Monday, April 12, 2010

Foreclosures Provide Boost To Disposable Income

Tim Iacono discusses strategic defaults as a source of increased consumer spending as consumers are spending the money they would otherwise be using to pay a mortgage. He estimates that $1 billion per month could be freed up by individuals choosing not to pay their mortgage. See the following post from The Mess That Greenspan Made.

Zachary Scheidt filed this report at Seeking Alpha in which he wondered how much the wave of mortgage defaults has benefited consumer spending. That is, for those individuals who decide to stop paying their mortgage but stay in their house until someone comes and kicks them out, how big a boost is all that extra mortgage money giving personal consumption, the group that accounts for two-thirds of the U.S. economy.
But with all the headwinds, and with all the negative publicity… the consumer, it appears, is beginning to step up to the plate and once again spend us into recovery.

It’s been quite a mystery to me for some time now. Exactly where is all this pocket change coming from – especially considering the difficulties we are seeing in other areas (savings rates are once again headed lower, consumer credit hasn’t expanded by any material amount, and despite positive payroll headlines, the underlying report is full of holes).

It wasn’t until this past week when a colleague mentioned the term strategic default did I realize what was likely occurring. Many consumers are spending their mortgage payments! It’s beginning to make sense in the most disturbing way. As homeowners face staggering payments on houses that have negative equity, a large number are simply deciding not to pay their mortgage bill, resigned to the fact that eventually they will lose their house.

And what happens with the money that would have been sent to the lenders? Well, an increasing mentality of “eat drink and be merry – for tomorrow we’re evicted” has set in.
Yes, one of the many oddities about our current economic situation in the wake of the burst housing and credit market bubbles is that many people are making more and more decisions that, ten years ago, would have sounded ridiculous.

This subject was discussed here in The New Foreclosure Trend – Non-Foreclosures not long ago. A back-of-the-envelope calculation revealed the amount of mortgage money freed up to spend on other things is in the billions of dollars per quarter.

This article has been republished from Tim Iacono's blog, The Mess That Greenspan Made.

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