Every now and again, I see an economic commentary that is so ass backwards, I am compelled to call it out. Today is one of those occasions.

The commentary in question comes from the usually astute Housing Wire. Paul Jackson makes the case that voluntary mortgage delinquencies are driving retail sales.

I disagree.


Our tale begins ~6 months ago, during the Q&A portion after a speech at a conference. I was asked this question by an attendee:  “How much of current retail sales are being driven by mortgage delinquencies and defaults?”

My short answer was “Very little.”

Given that we have lost 15 million jobs, that wages were static for a decade, and that the underemployment levels are near 17%, the progression of events from Employment to Housing to Retail are fairly obvious (to me at least).

From 2002-2007 or so, ultra-low rates combined with an abdication of lending standards to excite Real Estate. We had a credit bubble, and a housing boom. Combined, that brought 10-20 million marginal new buyers into the Housing market. These folks were renters or small condo owners who were not typically suburban housing buyers previously. Many were people who “reached” for homes they couldn’t afford. In addition to the low rates and lending standards collapse, these buyers utilized 105% LTV or piggybacks, had a very high debt service ratios, maintained unstable incomes and  often used I/O loans and even Neg Am mortgages.

There was zero margin for error. Then the trap door opened.

In my Q&A session, I described timeline of the credit bubble bursting and the housing boom busting. The sequence is fairly straightforward:

1. Home prices fell 33% (peak to trough)

2. Recession begins

3. Unemployment ~doubled to 10% as 15 million people lost their jobs. Under-employment was rampant.

4. The Real Estate market collapses. 5 million foreclosures so far, approximately 7 million people more than 30 days delinquent on mortgages.

5. About 4 years after real estate topped out, 2 1/2 years after the stock market peaked, 2 years after the recession began, and one year after the bailouts occurred, the economy has begun to shows signs of life.

That is the chronology.

For the family that is in a home they cannot afford, the standard chronology is like this: Someone loses a job, or has their hours cut back. As the family’s income comes down, they spend on necessities: Food, gasoline, water. People are living on their credit cards, so that has to be paid. Other non-necessities get postponed (Student loans? Ha!) Eventually, the income reduction leads to a place where its food or mortgage.

The mortgage loses.


What do we know about Retail Sales? They have gained strength for 7 consecutive months. There gains have been concentrated in a few areas:

• Luxury sales rose 22.7%
• Furniture sales rose 13.8%
• Appliance sales rose 6.9%
• Auto sales gained 24% from year ago levels

Those people voluntarily not paying their mortgages are not buying luxury goods, for the simple reason they cannot afford them. The people behind on their mortgages in these days of tight credit are not qualifying for car leases or loans. And if you plan on abandoning a house in 6 months to a year, are you really buying appliances and furniture?

I think not.


On to the post in question.

Paul Jackson, the Editor-in-Chief at Housing Wire who posted a train wreck of an anecdote as a substitute for actual analysis. His post, ‘For Consumers, Time to Shop (Until the Mortgage Drops)” used a quote from Bill at Calculated Risk.

Jackson took the following — he called it a “case study” as the typical ‘HAMPlicant.’ 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

No one will dispute that this person is financially irresponsible, shows a “wanton disregard for minimizing spending”  and is not worthy of a mortgage mod. If you want to call them an idiot, I won’t argue.

However, one person is neither a trend nor proof of conclusion.

I have no problem with occasionally dropping an anecdote to add some color to a dry analysis. However, to take an outrageous example and draw a conclusion that its the norm is simply a recipe for getting the big picture wrong.

And I will even grant you that hundreds, maybe thousands of people who are behind on their mortgages are spending irresponsibly. Perhaps tens of thousands are. But there are over 7 million late mortgage payers, and 15 million people under or unemployed. That works out to be less than 1% of the delinquent homeowners. I’d like to see data

I wanted to double check the sourcing, so I tagged Bill at Calculated Risk last night. He confirmed the guest poster –Shnaps – was a mortgage industry insider. He also confirmed that he and Shnaps had discussed this individual. Shnaps stated that based on all of the data he reviews professionally and mortgage mod applications he processes, our tanned and manicured applicant was the exception, not the rule.

Jackson (apparently) never took bothered to ask. [UPDATE: Paul emailed me he did] Instead, he took an extreme example and drew a false conclusion from it. Unless he wants the usually excellent Housing Wire to become just another purveyor of Recession P0rn, he needs to consider doing actual research.

A few of the usual brain dead media suspects picked up his post as proof of some talking point or another. Merely repeating other people’s weak ass comments isn’t news — its somewhere between

Disappointingly, Diana Olick of CNBC also got drawn into the silliness. her work is more often than not excellent. Not this time, omitting both in depth research into retail sales and analysis of the actual data.

She should know better.


HAMP applicants tanned and juiced
CalculatedRisk, 3/23/2010

For Consumers, Time to Shop (Until the Mortgage Drops)
Housing Wire, April 5th, 2010

Mortgage Defaults May Be Driving Consumer Spending
Diana Olick
CNBC 12 Apr 2010

Mortgage Defaults Drive Consumer Spending: Experts Weigh In
Diana Olick
CNBC 12 Apr 2010, 14 Apr 2010

Category: Analysts, Credit, Real Estate, Really, really bad calls

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

62 Responses to “Are Defaults Really Driving Retail Spending?”

  1. tude says:

    I really don’t know what to believe. The truth is out on the streets (here in the greater SF Bay Area) I know several people who have been living for free in their homes for 2+ years, and they are spending a lot of money that they would not normally spend (yes, including buying cars!). I know others who have lived in more than one “cash for keys” scenario, where the bank is letting them stay in the house at a greatly reduced rate, then paying them to move out! They too are spending their extra cash on things they know they wont be able to buy later.

