July 02, 2009

REALTOR Magazine-Daily News-More Owners Walk Away When Underwater

More Owners Walk Away When Underwater
A study of the Massachusetts housing market by researchers from Northwestern University and the University of Chicago concludes that a home owner’s propensity to default increases the further their loan goes under water.

The study found that home owners begin to walk away after declines of 15 percent or more. More than 17 percent of households would default, even if they can afford to pay their mortgage, when the equity shortfall reaches 50 percent of the value of the house.

The researchers found:
  • People under the age of 35 and over the age of 65 are less likely to say it is morally wrong to default compared to middle-aged respondents.
  • People with a higher education (8 percentage points) and African-Americans (14 percentage points) are less likely to think it is morally wrong to default, whereas respondents with a higher income are more likely to think it is morally wrong.
  • Default is considered less morally wrong in the Northeast (6 percentage points) and West (8 1/2 percentage points).
  • There was little difference in the moral view of strategic default among Republicans and Democrats, but independents are less likely to say defaulting is immoral.
  • Respondents who supported government intervention to help homeowners were 12 percentage points less likely to say strategic default is immoral.

"As defaults become more common, the social stigma attached with defaulting will likely be reduced, especially if there continues to be few repercussions for people who walk away from their loans," says Paola Sapienza, associate professor of Finance at the Kellogg School of Management at Northwestern University.

Source: Kellogg School of Management at Northwestern University and the University of Chicago Booth School of Business (06/26/2009)

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