What ever happened to the theme that Mortgage Defaults were driving consumer spending?
Forget the anecdotes, I am compelled to point out that defaults, foreclosures and walkaways are at record levels, and retail sales have fallen dramatically.
I am just asking . . .
Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data, ability to repeat discredited memes, and lack of respect for scientific knowledge. Also, be sure to create straw men and argue against things I have neither said nor even implied. Any irrelevancies you can mention will also be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.
"Overall household indebtedness is up from $7 trillion to almost $10 trillion since 2000. On this sum, we estimate, the American consumer has an annual interest bill of more than $500 billion; a sum, by the way, that vastly exceeds his current income growth." —Kurt Richebacher
Knowing that the vote over the weekend in Greece was really a referendum on Euro membership, a majority of the Greek Parliament said yes to staying. European Finance Ministers meet again on Wednesday to solidify the 2nd bailout package for Greece at the same time hopefully a deal is consummated between Greece and its creditors this week. The Greek 14.5b euro bond that matures on March 20th is up by 2 pts. The optimism that all will be completed and contained AGAIN to Greece has yields lower in Portugal, Spain and Italy. The iTraxx Financial Index is also narrower by...
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August 30th, 2010 at 9:24 am
Here is a look back on the chronology of meteorological events leading up to the Katrina Landfall. Eerily similar to Camille back in 1969.
http://sabolscience.blogspot.com
Scott Sabol
August 30th, 2010 at 9:26 am
Either…
1.) It was never real. The theory was driven by angry home owners who made it up to justify their anger toward people who cheated the system (defaulted) and got a way with it.
2.) It was real, but short lived (the “sugar buzz” effect).
3.) Many of the early defaulters are now renting thereby eliminating any extra spending cash.
4.) Personal Savings is the new black.
August 30th, 2010 at 9:26 am
No, THAT’S what’s driving the increase in the saving rate …
From a recent MISH post: “Email From “Morally Conflicted” One Year Later After Walking Away”
http://globaleconomicanalysis.blogspot.com/2010/08/email-from-morally-conflicted-one-year.html
August 30th, 2010 at 9:41 am
Maybe it died when people realized that consumer spending isn’t driving anywhere.
August 30th, 2010 at 9:42 am
Don’t forget the reverse causal argument that consumer spending in the face of unemployment is driving mortgage defaults.
I never really believed the defaults -> spending argument, but to the extent that it is plausible, it is almost certainly a temporary phenomenon, a last hurrah before a family arrives at total financial devastation.
August 30th, 2010 at 9:58 am
hahahahahaha … funny man
August 30th, 2010 at 10:00 am
I think it is out there, right alongside Dick Cheney’s “deficits don’t matter” meme.
August 30th, 2010 at 10:17 am
“What ever happened to the theme that Mortgage Defaults were driving consumer spending?”
For data disabled cheerleader posters:
Foreclosures in 2009 = 2.8 million
Estimated forclosures in 2010 >3 million
Average time between first missed payment and foreclosure > 15 months
Where did the money go?
August 30th, 2010 at 10:29 am
The more he thought about the money he was losing, the more it stressed him out. Finally, Ronzio enlisted the help of a firm called You Walk Away and did exactly that from the remaining $319,000 on his condo mortgage. When the bank foreclosed, he says he felt a sense of relief. He also had more cash. He and his fiancée took the kids to Disneyland. Ronzio, 31, gave himself a treat as well.
“I bought myself an iPad,” he says.
http://www.bloomberg.com/news/2010-07-29/americans-splurge-on-ipads-while-broke-in-new-abnormal-economy.html
August 30th, 2010 at 10:33 am
DeDude at 9:41 wins the internets today.
August 30th, 2010 at 10:34 am
Rather than rely on a single anecdotal piece of evidence, I am compelled to point out that defaults, foreclosures and walkaways are at record levels, and retail sales have fallen dramatically.
August 30th, 2010 at 10:39 am
Mortgage defaults where driving around the Hamptons this past weekend.
August 30th, 2010 at 10:42 am
My buddy bought a car before he trashed his credit by defaulting on his condo.
Nothing fancy, but he needed a car to get around and he knew his access to credit would be nil.
How’s that for driving consumer spending?
August 30th, 2010 at 10:59 am
I think this is the reason why the credit card companies aren’t screaming more about their defaults: because they aren’t seeing the percentages as high as the mortgage lenders. People MUST have transportation, food, and the ability to buy the latest I-whatever. Therefore, why pay for where we live when we can always find someone that will rent to us, provided we have income? But we MUST have a sweet ride and cool phone.
Thinking of re-fying myself right now. It makes sense, as I’m at 6.125 and the bank is offering 4.00 for 15, and I owe about 20 years currently. Waiting to see what closing costs look like on a $150,000 deal.
August 30th, 2010 at 11:03 am
@NoKidding 10:17
In addition to your noteworthy data points, add in the action that has been happening to consumer debt, which does not include mortgages. I suspect that one could look there to answer your question of “where did the money go?”
People paying down every debt that it is possible for them to do, leaving the impossible debts to default.
If they were spending it on bling, one would see a bump in retail sales, and that’s just not happening. Instead, the number of vacant storefronts is climbing and climbing … the contemporary meme it to preserve their ability to use credit cards at all costs.
And while a mortgage default would certainly impact a person’s ability to take out a new credit card, I suspect that so long as they are making the payments on their existing credit cards, the banks will happily take the 20%+ interest payments and not close their existing credit cards.