    Honestly, I think the truth lies somewhere in the middle, and the proof for me will be when all this monkey business ends! The house across the street from me was abandoned and empty and ignored since early 2007. It was finally put on the market about a month ago at 1990s prices, 70% less than it sold at peak, and is now pending. I see this in a lot of neighborhoods around me, so I think we are definitely seeing some changes happening.

    We might honestly be in recovery, or this could be many peoples last hurrah.

  2. Lamont says:

    There are over 6 million people that are no longer making mortgage payments and still living in the house. Also, most those households have at least one member of the household still working, meaning that there is still an income stream. So all in all, this could add a fairly meaningful amount of cash that is being spent on consumer goods and services each month rather than going to the bank. The only contention is how much.

    About retail sales, tens of thousands of small businesses are never counted in the survey. The retail sales survey mainly counts chain store sales. Retail sales have gone up to some extent because small stores, like ma and pop shops, continue to close and their old customers begin to go to the still in business chains.

    About the pop in sales for March and continuing for April, a large amount of that pop is from income tax refunds which are running 22% higher this year than last year. For myself, I’m receiving a huge income tax refund because of losses in my wife’s small business (a furniture store). We will use that money to buy a new Deck , among other things, and savings. This should boost retail sales, though the company we’ll buy from has never been included in the retail sales survey.

    A second factor for higher retail sales, according to the survey, is continued stimulus payments. Right now personal income ex-transfer payments remains at the bottom levels of this recession. Including transfer payments personal income is up, though currently 20% of all personal income is coming from govt transfer payments vs over 12% in the last boom period, personal income is up.

    A third factor for higher retails sales is the large amount of cash that continues to be withdrawn from money market mutual funds and is not reinvested. That amounts to $74 billion since the beginning of the year alone.

  3. wally says:

    Suppose you simple reword the claim: But for unpaid mortgages, retail sales would be X amount less than they were last month.

  4. thebondgurl says:

    Ok, but you haven’t said what you think the driver is behind the surge in retail sales. Unemployment/underemployment is high and defaults are still up there has to be a link here between employment levels and discretionary spending. You stated what you disagree with but you haven’t presented an alternative explanation.



    1. Luxury goods sales — wealthy feeling better and spending
    2. Auto sales — 90% of employment pool are employed — they have pent up demand
    3. Appliances/furniture — people living in homes they can afford and living their lives;
    4. 1.1 million new jobs (Household survey) going back to work

  5. Greg0658 says:

    “> Tax Credits for Energy Efficiency
    Learn how you can take advantage of federal tax credits for your energy efficient purchases and improvements. For information on state and local tax credits, see State Incentives for Renewables and Efficiency.

    > Rebates for ENERGY STAR Appliances
    Rebates for ENERGY STAR Appliances will be available from your state in late 2009 or early 2010. Find out how the program will work and how you can apply.

    > Energy-Efficient Mortgages and Financing
    Learn about your options for energy-efficient financing programs, including mortgages to home improvement loans.”

    I’ve been hearing radio spots for local stores pushing this program – $300M looks to small to be driving the #s involved here .. then again with 40 to 1 growth via the reserve quotient maybe that is a play …. I don’t know except to say bazaaro times

    can I go off on a bazaaro item close to my zone – a request for tax rebates to do a motel/hotel Corp name change for advertising, towels, interstate signage – that sorta stuff – in old days was an expense against the business income … I just gotta figure out a business plan with muscle in the wings for me

  6. Lamont says:

    Furniture sales, according to the retail sales survey , have not gone up 13% as reported in the article above.


    Per the data, furniture store sales, according to this survey, bottomed in October 2009 and have increased by 6% since that time, but are still off 18% from their January 2007 peak. [BR: year over year data is what I used]

    Barry also reports in the article that appliance sales are up 6.3% off the bottom, but that is very misleading. According the the retail sales survey, appliance sales are lumped in with electronics sales, so an accurate breakdown between appliance and electronic sales can’t be made (unless he has other data from somewhere).


    And electronics ARE purchased by people that are no longer making mortgage payments. People buy ipods, personal computers, cell phones, DVD players, and plenty of other electronic stuff all the time.

    As for auto sales, yet they have been improving somewhat, but March may be an outlier because of the huge Toyota incentives, which were then matched by the domstic auto-makers. We’ll see if this continues into May and June.

  7. ashpelham2 says:

    It’s still the year over year comparisons that are showing improvements, and of course they are going to be better. At this time last year, we had just exited the hardest economic winter in many, many years and fear was rampant. It’s easy comparisons. To a lesser extent, with the tough winter we just had climatologically, I could see some improvement in retail sales as people are simply using up things that they’ve held on to for a while.

    It’s all perspective. I think things are better in parts of the country, no better in others, and possibly worse in still others. In my part of the world, we are flush with cash after our tax return, a couple of sales I made that were big, and just some smart budgeting. We got the house painted (90% of which I did myself, but I still spent 1300 on supplies), bought my wife an upgraded setting for her diamond, and have bought a few cycling things. we are cautious as to what we spend from this point on, as her unemployment runs out in July, and my income at my job, which I took in August after being laid off, is a pay cut versus the last job.

    Our bills are reasonable, much less than others, and we are current on everything. But it will hand to mouth once her benefits expire.

  8. mtlippincott says:

    I was unemployed for quite some time (over a year) in NYC after being laid off from a finance job. Let’s sayI had been able to live rent free (basically, the equivalent of not paying a mortgage) that entire time while also collecting unemployment…I would have been spending a whole lot more. And yes, even on luxury goods. Certainly electronics.

