As this financial situation has unfolded, many of us have become more familiar with some new terms that really are old ideas - specifically the terms "underwater" and "upside-down." The terms, as I understand it refer to having a loan that is larger than the value of the securing asset. In the current market, it is being used frequently to describe home-buyers whose outstanding principle is larger than the current market value of the home. The thinking is that people in this position are likely to walk away and the property is likely to end up in foreclosure. However, not everyone agrees with this.
An excellent explanation of why underwater does not necessarily equate to foreclosure is in today's issue of The Wall Street Journal. Karen Blumenthal points to some interesting research that shows the number of people who walked away during selected downturns in the past, is smaller than we might think. And the logic of the past may apply to the current situation.
Many people don't evaluate the current situation in terms of debt vs. asset in the present. Rather, they are looking at the value of the home over time (hopefully increasing) vs. the balance of the mortgage over time (hopefully decreasing). They also may be looking at the value of the home as a home rather than just an asset. If the home provides the utility you seek as a homeowner, and it is worth a given number of dollars for that utility, then being "underwater" may not be a significant problem at present.
There are a lot of possible ways to use this article when discussing decision-making in economics or personal finance. What would you suggest? I look forward to your comments.