> there is a value between zero and however much the property is underwater that people would be willing to pay to no longer be underwater.
It's hard to play along with such a unrealistic hypothetical. Sure, I'd pay $5 to rid myself of $10 of debt, but lenders generally won't be willing to accept that, so around we go in circles. Generally, mortgage lenders are willing to accept short sales when they reflect market realities though.
> Being underwater is really bad and will be life destroying for many people, even if they never have to sell they will be far worse off on average than if they didn’t buy a house that lost value.
I get you lose some optionality, but for a lot of people, the market value of their house went down at the same time as mortgage rates went up. Monthly payments on a 100% financed home would be pretty similar, so I don't see how it's life destroying to be underwater when you have a similar payment to keep your house as your neighbor. Yes, if you have a forced sale, it's not great, but it's not significantly worse to be tens of thousands underwater than if you were simply at $0 equity; again, most of the time you don't end up needing to pay the underwater portiom back. Yes, if you made a large downpayment, that's no longer accessible; there's risk there, but a smaller downpayment and PMI was usually an option, and sometimes PMI isn't that expensive. Yes, it reduces your willingness to move, and that's negative in a lot of ways, but there are ways to move anyway, you mostly have to set up the new housing first before defaulting on the old housing and commit to the new place for a while because it will be harder to move going forward.
Otoh, you have leverage over the lender in a way that most borrowers don't. If the lender forecloses, they realize their loss; that makes them somewhat reluctant to foreclose. You may be able to miss more payments before foreclosure proceedings begin or get other concessions.
It's definitely a different story, IMHO, than in 2008-2009 when people were underwater and rates went down. In that case, being underwater prevented accessing lower rate financing, so people in that situation were missing out on useful services.