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Strategic Defaults Offset By More Promising Trends

Strategic defaults by those whose home values are underwater are offset by indications that simultaneously an increasing number of other homeowners see enough value in their homes to renovate them, according to one expert.

Dennis Capozza, finance and real estate professor at the University of Michigan's Ross School of Business, Ann Arbor, Mich., said house price declines have continued but at a decelerated pace even in the hardest-hit areas, and although 20% of U.S. mortgages are currently "under water" Americans' risk for defaulting on their home loans is at its lowest point since 2005.

This coincides with improvements in home remodeling data, he said. "One of the consequences of the decline in housing prices is a slower turnover rate and greater difficulty for homeowners to swap one house for another, i.e., 'move-up'. This makes renovation, rather than a move, more attractive," he told National Mortgage News. "However, this can occur at the same time that so-called strategic defaults are increasing because of the cumulative effect of price declines. Both are driven by the unusual market conditions we are experiencing and can occur together."

Feedback from both service providers and academic research suggest current or future growth in home improvement spending that indicates some Americans see value in their homes that is worth building on.

Homeowner improvement spending "is likely to reach a cyclical bottom" in the first quarter of 2010 then "steadily increase through 2010," according to the Leading Indicator of Remodeling Activity released by the Remodeling Futures Program at the Joint Center for Housing Studies of Harvard University.

The LIRA projects annual declines in home improvement spending will ease from the current rate of 12% to 3.1% in the third quarter of 2010.

"With signs of stabilization in the national economy, homeowners are once again planning home improvement projects," said Nicolas Retsinas, director of the Joint Center for Housing Studies. So remodeling industry fundamentals are beginning to turn positive. Improved fundamentals include increases in sales of existing homes, home price decline moderations in most markets across the country and favorable financing costs despite tight credit availability.

Phil Hurst and Gary Elmes, the owners of ElmHurst Cabinet Co. based in Mesa, Ariz., whose company works almost exclusively from referrals, say that despite the economic crisis home restorations and remodeling are on the rise. ElmHurst finds that homeowners are investing in comfort and long-term quality because they intend to stay in their homes, and says that even though American homeowners are now finding that selling their homes may not always be a viable option they are carefully considering their investments, including the upkeep, regular maintenance, or improvements in their home.

For example, energy-efficient appliances will likely lower monthly costs, bring in tax credits and increase the value of the home, so in the past 10 years these types of expenses have gained in popularity.