    I don’t know Barry, if you wipe eliminate the cost of shelter from people’s budgets for an extended period of time, you open up a huge ability to spend. Paul’s anecdote may be lazy but I think there’s some truth there. David Rosenberg is making this case on a daily basis. I think he estimated foregone mortgage payments has added the equivalent of a 5% wage hike for Americans potentially (with some room for error).


    BR: 15 million unemployed underemployed — many of whom are living rent free for 2 or more years — suddenly start additional spending in Q4 2009 and Q1 2010?

    Is that the most compelling explanation?

  9. I don’t think you can say it is the driving factor, but it certainly is contributing. I have stories too of defaulting homeowners (if that is what they still are) who have bought trucks and electronics. And, here is a good post at Credit Writedowns on the subject: http://www.creditwritedowns.com/2010/04/how-strategic-defaults-are-boosting-consumer-spending.html.

    I think the biggest factor to increased consumer spending is the drop in the savings rate. We are back down to 3% from 6%. However, I think this will stall out or remain flat from here. We don’t have as much access to debt or home equity to goose consumer spending so we actually have to spend just our earnings. I can’t imagine we will drop much below a 3% savings rate. Of course, I didn’t think we would drop from 6% to 3% so I could be wrong there.


    BR: The link you provide just points to the articles I mentioned. Not exactly data, more like circular linking/reasoning.

  10. rcogen says:

    For someone who gets pissy about strawmen, I think you’ve fallen into the trap. The question isn’t are mortgage defaults “driving” the growth in retail spending, they pretty clearly aren’t, it’s are mortgage defaults supporting retail spending? The answer is most definitely, yes, and they overall data would not be nearly as nice if it weren’t for the mortgage cash being freed up.

    Are these people buying cars and luxury goods? I sincerely doubt it, but mini-luxuries to fend off the depression of being financially ruined (meals out, tanning, nails, movies, gifts for the kids) or items they think might help them get back on their feet (interview clothes, even technology), absolutely.

  11. crjdriver says:

    I would agree with BR’s assesment except for the 1/5 deliquent mortages who are strategically defaulting. According to a Wachovia’s conference callin 2008: (Granted this is old but one could make the arguement that strategic defaults are at a greater risk now)

    An executive with Wachovia, one of the country’s biggest and most aggressive lenders, said during a conference call in January 2008 that the bank was bewildered by customers who had “the capacity to pay, but have basically just decided not to.”

    These 1/5 strategic defautls now have a much greater disposable income (temporarily) and will most likely rent( for much lower monthly cost) when/if the bank ever gets arond to foreclosing on them.

  12. b_thunder says:

    • Luxury sales rose 22.7%
    • Furniture sales rose 13.8%
    • Appliance sales rose 6.9%
    • Auto sales gained 24% from year ago levels

    Yes, from 1-year ago extremely depressed levels. But how do the numbers compare with the pre-recession levels? S&P500 and NASDAQ signal that they should compare quite favorably!

    I don’t want to split hair here, but I think I should try: other than the luxury items that are mostly purchased by the wealthy who are “recovering” much better than the rest, the other 3 categories are mostly purchased on credit which was quite difficult to get in late 2008-early 2009 even for those still employed. Could this “snap-back” be due to the unfulfilled demand from 2008-2009? Like car sales were “pulled forward” by cash 4 clunkers, these purchases were “pushed back” due to lack of credit.

    P.S. is BR’s fierce defense of the “bullish data” against those who try to question/misinterpret/talk their own bearish book in itself is a sign that we used to look for on the cover of major magazines? Is BRs own bullishness (even if it’s only for the short term) a signal of the market top? He is the smartest blogger that i happen to read, but can even he be right 100% of the time?


    BR: The argument is the recent retail sales data is being driven by this multi-year old phenomena. We have have strategic delinquencies for 2 years — why is it impacting retail sales today?

  13. This is question of both activity and timing.

    There have been 15 million unemployed/underemployed for a long time. There have also been millions who are delinquent on their mortgages. Why now — from O(ctober 09 to March ’10 — did they all begin to spend>?

    Does any one find that the most compelling explanation for retail sales rise?

  14. karen says:

    BR, in answer to your question, Why now? In order to declare bankruptcy.. have you checked those rates lately?

  15. John Clarke says:

    Cash for Clunkers, Tax Refunds (some of which are a result of the Stimulus Plans) extension upon extension of unemployment benefits, First Time Home buyer tax credits (i.e. higher Furniture/Appliance sales)–
    These stimulus programs are coming to an end. Interest rates and energy/commodity prices are on the rise.
    Lets see if the trend in Retail spending continues…
    There’s no doubt some truth to people spending money on other items that they would ordinarly spend making mortgage payments– a quote from above:
    ” No one will dispute that this person is financially irresponsible, shows a “wanton disregard for minimizing spending” and is not worthy of a mortgage mod. If you want to call them an idiot, I won’t argue. However, one person is neither a trend nor proof of conclusion…”

    I certainly agree with this. But my question in return is how many people with this type of behavior took out mortgages that they KNEW they could NEVER afford. Some got duped by crafty lenders, no doubt. But many share a big chunk of the blame for the mess we’re in today… All of the easy money stimulus coming from Obama, Congress and Lil’ Ben are not helping to change this reckless behavior…

  16. clipb says:

    another aspect to this discussion: the charts of household debt versus income show a large retrenchment from the highs of a 2-3 years ago. but how much of that is foreclosure related, not wise folk paying down their debts? using rough numbers like: 3mn foreclosures, mortgage debt of 200k per = 600bn decline in consumer debt. been looking, but hard to come up with hard numbers, but still..

