Pay Now or Forever Hold Your Peace

In previous posts, we and our co-writer have argued that housing values will make a serious face-plant on the road ahead (see this article, and this one as well). Put concisely, just about any mortgaged house in the United States, and indeed the world, will end up 'under water' in the near term (i.e. the mortgage is for more than the house is 'worth').

We turn at this point to the Washington Post, which has an article about Ms. Elizabeth Small. Although the article does not make it clear, she's probably worth around $1.5 million or so... until recently, that is. Now, she has lost $1 million since 2000, including $200,000 since April 2008. She can no longer afford to pay her mortgage payments and living expenses off of her investment income, and Social Security -- surprise! -- doesn't provide all that much security, after all.

To defend her dwindling capital base, she reported she was looking into certificates of deposit, or bonds. Last we checked, both those 'investments' were paying 0%... Her course of action -- which quoted professional money managers didn't even think to recommend -- should be to either pay off her mortgage, or walk away from her house. Ms. Small, we think, is in a situation similar to other people: she's not taking the best step of all, which is to pay off debt, or default.

We suspect the monetary powers-that-be will attempt to rescue people like Ms. Small with hyperinflation. Hyperinflation will reduce the value of the mortgage payments (or perhaps even the mortgage itself) to meaninglessness; say, a caramel macchiato, with an extra shot of espresso. However, the benefits of the debauch of the currency will only accrue to those who can maintain their income, and have it go up roughly in lockstep with the rate of inflation. Needless to say, it would be a Pyrrhic victory to those few who pull it off. We regret to inform Ms. Small that she will not be one of them.