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Sunday, July 12, 2009

Are 'Strategic Defaults' Contagious?

New Real Estate Vocabulary

Amongst other things, the current recession/financial melt-down/housing bust has inspired some new real estate terms (or at least adjectives).

So, a "normal" transaction involving one Buyer, one Seller, and two Realtors is now called a "traditional sale," to distinguish it from all the ones that are "lender-mediated" (foreclosures and short sales).

Now, get ready for "strategic defaults" -- also known as "intentional defaults" or "walkaway's."

As in, not paying your mortgage because you can't.

Rather, not paying your mortgage because you've made a rational decision not to.

According to a new academic study, fully 26% of recent mortgage defaults are now of the "strategic" kind. Unfortunately, as more people default, others' reluctance not to weakens, too:

The higher the number of foreclosures in a given Zip code, the higher owners' willingness to walk away, the researchers found, suggesting what they call a"contagion effect that reduces the social stigma associated with default as defaults become more common.

Here's hoping we don't coin too many more new terms before the housing cycle turns up.

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