  17. IdiotInvestor2 says:


    It is possible that you are making the same mistake that Jackson did with his analysis. He is basing his argument on one anecdote, and you are basing your argument on rebutting his faulty report. His method is wrong, but his conclusion may not be wrong.

    Mish has been pounding the table on the faulty way to measure retail sales. Are they really that up ? If that boost is small, how much of it is due to strategic defaults ?

    I personally have no clue. I am not an economist, but I have been paying attention for last 10+ years of investing. It’s all very confusing now to me. There seems to be a huge mismatch between what logic says (Rosenberg+Mish), what your data analysis says, what stock market is doing and the reality that I see around me. It’s just not adding up. The discrepancy is larger than ever before.

    Maybe we are living a split world of haves and have nots.


    BR: We’ve have Strategic defaults for several years now — please explain how the recent upturn in retail sales is being caused by that.

  18. mtlippincott says:

    “There have been 15 million unemployed/underemployed for a long time. There have also been millions who are delinquent on their mortgages. Why now — from O(ctober 09 to March ‘10 — did they all begin to spend>? ”

    To this point Barry, certainly there could be some delayed effect as well. Clearly you default on your mortgage for the most part b/c you can’t afford it. It takes some time for those missed payments to start adding up for you to be able to really spend. Also, you are talking about a 6 month period of retails sales gains, that’s 25% of the 2 years you are discussing, so it’s not exactly an instantaneous boost.

    I think given the lag needed to build up some cash from missed payments, perhaps coupled with people in general feeling a little better, plus some definite underlying recovery (hey, I have a job now) would be reason for some of that money to be spent just recently even if the effects have been around awhile. The timing doesn’t sound so suspicious to me.

    Anyway, I was never arguing that this is the majority factor of spending. Certainly the savings rate dropping again would probably be a major culprit as well as some legitimate recovery.

  19. mtlippincott says:

    Also, I don’t see much reason why the foregone shelter payments would bias towards any one particular category of retail sales (except they probably wouldn’t be in luxury goods). Even furniture

  20. realgm says:

    There are quite some people who were freaked out and cut down on spending at the peak of the panic cycle. After a few months and an “apparent” recovery, a lot of these people are sick and tired of saving and being afraid to spend, so they decided to start buying things again.

    American had been doing irresponsible spending for 20 years+.

    It is not surprising that some of those people would spend irresponsibly again now that things look “better”.

    The only difference this time is that the easy credit in the past is not there anymore. The easy money is only available to the banks.

  21. callistenes says:

    Thanks for this BR.
    I’ve been hoping to get a find a good argument not just for but against the defaults is spurring spending debate.
    While I don’t think its the driver, its definitely contributing.
    But also maybe individuals aren’t cowering in fear anymore and this is why the savings rate is dropping and they’re going out and spending. So its some combination. My career used to be in retail and hospitality point of sale for 10 years so I keep a keen eye on these types of things when I’m out and about.

  22. greedsgood4 says:

    As many have mentioned, this is a gray zone and hard to know for sure.

    I’ll point out though that the duration between default and foreclosure has expanded greatly over the last 6-12 months as banks have slowed down the process and limited the quantity of foreclosures. This could be having an impact on the foreclosed consumer and their brazenness toward spending as they become more accustomed to living rent-free.

    To BRs point, the high end consumer has obviously increased spending. Whether this is a product of higher tax refunds or greater confidence due to a return to wealth appreciations (equities, bonds, etc) is hard to say. The Easter holiday timing may have also impacted the stats. We’ll have to keep tracking to see if this is a exceptional rebound or the start of a true recovery- I’m in the former camp.

  23. gloppie says:

    People stupid enough to buy a house they can’t afford are stupid enough to spend their money on useless crap.
    All of them.

  24. wally says:

    I think b_thunder may be on to something. BR has been on aggressive defense patrol lately; his subliminal must be itching for some reason.

  25. haris07 says:


    This post smacks of you turning too much of a cheerleader for the “good retail news”. While you may be right in that not a lot of the retail sales are possibly driven by mortgage delinquencies, you don’t have a lot of data to support that it isn’t either. Furthermore (and I realize that this is not the main topic here, but it is relevant), disposable personal income less transfer payments is down to flat but consumer spending is increasing – if you want to cheer lead that as a sustainable trend, god bless you. Together with contribution from mortgage deadbeats (note that I am not saying it is a driver or even a primary component), this has served to goose up retail spending. And while you are at it, please also ascribe market (or above market) multiples for the stock market driven by this kind of consumer spending!

    Till today, I had not a single post from you that I wanted to complain about, but I guess even you have been taken in by the stock market surge and are coming up with answers to justify it. Disappointing tone.


    BR: Its one of the bad memes that can start rolling — And I want to stop it in its tracks.

    Monkeys love a good story — the narrative appeals to all of us.

    Dont be a chimp. Be a quant instead. . .

  26. Lamont says:

    Why are retail sales up in March?

    1. Tax refunds running 22% higher than last year, approximately $13 more billion thus far per Zerohedge.

    2 ” $73 billion in tax relief and income support in 2010:Q1 directly raised household spending by $47 billion”

    3. ” Year To Date, a massive $274 billion in money markets has been withdrawn, yet under $200 billion has been reinvested”

    4. Holiday shift

    5. pent up demand from weak February, probably due to snow

    As for real consumption data vice retail survey data, sales returns in most states showed as of March that consumption in those states continues to be in recession in not only the retail space, but all spaces of their economies. It even looks worse when you figure that sales taxes have been increased in many places; yet revenues have continued to go down month after month and are far down from March 2009 levels.


