[riverdawg]

"Many people [who put no money down when buying their homes] will have no choice other than to walk away from their property and mail the unwanted keys to their lender."

People who put no money down or take out an interest-only mortgage are essentially leasing their house with an option to receive any appreciation in its value. If the house appreciates in value, the option is "in the money." If it doesn't, the option is worthless. In the meantime, the mortgagee enjoys the service flow from living in the house. In many communities, including mine, the net-of-tax cost of owning, say, a three-bedroom, two-bath house is equal to or less than the cost of renting it because the expected price appreciation is small or even negative in real terms.

We just aren't used to thinking about houses as a depreciating asset, like an automobile is. If you buy a new car with only a couple of thousand dollars down, you are "upside down" as soon as you drive it off the lot. But we don't see many people mailing the car keys to the finance company; the depreciation is just an added cost of ownership. If housing prices fell in many areas over an extended period of time, I would expect see to more, not fewer, interest-only and no-money-down mortgages chosen by buyers, just as we see people choose to lease, rather than buy, automobiles with historically high depreciation rates.

Having said all of this, the last paragraph of the article gives sound advice, and simply reflects principles of prudent personal finance for most people.

[Attention Surplus Disorder]

"People who put no money down or take out an interest-only mortgage are essentially leasing their house with an option to receive any appreciation in its value. If the house appreciates in value, the option is "in the money." If it doesn't, the option is worthless. In the meantime, the mortgagee enjoys the service flow from living in the house. In many communities, including mine, the net-of-tax cost of owning, say, a three-bedroom, two-bath house is equal to or less than the cost of renting it because the expected price appreciation is small or even negative in real terms."

Nicely stated. Good post!