Strategic Defaults Can Definitely Depress Local Housing Prices

I’ve been away on vacation, but a quote in an article from three weeks ago on CNN caught my eye. It has something that is very important to address when looking at strategic defaults.

But don’t expect a few depressed mansions to bring down the neighborhood. A single foreclosure in an otherwise wealthy area is unlikely to impact surrounding values, Blomquist said.

“You’re not going to see the weeds growing,”

Link

This is wrong. Consider the economic decision that is being made here: the family weighs the costs of foreclosing – the credit rating hit, cost to move, fees, etc – against the benefits – erasing the capital loss on their home.

This decision will be very, very similar for the surrounding families. Families with similar jobs, incomes, and lifestyles live close together. It’s rare that families with high-incomes and low-incomes are mixed together in the same neighborhood, let alone on the same street. People with large families more often choose single-detached homes over condos. People choose to live around other with similar lifestyles.

But the real key thing that will definitely all share is that their houses are underwater, or at least have severely dropped in value.

Worse yet, if lots of people in one neighborhood simply walk away from their mortgage then the strategic defaulters could depress prices further and exacerbate the issue. If the decision to strategically default makes sense for one family, then it will make sense for a good chunk of their neighbors too.

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