Underwater mortgage debt creates a drag on the economy with a weaker recovery in places where mortgage debt is the highest as “more mortgage debt results in lower consumption and higher unemployment,” according to a study by The Roosevelt Institute.
Other explanations of the sluggish economy, such as structural unemployment, caused when the economy is unable to match workers to available jobs, or the negative wealth effect, in which people spend less because they feel poorer due to collapsed housing prices — “contain serious weaknesses,” the study said.
Recent estimates show that a third of all houses with a mortgages owe more than the home is worth. The total amount of underwater mortgage debt could reach $1.2 trillion.
The full report can be found here.