In the Seattle Times today, the report discussed the rise in "negative equity" going from 23% of all households in teh Greater Seattle area to 34.3% at the end of 2010. Now, my group and the companies that I have been working with for the last 8 months have been saying that this is the trend for ages now. We have been talking about how homeowners have seen the greatest decrease in wealth in recent history and now our major news outlet decided to chime in, thank you.
The article quotes Zillow.com's chief economist Stan Humphries as saying, "[the increase in negative equity] increases the likelihood that owners will default - even if they still can manage the payment." The article then goes on by quoting Glenn Crellin, the director of real estate research at WSU and states that "strategic default" ..."damages owner's ability to obtain credit for other purchases, further curtailing economic activity."
This article states some generalities but misses the essence of the strategic default. By definition, it is strategic, meaning there is a plan in place. Crelin is only half right in his assessment, because what he fails to capture in his analysis or at least in the sound bite provided by the Times is that by defaulting, the homeowner frees up cash flows of at least the mortgage payment.
Under the Deed of Trust Act for Washington, a defaulting homeowner can expect, at a minimum, seven months of mortgage payments being freed up for use in other economic pursuits. The cash can be used to get rid of other debt, build bankruptcy proof asset pools, or even on a turn of whimsy pay for that amazing trip that the homeowner and spouse have been dreaming about but never had the cash to afford.
That cash flow is creating economic activity, just not for the banking establishment. Homeowners are using that cash flow also to maintain lifestyles that have been severly hampered by the down turn in the economy.
The article did note that homeowners that decide to hold onto their mortgage, probably out of an uninformed sense of morality, harm the economy as well. Those homeowners do not expend money on home improvements, basic maintenance, and are unwilling or unable to move even for better job opportunities. That means that the utility of the cash being flowed from those homeowners to the banking institutions are actually less effective than that of the strategic defaulter.
Bottom line, it is better to default while you are in control of your financial self, than be forced to default when you have no other options. Men were created to act, not to be acted upon.
