“Underwater” Mortgages and “Strategic” Defaults

This article caught my interest; it is titled “About half of U.S. mortgages seen underwater by 2011”:

Apparently their projections for “underwater” mortgages is based upon their forecast quoted in the article: “Covering 100 U.S. metropolitan areas, Deutsche Bank in June forecast home prices would fall 14 percent through the first quarter of 2011, for a total drop of 41.7 percent.”

While I haven’t spent the time to really develop an in-depth projection of my own as to where the “bottom” will be in residential real estate, I do believe it will be far lower than an additional 14% decline, for a variety of reasons.  If this becomes the case, the “underwater” aspect quoted in the article would presumably be exacerbated.

The Deutsche Bank forecasts mentioned in the article can also be read in conjunction with some other interesting research recently published with regard to “strategic” defaults, which was mentioned in this Economist article from 6/25/09:

This “strategic defaults” issue is important and bears close monitoring going forward, especially if more mortgages go “underwater.”

SPX at 997.08 as this post is written