I just read an article which many of you may have seen published by US News & World Report written by Luke Mullins. The jist of the article was that many Americans today are re-prioritizing how they pay their debt. Back in the day before the “Great Recession”, it was always mortgage first, and credit card debt second. Today more and more homeowners are choosing to pay credit card debt first, and mortgage debt second simply because credit cards can be used to pay for basic necessities like food, gas, and clothes. While shelter will always be considered a basic human need, homeowners in Illinois often have more than 15 months before they lose their home through the foreclosure process! Essentially, these homeowners will do all they can to preserve their existing credit lines at a time when it has become more and more difficult to obtain new credit.
Quoting directly from the article:
The development is rooted in the housing bust. When home prices turned south–falling roughly 30 percent from their peak in the second quarter of 2006–a great deal of borrowers watched the value of their homes drop below what they owed on their mortgages. Today, roughly one in four homeowners finds himself in this position, which is also known as being “underwater.” Without equity in their homes, such borrowers are more likely to default. “They don’t see any value in putting money into an asset that has lost that much value and will probably never regain that value to offset the mortgages,” says Celia Chen, of Moody’s Economy.com.
One in four homeowners are “underwater”, in that the current market value of their property is LESS than their outstanding mortgage debt. This is one of the main reasons we are seeing a record number of mortgage defaults across the country today. What incentive do people have to pay their mortgage when it may take 10, 15 or even 20 years for them to return to positive equity? From a purely economic standpoint – NONE! But from a moral standpoint, a borrower may continue making payments because they made a promise to the bank to repay that debt. Whether or not this moral obligation is reason enough to keep a homeowner current, well that just depends each individual borrower.
Read the article if you have time. There are some interesting facts about this shift in debt prioritization.