For Consumers, Time to Shop (Until the Mortgage Drops)

Here's a provocative thought: what if 'extend and pretend' within our nation's troubled mortgage markets is actually providing a lift to consumer spending? It's not as far-fetched as the idea might initially sound, and it might help explain some interesting data we've seen as of late -- and it also might explain why the statistical recovery we're seeing now doesn't really feel like a recovery to most Americans. And, if I'm right, it also explains why we may very well slip right back into the throes of recession all over again as we head into 2011. Let's start with what we know. We've got 7.4 million non-current loans in this country, according to data source Lender Processing Services, Inc. [stock LPS][/stock] -- that's an awful lot of households still living in a house, without a mortgage or rent payment draining their available disposable income. And the mortgage or rent borne by most households has historically been one of the most significant capital commitments any household makes, relative to other purchases. In fact, as I've shown in previous columns, most Americans behind on their mortgage have gone more than a year without making any payments. The average age of a loan in foreclosure is now 410 days delinquent, after all, according to LPS; and that's just the average. Many delinquent borrowers are able to stay in their homes for even longer than that. We know from emerging credit data at Equifax and from other credit bureaus that Americans are now more likely to stop paying their mortgage first relative to other debts, meaning that they will continue to pay their credit cards, auto leases and other financial commitments. And why not? Miss a few payments on the car, and the repo men are there to claim that shiny Lexus within weeks; miss a few credit card payments, and dinner Saturday night is immediately disrupted. But miss a mortgage payment? The consequences here are now so far off into the future and so vague, and layered under numerous government assistance programs, that any future penalties are tough for a consumer to accurately assess when faced with making a choice on how to best manage their debts. (I'd even argue that for many consumers, given the current environment, it makes logical sense to default on their mortgage first.) So we've got millions upon millions of consumers in the U.S. meeting their shelter needs for free, even if only temporarily; and what's becoming of any extra disposable income, since no rent or mortgage need be paid? Is this money being saved? Of course not. We're Americans -- we don't know how to save (and neither does our government, apparently). Instead, we're seeing consumer spending head northward, and for five straight months, too. This data has many economists touting a nascent economic recovery, but I think the data instead paints a very sinister picture. Put simply: people are spending their mortgages. Consider the following individual as a case study -- an actual 'HAMPlicant' at one of the nation's larger servicing shops, as highlighted in a guest post at the Calculated Risk blog. They had an $1,880 monthly payment on their mortgage they'd defaulted on, yet their bank statements for the past 30 days included the following expenses:
  • visits to the tanning salon
  • visits to the nail spa
  • some kind of gourmet produce market
  • various liquor stores
  • A DirecTV bill that involved some serious premium programming or pay-per-view events
  • Over $1,700 in retail purchases, including: Best Buy, Baby Gap, Brookstone, Old Navy, Bed, Bath & Beyond, Home Depot, Macy’s, Pac Sun, Urban Behavior, Sears, Staples, and Footlocker
Here's one household that's clearly doing their part to ensure that consumer spending stays strong. And any sane person should be asking themselves: How many more people like this are out there among the 7.4 million delinquent loans we now have? And how many more 'spenders' are there among the 5 million or so currently underwater homeowners -- many of whom may at some point decide to default on their mortgage, too, but dutifully continue spending at Best Buy and eating at the Cheesecake Factory? And the zinger: what happens when these people eventually find themselves, at some point in the future, saddled with rent or a mortgage payment? Even if you assume that just half of the current 7.4 million currently delinquent mortgages fit this sort of 'spending profile' (that is, they are spending their mortgage) and you assume a $1,000 median monthly mortgage payment for most U.S. homeowners -- you get a $3.7 billion boost per month to consumer spending. It's certainly enough spending to matter in the overall scheme of things. A colleague I respect immensely, John Mauldin, has as of late been hammering a simple economic identity we all should be familiar with: GDP = C (consumer and business consumption) + I (investments) + G (government spending) + E (net exports) Regardless of how you see it, the dominant variable in the GDP equation above is consumer spending (C); it's roughly 70% of GDP historically, including health care costs (half of which are actually a government expenditure, but let's stay out of the minutiae of how data is reported for now). Which means, in the end, that as consumer spending goes, GDP generally goes. Mauldin sees the risk of recession in 2011 as a 50-50 proposition, largely due to concerns over government stimulus spending and taxation (G). He argues that we must get our deficits under control. But if I'm correct in asserting that there is a 'delinquency effect' embedded in our current personal consumption figures, as well, we have even more troubling cause for concern -- because shrinking government deficits while simultaneously watching consumer spending tank all over again is a recipe for significant economic pain. The alternative -- government spending its way into oblivion, and headlong into a sovereign debt crisis -- isn't exactly a rosy picture, either. My advice? Plan accordingly, whether for your business or your household. Paul Jackson is the publisher of HousingWire.com and HousingWire Magazine. Follow him on Twitter: @pjackson

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