    BR: Best response so far . . .

  27. DeDude says:

    “Luxury sales rose 22.7%”

    Probably the investor class who has seen some real increases since March 09 and now are beginning to feel comfortable spending some of those gains

    “Furniture rose 13.8% and appliances rose 6.9%”

    When people are forced out of their homes and those homes renovated and rented out, those two categories will see some sales.

    “Auto sales gained 24%”

    They had to, because when the old car die most people must replace it. Sales were depressed from 16 million to 10 million and there was no way this kind of depression could be sustained unless substantial numbers of people began walking to work. Lot of those who postponed a purchase until “we find out if Armageddon comes” have come out to the lots. Even I replaced the old 97 Cavalier with a new Corolla ;-)

  28. izimbra says:

    A lot of people in the comments on conflating two different questions.

    Barry is arguing, correctly I think, that retail sales are not being driven by people in mortgage default.

    Other people are suspecting, correctly, that the weak home prices and the retail sales are connected. The reason isn’t complicated – at the margin people (not in default) are putting less of their cash into home improvement, home purchase, and home debt service (on the more expensive mortgage they didn’t take out), so they have more left over for other things. A lower percentage of overall U.S. income is being directed toward housing and shelter now, leaving more for other things.

  29. flipspiceland says:

    Money market account balances have fallen nearly 100 billion in the last few months. That may have more to do with it than it’s being given ‘credit’ for.

  30. dagmountain says:


    I wish you’d been a little more clearer in who is powering these retail sales before now. It is confusing and hurtful for some people to read reports that the economy is recovering and the future is bright when according to BofA the top ten percent of income earners even before the job losses accounted for 53 percent of the 70 percent consumer /GDP number. Main Street is still getting killed out here and it seems as though were loosing on of our biggest defenders. Thank you for all of your good journalism.


  31. purple says:

    Retails sales are recovering because the wealthy are back to their free spending ways. A long time ago, John Kenneth Galbraith noted that assets like stocks valuations play a large role in driving consumption in capitalist societies with great inequality.

  32. constantnormal says:

    Strategic defaults are bailouts for the rest of us.

    This is the whole point of Moral Hazard, and how left untreated, the moral ethic of dropping one’s debts onto the backs of others can run rampant through the economy. Like inflationary expectations, this takes a sustained and UNIFORM (no more dual standards between debtors with lobbyists and debtors without) effort to alter.

    What with political vision targeted only on getting re-elected, any sort of uniform, sustained pressure to keep debts with their owners seems highly unlikely. This is not the Road to Japan, rather it is the Road to Greece.

    One possible reason for the recent rise in spending is that perchance the public has been fooled into believing that the recession is over (possibly true), and we have a good 4-6 years of safe sailing ahead of us (almost certainly false, given that none of the underlying causes for the recent instabilities have been corrected). This would explain the switch from increased saving and building cash cushions to returning to wanton spending.

    American Consumers Return To Their Historical Pattern Of Going Nuts

  33. 4horsemen says:

    This is becoming comical. I agree the analysis lacked depth, but I also know that this is one of many anecdotes pointing to the same thing.

    I would agree that while defaults may not be the “driver” of retail sales, they most certainly must be helping to prop them up. How can you dismiss this possibility as negligible without giving a powerful counterargument to the contrary?

    In response to the question, “Why now” – why NOT now? I suspect that earlier on, squatter would not be sure how long they could continue / get away with living rent free. The longer it lasts, the greater the comfort level with the situation. And also allows time for unemployment benefit checks to build up enough for an i_Pad!

    I have no anecdotes since I do not live in the US, but I was watching the news a couple of nights ago (US local news) and something interesting caught my ear. The story was about 3 roommates, 2 of which tormented and beat up the third, a mentally handicapped individual. Compelling enough, but that wasnt the story to me. In passing, the news mentioned that the home was in foreclosure, but was being rented out to the three men.

    How do you charge rent on a property you arent making payments on?

  34. 4horsemen says:

    Also – how does one have pent up demand for Cars. Isn’t there an average of something like 3 cars per family?

  35. 4horsemen says:

    @dagmountain Says:

    ” It is confusing and hurtful for some people to read reports that the economy is recovering and the future is bright when according to BofA the top ten percent of income earners even before the job losses accounted for 53 percent of the 70 percent consumer /GDP number. Main Street is still getting killed out here and it seems as though were loosing on of our biggest defenders. ”

    @dagmountain, it is important to get your perspective. It is also important for you to realize how the vast majority of people in the investment business operate. To paraphrase one of Barry’s recent comments (which also echoes how most investment managers think)…”I can not afford to miss out on a rally, even if it ends in tears.”

    Under pressure to perform as well as or better than “the Joneses, ” most managers reluctantly play these rallies, whether they see them as substantiated or not. They see risk to their jobs or loss of clients if their relative performance doesn’t stack up. The sad truth is that in some cases, this “play the rally” strategy may be the complete opposite of what they are doing with their personal money…

  36. benesposito says:

    I think what gave the story legs is the decreasing consumer debt, combined with increased retail. Is that not new? Clearly its not the only driver but it could be a contributor. While you have raised good points as to why it is not the sole cause i haven’t seen any DATA showing it isn’t contributing.

    “BR: We’ve have Strategic defaults for several years now — please explain how the recent upturn in retail sales is being caused by that.”

    a) ” the percentage of new problem loans is also at its highest level in five years. More than 1.1 million loans that were current at the beginning of January 2010 were already at least 30 days delinquent or in foreclosure by February 2010 month-end.”

