Recently there was a blog entry over at the LA Times about "strategic defaults". If you are unfamiliar with that term, it refers to people that walk away from their mortgages even though they have the ability to pay it. They are making a strategic decision to default based on the numbers. This blog entry got quite a lot of comments. There were basically two sides arguing. One group agreed that in many cases walking away made sense. The other group played the morality card (it's kinda like the race card but more universal).
They have discovered a funny thing about all these defaults. The higher the FICO score the more likely the person is to pull a strategic default. I have my own theories about why that is. A higher FICO score usually means a better job and income. Better jobs and incomes are generally the result of a better education and probably a higher IQ. This is a group of people that CAN do the math. They can and obviously are figuring out that it's going to be far better financially to let the house go.
Most economist are coming around now and realize those bubble prices are gone for a long time. The most recent estimates I've seen say 2030 before prices recover. Personally, I think that is a little too optimistic. I don't think those prices will be back for another decade past that. For prices to return to bubble levels and be affordable under normal lending levels, incomes would have to nearly triple. In a 20 year span it's more reasonable to assume incomes will roughly double (that means you need a 3.5% increase per year). And the way employment and wages are going lately we might not see any growth for a few years. Traditionally the ratio of median income to median home price has been 2.3. In 2001 it had climbed to 3.7. That was probably the result of low interest rates allowing people to buy more home for the same payment. At the peak the ratio was over 7 times median income. We are back down to about 3 (median house is $190k, median income is $65K). With the ultra low interest rates we have today the actual affordability of houses (monthly payment) is lower than it has been for decades (as long as you don't buy one with a huge mello roos tax). Whoa, getting a little sidetracked here.....
So, smarter people do the math and realize it will be decades before prices recover. Lets say they are making a payment on a $600k house that is now worth $300k. Optimistically it will be 20 years before that house is worth $600k again. Equity gain in 20 years ZERO. Lets say they got a juicy loan mod and got a 4% rate on that $600k. That's a payment of roughly $2900/mo and they will pay $696k over the 20 years.
Let's say they default, ruin their credit and cannot buy for 5 years. In 5 years they buy a similar house for $300k. No sweet loan mod though so the interest rate is 6% (that might be optamisitc) so the payments are $1800/mo. Over the 20 years they spend $432k on payments.
The difference in payments alone is $264k BUT let's not forget that home is projected to double in value over that 20 years so they have an additional $300k in equity. The net difference for this family is $564k in 20 years!
Would you be willing to give $564k to a bank just so you could tell people you live by a higher moral standard?