This 60 minutes video highlights an alarming trend of people walking away from their mortgages, even though they can still afford to make the payments. Their logic is that the house has lost value and they are upside down on it so they need to just let it go. How messed up is that? I don’t care what the estimated value of the house is. If you can still make the payments, you need to make the payments. You signed a contract with the bank that said you would pay the agreed amount each month. You are therefore obligated to pay the agreed amount each month.
Part of the problem is a lot of people bought at the height of the bubble, expecting their homes to go up in value. They got burned when the bubble burst and housing values dropped. But you don’t actually lose money until you sell the house and lock in your losses. Real estate is a long term investment. Most advisers recommend planning to stay in a house for at least five to seven years to realize profits from the appreciation. We got spoiled in the early and mid 2000’s when low interest rates spurred a frenzy of rapid home price inflation. Many buyers expected the quick profits to continue forever, which it couldn’t (and didn’t).
The point is that over time, the real estate market will come back. When it does, many of these homeowners who are walking away will be able to sell their homes again for a good price. At that point, by holding the real estate for a longer term, they will be able to minimize their losses and possibly even sell at a profit. It’s a waiting game and may seem somewhat fruitless but it’s a lot better than walking away when you can still afford the payments!