    That 1.1 million is a relatively HUGE precentage of the total.

    b) credit card delinquencies are dropping… this is likely in part as a result of mortgage payments being diverted to short term debts.


    You have to figure with millions of delinquent mortgages that some of that money is making its way into the eocnomy at large. Where people may have had to cut bills (cable, phone, groceries, public transport over commute etc) or other normal things they will be avoiding having to make those cuts.

    If nothing else its preventing retail from dropping as much, allowing those who are fine to skew the data up.

  37. theobannion says:

    Dear Barry,

    Have been following you on Seeking Alpha for a long time now, and have always respected your views. But in the case of this article, I would say that neither you, nor I, nor Mr. Jackson know how many people who are not making their mortgage payments are spending irresponsibly; but accepting that there are 7M late mortgage payers, that gives us 7M who have something more to spend than they would have were they to continue making their payments. To say that they are “driving” retail sales is extreme, but we’re a nation that has been conditioned to believe (since television moved into the mainstream population around 1947) that the secret to happiness is to buy stuff, show off our stuff, and have fun. It isn’t in our cultural makeup to save the extra bucks. If we had been wired to do that, we never would have bought that house we couldn’t afford, or we would have had some more money saved so that we could have put more down and taken out a smaller mortgage. So, having the bucks, knowing nothing else than our cultural bent, one would reasonably guess that the “consumer” would buy something. (I’ve always objected to being objectified as a “consumer.” I would like there to be more to me than that.)

    Drive – no; but contribute to the upward movement in retail sales, yes. We also have an unknown (by me at least) number of people who have indeed been foreclosed upon and have moved into lower cost lodging – maybe with mom & dad, maybe into an apartment. A few more bucks to spend there as well.

    Maybe Jackson made too long a leap, but one can’t dismiss the argument in its entirety.



    BR: Nice try, but I haven’t been on Seeking Alpha in 2 years . . .

  38. Are Mortgage Deadbeats Juicing Up the Economic Numbers?

    One of the favorite excuses offered — and one that’s being widely circulated among perma-bears all over the web — is that people that are defaulting on their mortgages are taking that “saved” money and going on a spending spree. It’s argued that “deadbeat shopping” is driving up the retail sales numbers and that as such, the growth in retail sales isn’t sustainable.

    What about the effect on retail sales caused by vast numbers of people that are cutting down drastically on their spending to be able to meet their obligations? What about all of the people that abandon their mortgage only to go and rent somewhere else? Never mind. None of this helps the bear case, so let us just ignore these inconvenient commonsensical facts.

    Let us be extremely generous toward this “deadbeat shopping” hypothesis and assume that 60% of the value of defaulted mortgages is effectively applied by deadbeats towards consumption (an absurdly high number). This means that spending by deadbeats, not related to their mortgage, rises by $720 per month. Multiply that by the 7.9 million delinquent mortgages and you get a total figure of $5.7 billion per month in deadbeat consumption money.

    Now, let us assume that mortgage delinquency is rising at a ridiculously high rate of 4% per month. This means that total consumption from deadbeats is rising by about $228 million per month. This is peanuts, folks. This represents about 0.026% of monthly Personal Consumption Expenditures (PCE) which are averaging about $863 billion per month. This doesn’t even amount to a rounding error in terms of PCE and/or GDP growth.

    Let’s take a look at retail sales, which totaled $363.2 billion in March of 2010. If every single penny of the “deadbeat money” were spent on retail items (highly unlikely) it would still have contributed less than 0.07% to the 1.6% MoM growth rate of retail sales in March. Again, this amounts to a rounding error. In sum, “deadbeat mortgage shopping” is an insignificant factor in the current economic recovery. Indeed, the margin of statistical estimation error for the PCE and retail sales numbers is of a significantly greater magnitude than the deadbeat mortgage factor. Deadbeat shopping is quite simply, a non-issue.

  39. triplec says:

    “BR: 15 million unemployed underemployed — many of whom are living rent free for 2 or more years — suddenly start additional spending in Q4 2009 and Q1 2010?

    Is that the most compelling explanation?”

    Speaking from experience here is the mental outline…

    1. You look around last year… get mad and actually take that first step of not paying… Scary but doable… Sleepless nights etc.. Fear.. Insecurity.. etc. etc.

    2. 3 months later no word from credit card companies and you apply for modification… Block 800 numbers.. Sleeping a bit better because “darn it” the banks got a bail out..

    3. 5 months later .. With 800 numbers blocked and a pile of unopened letters in a box you still are swimming along just fine.. Of course the $4000 mortgage in 5 months times adds up to $20,000!!! Enough to get you started when they kick you out. A feeling of euphoria starts to set in.

    4. 7 months later and $8000 more.. Geeeezzz.. Lets go buy something to celebrate..

    5. 12 months later .. This is ridiculous great!!!.. Everywhere I see no one is paying their mortgage so this is like winning the jackpot. By this time I am just waiting for them to kick me out because I have close to $30,000 saved and still spent $18,000 to celebrate..

    6. Yea!!!.. The govt. feels sorry for me.. The media feels sorry for me.. This is incredible.. The only negative is I wish they would hurry up and kick us out because there is an awesome huge house for rent at the end of the street but I just can’t justify the $2000 rent until they kick me out.

  40. triplec says:

    “BR: The argument is the recent retail sales data is being driven by this multi-year old phenomena. We have have strategic delinquencies for 2 years — why is it impacting retail sales today?”

    The lack of consequences can now be observed by the average strategic defaulter. I believe this will keep growing if I think I am right and I am relating correctly to today’s “human nature”.. It is not uncommon to find folks gloating about what you can “get away with” over the Internet in the right forums. Just like the beginnings of an addicted gambler.

