Some estimate that 5-10% of American homeowners are in some form of negative equity, with the potential for more to fall into that category in 2008 and 2009 as home values are dragged down by the increasing market share of lender-mediated foreclosures and short sales. If you're a homeowner, owing more on your mortgage than your home can fetch on the open market puts you in a tough position—especially if you have an unexpected and extended loss of income.
So what options does an upside down homeowner have?
Option # 1: Suck it up, work through it, make the payments, wait out the tough market and enjoy your home all the while.
Option # 2: Walk away from the mortgage and all obligations, leaving your credit damaged but your lender holding the bag.
Beyond a simple sense of obligation to do "what's right," what would really keep a distressed homeowner from choosing Option # 2? The economic incentives in this scenario are structured such that walking away from a monthly cash obligation on a declining asset might actually justify the sizable dent in your credit score. So does that mean that across the country from sea to sea there are mass legions of consumers voluntarily going back to renting? That there's hundreds of thousands sending their lender the dreaded "jingle mail," so named by the sound of keys to the now-abandoned home rattling around in the packages in the lender's mailbox?
According to many, no. Filed under "Fake Trends," the Free Exchange Blog from The Economist tackles the issues surrounding this myth and directs us to some relevant web content. Click here to view the full post; it's worth the read.
In sum, people respond to far more than just economic incentives (emotional and social incentives are insidiously powerful) and, perhaps more importantly, buy houses for reasons that extend beyond their financial benefits.
In other words, owning a home is not like owning a stock. No one's particularly enamored with the idea of owning Apple stock on principle alone (unless, I suppose, you have one of these). Most own Apple stock solely because it's a good investment for their financial portfolio.
Homes are different. They're where where we live, sleep, eat, breath and drink beers on our back porches. The fact that you get to build a little wealth in your back pocket over a long period of time is a nice bonus, but it's not necessarily the main attraction.