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Strategic Default Not Best Option For Underwater Mortgages, Say Economists And Homeowners

SEATTLE, July 26, 2012 /PRNewswire/ -- If faced with a deeply underwater mortgage, most economists and homeowners agree they would not strategically default, according to dual surveys from Zillow®.

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

The survey, sponsored by leading real estate information marketplace Zillow, Inc. (NASDAQ: Z) and conducted by Pulsenomics LLC, 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 percent of homeowners said they would not make the decision to strategically default if they were underwater on their home by more than 40 percent[i]. Nearly 75 percent of homeowners in the U.S. with an underwater mortgage are underwater by 40 percent or more, according to Zillow's first quarter Negative Equity Report[ii].

"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."

Thirty-seven percent of homeowners who said they would not strategically default cited moral reasons, while 35 percent indicated it didn't make sense given that they intended to live in their current home for a long time.

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