news is: that the monthly foreclosure rate is 9% lower than it was the month before.
The chart illustrates the monthly foreclosure rate of single-family homes by state (x-axis) and the growth in that rate since last year (y-axis). Arizona, Nevada, and California have the highest foreclosure rates, but the monthly pace is down since last year. The bubble is working its way through. Going forward, though, the monthly foreclosure rate is likely to grow in some economies, like those seen in Connecticut and Hawaii, as recessionary pressures of rising unemployment and falling income pass through to the housing market.
Oh man. It's bad out there.