    There are multiple ways to hide money, use relatives etc. and if you run out of ideas there are plenty places to go on the internet to find more. There is a sense of satisfaction when you can steer your friends and family in the same direction.

    What I can’t find on the internet is someone suffering unbearable consequences for stopping payments even with recourse loans. The old “FICA Score” scare is wearing pretty thin.

  41. Casual Onlooker says:

    Thanks Barry for a thoughtful article, keep up the good work.

    I don’t buy into the “deadbeat economy” rational. Every argument I’ve heard supporting this approach is anecdotal, and most of those anecdotes are hypothetical at best. I’ve yet to see any *hard* unambiguous figures that support any of that. But hey, a colourful anecdote is just what we need to whip up the masses and lead to a renewed round of finger pointing. (curiously it’s always someone else that points their fingers at, never themselves. No no, not us, never us, it’s ‘them’)

    One other -guess- as to what is helping to drive the numbers, how about pure recession fatigue. After a couple of years of holding their breath, and holding back on purchases, many are saying ‘screw it, I just want to buy something’.

  42. willid3 says:

    maybe its really simple. its not the mortgage defaults at all. maybe is that instead of the 80% of Americans that still have jobs but had gone into a bunker expecting a complete disaster, are starting to peek out of their bunkers? while their incomes have been collapsing for a very long time, and have continued that nose dive, they can buy some but not luxuries, and they may have bought some cars as they as pent up demand or need has driven some of that, and some of that is just comparing the collapse in auto sales for 2 years to slightly better times. they are still extremely concerned about their jobs though.

  43. Marshall says:

    Barry, you have this annoying habit of letting facts get in the way of a great story.

  44. Edward H says:

    I agree you can’t extrapolate anecdotes to the aggregate. But I disagree with your interpretation that there is no net addition to retail sales from strategic defaults. No one is saying that strategic defaults are DRIVING retail sales. They are just increasing them at the margin. How much, we don’t know yet but Zandi did a credible back of the envelop guess of 1% of GDP.

  45. Please explain what makes that # credible?

    He said 6 million people in arrears on their mortgages, and that is $8 billion dollars.

    Where he screwed up the math was that he seems to misunderstand that $8 billion dollars are liabilities — that is what is owed — not what is lying around in excess cash waiting to be spent. Just because the banks aren’t getting it doesnt mean the retailers are oinstead.

    Remember, most of these people are in arrears PRIMARILY DUE TO LOSS OF INCOME. 15 million unemployed/underemployed losing $48k per year is a huge drop.

    But the lack of paying the mortgage doesn’t make up for this . . .

  46. benesposito says:

    As i stated in the other comment, 1.1 million of those became arrears in the first month of 2010. That’s 1 in 6 of the total.

    Was there a sudden spike in unemployment in January? Did 1.1 million people come off benefits then?

    The bulk of them as come since q4 09, yet this is when unemployment was getting “less bad”. If you want make the case of people exhuasting their funds, savings, credit etc. Up until their first missed payment they had “just enough” to pay that payment. The first time they don’t make it, they likely were close. Presto. Spending money.


  47. ICHAN says:

    Agree that one “case study” doesn’t paint the whole picture but these folks that have given up on their homes are in fairly desperate situations. When it’s all over they are going to lose a lot, probably their life savings in the down payment so it would not surprise me that the “technique” of using a portion of the free rent to finance purchases of “hard assets” which they can take/sell etc sounds like a strategy that alot of folks would consider. It’s easier to get at a cash in a bank account then stuff. So while it’s not the majority, but it’s probably not insignificant either.

    I’ve been hearing stories from folks about the schemes happening in the Short Sale market… basically buyer and seller go through same broker. Usually not good as there’s a conflict of interest… but in the case of a short sale it’s actually in everyone’s interest…the broker gets double… the buyer gets a good price… the seller gets kicked back by the buyer and the broker so at least they walk away with some cash to move on and everyone wins… When I hear that stuff like this is commonplace the above seems totally plausible.

  48. seanTZ says:

    It would also help to know where(regionally) the increase/strength is coming from. Without access to current subscription/fee data, it’s hard to provide a quantitative rebuttal.

    I would be very suspicious if CA or the Southwest is a source of strength. California is ground zero for the debt moral hazard mentioned in many of the comments above…If CA is a lag on the numbers, then the increases would have more credibility.

  49. philipat says:

    I agree regarding Diana Olick, her work normally IS very good. And she frequently upsets Kudlow. WHich is good enough for me!!

  50. The Window Washer says:

    When the Fed Funds Flow got posted in the Think Tank a little while back my curiousity got to me and a did some post-it note math. The reduction in debt isn’t being cause by defaults, which is a popular thing to blurt out, people are paying down debt.

    This is the same lazy idea in a different form, things are turning slowly and the deleverage rollercoaster has begun. My lazy way of thinking of it is that credit cards are getting paid off and people are using more cash, or maybe just the AMEX instead of the Visa. How many people do you know who aren’t doing just that?

    Also everyone I know, parents, step parents, girlfriend and friends held off on purchases in 09 then have bought this year. Cars, TV’s, tractors, classic car repairs ec… Who hasn’t thought of getting a new TV in the last year? Prices have gone to nothing and now the problem is finding a wall big enough for your toy.
    One of myproperties the rent is $550 a month and three people in their 20′s share it, went to do a repair last weekend and one of them had a new TV that was as big as his bed. They don’t have any debt they live in a house I bought from fannie for 46k. Jobs in health care and tech support from home.

    Why doesn’t some lazy journalist make that the story of stoners leading us out of the recession?

    Lamonts money points are pretty interesting.

