Mish,

I'm an avid reader of your blog.

I'm sure you get a lot of messages like this, so I'll try to be brief as possible.

I know you've heard the story before: I purchased a house in 2005. It was a new build that was completed in May 2006, and I have been living in it since.

The house is in Scottsdale, AZ (a non-recourse state). I purchased it for $740K with minimal money down ($40K). The house is now worth maybe $450K...maybe.

I have been able to afford the payments up to this point, but recently my income has been reduced due to the current economic situation, and now I think there is a chance that I may even lose my job.

I will not ask you for specific advice regarding my situation, but in my humble opinion, we are well past the point at which it would make "financial sense" for me to walk away...but I feel morally conflicted...yet every time I make the payment, I fear I am losing money that I may need for necessities - perhaps sooner than later...BUT maybe if I could "hang on" long enough I could eventually sell the house to break even and/or perhaps my income will increase again.

So, I will keep my question very simple: In your opinion, disregarding whether or not I can afford the house, how long will it take for home values to get back up to their 2005 levels?

My guess is that you are going to have bad news for me. Thank you for your time.

"Morally Conflicted in Arizona"

Dear MCIA

I have good news and good news masquerading as bad news. The good news is you are thinking clearly and you are right to be concerned about your finances. I would suggest you review:

Here is the key idea from the latter:

Mortgages are not ethical documents, they are legal contracts. The typical residential mortgage for an owner-occupied home gives the borrower two options: pay on time and in full, and keep paper title to the house, and full entitlements to any appreciation upon its later sale after the mortgage is satisfied; or, stop making payments, and hand the keys back to the lender.

Morality and ethics don't even enter the equation. Either option is perfectly legal for the borrower, and the only criteria should be business-based. All the ethics you need are contained within the four corners of the pages of the mortgage contract.

Indeed, the ethical thing to do, is for each borrower who is underwater to look without blinders at their family's financial situation, not just now, but over the long term.

The above comment was from "HD" your friendly neighborhood anonymous East Bay realtor/lawyer.

Here is my reply to "HD"

Bingo!

In regards to individual homeowners, if there is an ethics issue at all it would be for the homeowners to make sure their families are protected from harm rather than accepting financial ruin for themselves and their family because of someone else's misguided sense of ethics.

In regards to financial institutions, the free-market should be our guiding light, not government manipulation, intervention, and taxpayer sponsored bailouts.

Good News Masquerading As Bad News

The bad news is it might take 15 years for you to get back to even on your house. Heck, it may take forever. If you try, you may not even make it, especially if you lose your job or suffer another financial calamity of some sort including a cutback in hours or a wage cut.

The bright side is home prices are likely to keep falling for a couple more years at least, then do nothing much of anything for another 5-10 years. That means if you walk away and suffer the credit rating penalty now, it may not matter by the time you are ready to buy another house 3-5 years from now. Moreover, you would then have a clean slate on credit, and hopefully a saved up down payment as well.

However, if you try and wait this out, yet fail by going bankrupt in say two years, you will have made matters that much worse in terms of opportunity cost in improving your credit, and in saving up money for a down payment, while worrying every step of the way about the axe that will fall.

As is always the case: This is an opinion and not advice. Please seek legal council from someone in your state that understands your state's laws.

Who Benefits Now From Falling Prices?

Those who never had a home in the first place but are looking to buy.
Those hopelessly underwater and willing to walk away and start over.
Those looking to buy rental property down the road at attractive prices.

Who Loses With Falling Prices?

Those unable or unwilling to walk away.
Those with a substantial down payment and about even on their mortgage.
Those trapped in their homes who want to sell but cannot because they are about even on their mortgage and do not have cash to bring to the table at closing.

In a sense we are all losers, because we have all bailed out banks because of bad loans. Yet, in a sense we all benefit from falling prices because the sooner housing bottoms the better off we will all be. Home prices need to drop to affordable levels.

There are two sides to every coin. It's important to look at both.

Addendum:
You absolutely should have NO BANK ACCOUNTs or CDS at any bank you intend to walk away from.

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Click Here To Scroll Thru My Recent Post List

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com .

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