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Author: geekytoo One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 11  
Subject: beat my drum! Date: 3/18/2008 7:14 AM
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There's a new bubble forming. Everyone is jumping on the bandwagon. The end of the world is coming. We're facing a complete destruction of our credit and financial institutions as we know them. OK, none of that is true except for the second sentence.

The new bandwagon is the pundits who are predicting ever escalating housing losses, vacant homes by the millions, abandoned properties, and various other collapses. To be fair, some of them have been beating their drums for some time now. They saw the bubble form and they wondered what would happen next. They warned us that we couldn't build an economy by trading houses.

Still, the fear mongering is getting to be ugly now and occasional bouts of madness come through. We keep hearing about homeowners with negative equity and are told that they might just walk away from the houses. They might, but they might not. It really depends on quite a few factors. How much will it cost them to walk away? More importantly, where will they go? It's nice for a newspaper article to cite the case of the person who moved across the street and whose rent is half what the mortgage payment had cost, but how typical is that?

What about the people who can't or won't walk away? Maybe people will have negative equity and maybe they will wait it out. Why? Because they have a place to live and it's easier sometimes to keep making the payments than to start over and to lose one's credit. People who have ugly mortgages probably have ugly credit card debt too. If they walk away from one, they may lose access to the other. Will they go to a cash based life?

People don't invariably walk away from depreciating assets. Consider a widespread case that people invest in all the time: a car. People buy cars to get around. Many people at some point in paying back their loans end up owing more than the car is worth. Why do they keep driving it? Why don't they walk away? They could send the keys to the bank and not worry about a car anymore. They could start taking the bus (cheaper than a car) or they could carpool or rely on other modes of transportation. Guess what, they don't!

People are mostly rational, but not completely. They may derive a sense of pride from living in a home that they perceive as theirs, even if their equity is negative and they may even make sacrifices to continue paying that mortgage. Maybe they don't want to rent for the rest of their lives.
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