I’ve been hearing quite a bit lately about the recovering U.S. economy, but questions still remain as to whether the changes we’re seeing are only short term fluctuations or actual improvements in the economy.

According to a recent article on MarketWatch, James O’Sullivan, an economist with MF Global, apparently feels that we’re seeing real economic recovery and that the outlook for the future of U.S. markets is positive.

Along the same lines, companies are beginning to hire again and, according to some research I did on housing prices recently over at Zillow.com, even the real estate market in many areas seems to have leveled off.

Homeowners able to pay are walking away from mortgages

All that seems to be pointing to a positive outlook for the U.S. economy as a whole, however, I’m also seeing signs of bad things to come. A perfect example is a story on 60-minutes the other day, in which they spoke with a number of homeowners who had decided to walk away from their homes, even though they were able to continue to make payments. For most of these homeowners, the decision to walk away was, of course, a financial one, but the motivations were slightly different from what we’re used to seeing. The people interviewed in the story were all capable of continuing to make payments on their homes, but due to the huge loss in value (as much as 50% in some cases), they chose to simply walk away rather than continue making payments on a property who’s value may never recover to the levels seen when they purchased the properties.

What’s interesting to me about this story is, morals aside, it seems this may be a reasonable financial decision for homeowners to make if they find themselves stuck with a million-dollar loan on a property now valued at $600,000, just to illustrate one example.

My concern is that many of the foreclosures we’ve seen recently have been a result of homeowners being unable to continue to make payments on their loans. This apparently new trend of walking away in spite of their ability to pay could create an entirely new problem for the housing markets and cause the recession to drag on into the foreseeable future.

The credit hit isn’t as bad as you may think

Morals aside, if you were looking at a 50% loss in your home value, and facing the prospect that your home value may never recover to the level it was when you purchased the property, wouldn’t you be tempted to just call it quits?

While these people will certainly feel a strong punch to their credit rating for a few years afterwards, my experience in the mortgage business tells me it’s only temporary and, as little as 2-3 years after walking away from their homes, their credit scores could recover to high-600′s to low 700′s.

So, which is better from a financial standpoint? Continuing to make payments on a mortgage that might forever be greater than the value of the home? Or simply call it quits, suffer 3 years of bad credit, and then move on?

I fear the latter option may become more and more appealing to homeowners currently underwater and if this were to become a popular strategy, the effects on the economy as a whole could be disastrous.

The moral issue

Another question that was brought up in the 60 Minutes report was the moral issue of walking away from your home. The justification one homeowner gave was that his bank wouldn’t feel bad about foreclosing on him, so why should he feel bad about walking away?

So what do you think? Should the moral issue be a concern? Is there a moral issue at all or is it “strictly business” as one interviewee put it?

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