Underwater home owners in the US should not default, it is suggested

If faced with a deeply underwater mortgage, most economists and home owners in the United States agree they would not strategically default, according to dual surveys from Zillow.

Nearly three quarters, 71%, of economists surveyed in the June 2012 Zillow Home Price Expectations Survey said they would not strategically default, even if they owed on their mortgage at least 40% more than the current value of their home.

The survey, sponsored by leading real estate information marketplace Zillow and conducted by Pulsenomics, was compiled from 114 responses from a diverse group of economists, real estate experts and investment and market strategists. The main portion of the survey, which captures respondents' expectations concerning the future of home prices, was released last month.

In a separate Zillow survey conducted by Ipsos, 59% of home owners said they would not make the decision to strategically default if they were underwater on their home by more than 40%.

Nearly 75% of home owners in the US with an underwater mortgage are underwater by 40% or more, according to Zillow's first quarter Negative Equity Report.

‘We were initially surprised that so few economists would be willing to strategically default, since when you do the math, it can often be the best economic choice, if you leave aside moral and ethical considerations,’ said Zillow chief economist Stan Humphries.

‘Of course, strategic default is not just a mathematical decision. The most common reason for avoiding strategic default cited by homeowners was that it is a moral issue. That likely comes into play with economists and analysts, as well,’ he added.

Some 37% of home owners who said they would not strategically default cited moral reasons, while 35% indicated it didn't make sense given that they intended to live in their current home for a long time.

The Zillow Home Price Expectation Survey additionally asked the same group of economists and housing analysts their stance on the adoption of government sponsored mortgage principal forgiveness initiatives for underwater borrowers. The survey found that 72% of respondents opposed any adoption of such programs, while 28% were in favour.

'These survey results suggest that economic and financial considerations are not the dominant drivers of behaviour for even deeply underwater borrowers,’ said Pulsenomics Founder Terry Loebs.

‘This underscores the challenges in valuing underwater mortgages and in determining the costs and benefits of principal forgiveness initiatives,’ he added.