This is more about homeowners who choose to walk away. The referenced NYT article says:
New research suggests that when a home’s value falls below 75 percent of the amount owed on the mortgage, the owner starts to think hard about walking away, even if he or she has the money to keep paying….
Squashed and I have a disagreement about this. We both believe that a simple percentage is not enough. We both feel that somewhere there exists a value threshold. For the sake of argument, we agree that the threshold is at $100,000 in negative equity (with other factors). This is due to the fact that people allow some value for their credit score, the cost of moving, the sentimental attachment to their home, etc. Where we disagree is that I believe we can actually hit a million homeowners fitting the criteria while Squashed thinks the number is far smaller. My belief is based on the fact that California, Florida, etc. were the worst bubble states, but also accounted for the most homes sold at outrageous prices (these two facts are not unrelated). Unfortunately, I was unable to find a source of data that allowed analysis to back my claims. So you’ll have to trust me that I looked for such data sets (if you only understood my desire to prove Squashed wrong and broadcast that to the world). Even the best data sources deal with fairly broad aggregates. Median home price. Percent of homes in foreclosure. Number of homes in an area. That sort of thing. These things are not sufficient. As a consequence. I suggest taking these articles with a grain of salt.
Sure, 4.5 million homeowners may have hit the “critical” 75% value-to-loan amount. But that isn’t sufficient to predict a tipping point in walk-aways. You can’t simply take one aggregate (we find that our survey sets the tipping point at 75%) and apply it to the population at large without answering why there wouldn’t be an absolute threshold value.
If I asked a group of minimum wage workers if they’d pay 10 bucks a week for all-you-can-eat donuts, it can’t be extrapolated on a percent basis to millionaires or billionaires.
Anyway, I still do not have my data (well, possibly, I’ve looked at the First American CoreLogic data before. The next update should prove illuminating). This is only a minor issue. Strategic defaults are on the rise. They will continue to rise. Some of these “strategic defaults” will be misnomers (the defaulters won’t actually have the income to afford the payments). There will be other measurement errors. Most of the evidence thus far has been anecdotal. Independent of the cause, independent of the semantics, another wave of foreclosures is coming.
