Americans Said to See Value In Keeping Underwater Homes

Fear that more "underwater" homeowners may choose to default is contested by data indicating Americans see more value in keeping their house for the longer term.

Apparently that is more of an American way of making unusual choices in unusual times.

Although 20% of U.S. mortgages are currently "underwater," Americans' risk for defaulting on their home loans is going down, says Dennis Capozza, finance and real estate professor at the University of Michigan's Ross School of Business, Ann Arbor, Mich., because while the risk is still high, it's at its lowest point since 2005.

The University Financial Associates Default Risk Index, which measures the risk of default on newly originated prime and nonprime mortgages by tracking local and national economic conditions, has fallen to 158 for the first quarter, down from 164 in the fourth quarter of 2009. (The index comparison base is the average of the 1990s at 100, so default risk is 58%).

According to Capozza, the founding principal of UFA, a risk-management firm that forecasts mortgage and consumer loan performance, house price declines have continued but at a decelerated pace even in the hardest-hit areas which are returning to sustainable levels. "Slower house price depreciation will mitigate risk levels for mortgage lenders," he said.

These findings, which coincide with improvements in home remodeling data, indicate the fear that millions of homeowners whose properties depreciated or are currently "underwater" will choose to make a "strategic default" is not grounded.

"Yes, 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 Mortgage Servicing 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 growth in home improvement spending, which also indicates that Americans see more value in keeping their house than in strategic defaults.

Homeowner improvement spending "is likely to reach a cyclical bottom" in the first quarter of 2010 than "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 generally beginning to turn positive.

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