August 30th, 2010 at 11:05 am
I’ll bet that if we paid Zandi/Blinder enough ‘Cake’, they’d be willing to sign their Names to a Paper that, however tenuously, lays out the nexus between ‘Jingle Mail’ and *higher Consumer Spending..
just a hunch..
August 30th, 2010 at 11:10 am
I suspect that a lot of people are forgoing payment of their mortgages and living rent-free.They are ,however,paying minimums on credit cards.U can imagine how credit card defaults wii rise when they are finally foreclosed and have to pay rent.
August 30th, 2010 at 11:16 am
>> Forget the anecdotes, I am compelled to point out that defaults, foreclosures and walkaways are at record levels, and retail sales have fallen dramatically.
Barry, if I’m reading you correctly, you’re pointing out this divergence as evidence to discredit the prior hypothesis. I don’t see it that way. I just think there’s only “so much” that defaulters can do for retail sales (or the “economy”). Because (a) they only get to “default once” and (b) they eventually get kicked out and have to pay rent.
I never professed to know the timing of when we could expect this divergence. But, perhaps this is the time.
August 30th, 2010 at 11:28 am
When a homeowner defaults on a mortgage or continues to live in a foreclosed house or even a house that has been sold at a Sheriff’s sale, they do not continue to make payments… at least in this state.
If that person or family has income (and they may not, which is why they are in default) they will spend the money that they did not pay to the mortgage servicer. To that degree, it goes into the consumer spending totals. How much that contributes to total consumer spending may be a point of argument, but the fact that it does contribute is evident.
August 30th, 2010 at 11:29 am
I think most that default adopt a bunker mentality and do not rush out to spend. They will once the shock wears off.
August 30th, 2010 at 11:53 am
constantnormal,
I think wally hit my response to both your most recent note and our hosts.
The data says:
1) A big number of mortgages have ceased to be payed.
2) Nonpayment is creating spending money on the margin.
3) The money is beaing spent.
but…
4) consumer spending is down.
I don’t see a problem with that story. The forclosure wave has provided a boost to spending, but spending is down due to other stories in the economy. Wealth effect? Job security fears? Hours worked? UE benefits less than wages?
Apply the same standards to criticism of the ARRA. How could marginal jobs have been created when UE went up and hours worked went down? Obviously some other forces were larger.
August 30th, 2010 at 12:55 pm
People who have walked away from their mortgages may be spending money on things that they otherwise wouldn’t be able to, but I’m sure it’s not enough to effect the overall decline in consumer spending in any significant way.
August 30th, 2010 at 1:02 pm
Not sure who has said it was “driving” consumer retail sales but perhaps it was at one point A (as one one of many) contributing factor?
August 30th, 2010 at 1:05 pm
MERS is no longer a legal way to foreclose on houses according to courts around the country. A California court made its ruling in July. 63M homes use the MERS system. A decent chunk of those no longer have pay their mortgage unless the note can be produced by the lender. MERS just keeps track of who the lender supposedly is and was being used as a proxy by lenders to foreclose but a judge ruled in July that MERS was invalid and that the lender had to produce the note directly. Consumer spending numbers would be a lot worse imo if the people that haven’t been paying their mortgages actually did. It is legally easier to default on a home now and live rent free than it is to default on a credit card.
August 30th, 2010 at 1:49 pm
A lot of the defaults are also likely to be coming from people who’ve lost a job or are now underemployed and so don’t have the money to spend in the first place. Some are likely from all the “normal” bankruptcy tragedies from divorce and madical expenses where people now realize that rather than file for bankruptcy immediately, they can pay off those bills with the “savings” of not paying a mortgage payment on their overvalued house, and maybe avoid an actual bankruptcy.
August 30th, 2010 at 6:14 pm
This is nothing more than squatting, and has pernicious effects described here.
http://www.wallstreetexaminer.com/blogs/winter/?p=3073
August 30th, 2010 at 8:54 pm
Interesting, but as yourself have noted on many occasions, there is a difference between coincidence and correlation.
Personal income is flat and expectations are low so people are spending less and saving more. In your arguement, the folks being foreclosed still have to live somewhere and it is a reasonable deduction that they will rent. That would reduce spending on other items but would be a wash overall? Also, the way the Fed calculates GDP, this trend should help GDP growth?!! We have to wait and see wrt the final point but I’m not holding my breath.
August 30th, 2010 at 10:18 pm
I do know this in Austin Texas Convenience store business is down 30% compare to last year this time frame. 2009 was bad year. This business are run by the owner at the business Open to Close daily for 7 days a week. Even business owner in Korea Town in Austin are saying things are really bad out there. The convenience store owner that were running store with employee and not working actively at store have started working at the business again reducing the hours of employees.
August 30th, 2010 at 11:13 pm
Some other possibilities:
– Maybe people are starting to get scared… REALLY scared.
– Via TPC, even the rich are now getting gloomy: http://pragcap.com/the-super-rich-are-super-pessimistic
– The consumer spending trend in aggregate could be getting whacked by sharp cutbacks in other previously robust areas (boomers tightening up, upper class reining it in etc.)
– Gloomy housing and unemployment news could be reinforcing a “bunker mentality.” Note that not all that long ago, there was a decent case to be made for V-shaped recovery (even if the logic was spurious). But now, to quote The Stranger, things are once again looking darker than a black steer’s tookus on a moonless night…
August 31st, 2010 at 2:17 pm
Barry,
I thought you were smarter than this. Foreclosure is end of the rope for these people. Now they are paying rent somewhere. The previous 15 months when they were living rent free is when they had excess money. Not now, now they are paying rent, so they have less money. Is it so simple that it is confusing?