A nice follow out to only fools pay their mortgages…
Now, not all economists buy this argument. They say that the psychology of the current bust is different from what it was in Boston in the early 1990s. In a handful of metropolitan areas, including Phoenix, prices have fallen almost 50 percent from their 2006 peak.
Homeowners in such places may wonder if their houses will ever be worth more than their mortgages. So fairly small changes in their lives â€” like a reduction in work hours or the breakdown of a car â€” may lead them to walk away from their homes.
“I would not minimize that risk at all,” said Frederic Mishkin, a member of the Fed’s board of governors until last year.
If even 10 percent of the underwater homeowners walked away, Mishkin notes, foreclosures would soar, exacerbating the economy’s many problems.
Other economists who share his view are calling for across-the-board programs that would reduce interest rates or otherwise juice the housing market. They are worried that without bolder government actions, the housing market will continue to spiral downward.
In the end, the choice between the two approaches becomes a matter of cost-benefit analysis. The more aggressive approach would almost certainly do more to reduce foreclosures. But it would also be enormously more expensive.
If the economists from the Boston Fed are right â€” or even close to right â€” then the aggressive approach may cost something like $500 billion to prevent 500,000 foreclosures.
That’s $1 million per prevented foreclosure. Is that really worth it? Or could the money be better spent in other ways? (There is also the small matter of whether Congress would be willing to spend another $500 billion anytime soon.)
An example of the sort of house that you may soon be paying for are these McMansiosn in California, which have lost a million dollars worth of value.