  51. Tomas says:

    Only 40% of the modified mortgages in the Making Home Affordable Program are because of a loss of income! The average participants monthly payment averages about 500 dollars less. Clearly we are rewarding fiscally irresponsible consumers and giving them a little more money each month, which is pushing up retail sales. You can bet that that money is being spent on unnecessary consumer items, just as it was on a too-big house.

    I think you are too quick to dismiss on this one Barry.

  52. andrewp111 says:

    If someone gives up on paying 3K/month for his deep underwater mc-mansion and still has the same income, he can buy a car for cash in 5-6 months.

    Most luxuries are probably bought by rich people whose stocks are back up to 2008 levels, or by those who did well in bonds during the meltdown.

    Some small concealable luxuries like jewlery could be purchased by defaulters who are going to go CH7 to escape deficiency judgements on their mortgages, and need assets they can hide.

  53. joemomni says:

    I hate to say it but I think she is on to something in maybe a big way. I am seeing it in Florida. Many people who did not save and put a down payment . Are living for free and spending the extra cash on jet skis and such.
    I think the self discipline that people learn by saving for a down payment is so important to their future success. the old system of 20% down and affordable payments was a great one on many levels.

    looks like we are losing many “old systems” i am sad to say.

  54. rjs0 says:

    hmm…all of the cars ive ever bought have been used, under $5000; all my furniture is used, free, out of the box, or homemade except for bedding, and one of my fridges is used…dont those purchases count in retail sales stats?

  55. napster says:

    Thank you Lamont and Barry. I appreciate your efforts to make sense of the madness.

  56. nancefinance says:

    David Rosenberg wonders if Canadians aren’t helping to power retail sales in the U.S. Here’s what he had to say in his April 15 note:

    You read the Beige Book and you really get an impression that it is Canadian
    shoppers that are underpinning the retail sales revival stateside. Read these
    “New York and Minneapolis noted that shopping by Canadians was strong at
    businesses near the border”.
    “One large mall in the Buffalo area also notes strong spending by Canadian
    “Recent retail activity in Green Falls, Mont., has picked up modestly; Canadian
    traffic was solid”.
    This also may say something about the degree to which the Canadian dollar is
    overvalued right about now.”

    Also: I would add as previous commenters noted that an early Easter and heavy snowfall in February may have shifted spending into March.

  57. [...] spending figures, with well-known financial commentator Barry Ritholtz over at the Big Picture blog taking me to task for suggesting that deadbeat borrowers were having any impact at all. Ritholtz called the idea “ass [...]

  58. bignasty says:

    First time post here, looks like a cool blog to check out…

    I heard about this blog from another website & this particular entry is intriguing. I happen to straddle both sides of the fence with regard to this topic. I work full time as an REO Agent for a large real estate broker in the southeastern USA. The metro area in which I’m located is one of the top 18 in the country for population and has been hit pretty hard with the economic downturn. In 2009 alone, I sold 108 residential REO properties at price ranges from $1,000 up to $460,000. I’ve seen a lot of unusual situations arise from this “housing crisis” but won’t try to elaborate here. On the flip side, I also own a second business that wholesales new household goods, namely mattresses, to the general public during my nights & weekends. This business has done well over the last 6 months, bringing in a net monthly profit of $1,800 to $6,400.

    I say this because I’m seeing both the housing default/foreclosure situation and one facet of retail spending first-hand, at the street level. I think Barry should give a little more credence to the argument being posited by Mr. Jackson & other economists that the monthly mortgage nut isn’t being “saved” but is instead being spent on small luxuries in the retail world. Daily I am finding occupants who are in mortgage default in some cases 8-12+ in payments continue to reside in their property. These folks in 95% of the cases don’t have any intention of leaving until they get the final sheriff’s notice of their impending eviction. Many of the foreclosing banks will offer anywhere from $1,000-$3,000 in “cash for keys” to the occupants if they’ll leave by a pre-determined date so that the bank doesn’t have to go through with a full eviction and the response we usually receive is “we’re not interested.” It’s easier to live for free than to take a nice check BUT have to find a new residence and have to pay the monthly nut.

    I also think Barry needs to give more consideration to the “retail revival” to:
    1) income tax refunds–75% of my furniture sales have come from people spending their refund;
    2) first time home buyer tax credit–got to spend some money to furnish your new home;
    3) numerous car incentives–those who didn’t take advantage of cash for clunkers bought new using the big promos of late;

    Just my $.02. Thanks for a great blog. Looking forward to spending some more time here.

  59. catherine says:

    I think you are totally missing the picture with that 1% number of foreclosures (but that is a lot of people pouring money into the market you have to agree)

    but there are other reasons for the spending THAT ARE ALL ASSOCIATED WITH MORTGAGES.

    1. the people that were fired cash out their 401s and blow the money cause they have given up.

    2. 1.3 million households have disappeared and that is just the beginning (I have written a lot about this – it is how people survive – AND IT IS JUST STARTING) AND SO THEY HAVE TONS MORE MONEY (FOR A SHORT WHILE MIND YOU) TO BLOW



    5. many people are getting unemployment now for 2 years AND WORKING UNDER THE TABLE SO THEY ARE REALLY MAKING MORE THAN THEY DID.


    7. because of money divorce and separations are up AND THE SPOUSE THAT TAKES HALF AND LEAVES HAS MONEY TO BLOW ON THEIR OWN FINALLY…….




  60. [...] the idea that strategic mortgage defaults are goosing retail sales. We looked at this last week in Are Defaults Really Driving Retail Spending? as an idea driven mostly by anecdote (some quite ugly), but unsupported by any hard [...]