It All Makes Sense

I've been somewhat perplexed by how well consumer spending has held up, at least on a relative basis, given that 1) "underemployment" is above 20 percent and the number of long-term employed is at a record; 2) income has not kept pace with consumption; and, 3) the housing industry is nowhere near a recovery (and the foreclosures just keep on coming).

No doubt the government has played an important role in underpinning demand, especially through its emergency unemployment benefits programs and certain other stimulus efforts. But that didn't seem to explain matters fully.

Then I read the following post, "How Obama's 'Extend & Pretend' Mortgage Policy Explains The Apparent Disconnect Between Housing And The Consumer," at Business Insider's The Money Game (citing the excellent HousingWire blog) and, suddenly, it all made sense. The reason why no small number of Americans can afford to keep on spending is because they've got one less (big) bill to pay:

Our screens are filled with signals that the econom""y is recovering, and yet one area where there's no discernable improvement is housing. At best the bleeding has stopped. At worst there's plenty of room to fall.

This should stand in sharp contravention with news that the consumer is coming back, especially given the conventional wisdom that the home is (or was, anyway) the ultimate ATM, and that it was the so-called housing wealth effect that fueled years and years of American spending.

What gives?

Paul Jackson at HousingWire reckons that what we're seeing is the twisted result of Obama's mortgage schemes. Basically, scads of troubled Americans are living in their homes, waiting for some type of modification, not paying their mortgages, and thus freeing up an unusual amount to spend on stuff.

Jackson's logic:

• There are 7.4 million non-current loans in this country (a ton of folks living in a home but not paying at the moment for said home).
• Most Americans behind on their mortgages have now gone a year without paying a single bill.
• As we know, Americans are discontinuing their mortgage payments before other payments.

And he writes:

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

His conclusion: If half the 7.4 million homeowners are skipping a $1,000 monthly mortgage payment, that provides a potential $3.7 billion boost to consumer spending.

If Jackson's reasoning is correct, it suggests that critics of Obama's mortgage schemes are attacking them from a completely wrong angle.

It's not about, as the Santellis of the world might suggest, that it's some grave evil to be helping your neighbor who may or may not have gotten in over their head. It's more basic: the scheme is creating serious economic distortions, and are bound to unravel in ways that the market isn't properly anticipating.

For all the flaws of "crass Keynesianism" (see today's wankfest between The White House and Edmunds.com over cash-for-clunkers) characterized by charges of pulling demand forward is just as silly. The real economic violence comes from messing with economic signals, which appears to be what's going on here.

Jackson's point also jibes with what we heard when we talked to a Phoenix mortgage pro, who noted the violence to his market that mods were creating.

Until these really filter through the system, these, mortgage mods not only make the housing market suspect, but obviously other areas of the economy as well.

Comments

[matt wilbert]

Since monthly consumer spending is around $700 billion, 3.7 billion doesn't seem very significant.

[Kevin V. Lagorio]

Lest we forget people are getting their tax refunds and buying the necessities of life food, clothing, a couple of luxuries, and other necessities from their increased tax refunds as well. The increase refunds are because they have lower income and qualify for more credits. These refunds will be spent soon leading to lower consumer spending as things unravel further. This final unraveling will happen after June 2010. It is like the last supper before the big final kaboom. Remember the Mayan's were right, it is the big world wide financial collapse that culminates in 2012 and not the ultimate end of the world.

[Do You Want A Better Future?]

yes I agree with Kevin

I am sick of these liers telling us that they had no clue this would happen. We have been scammed people...by the biggest crooks out there. Sitting behind desks, and telling the media what to say and how to break the news. What a con Job.

The mayans come across as doomsters, but they knew it is just a cleansing out of all systems, mental, physical, spiritual and especially financial. Get and cleanse the system before they start their NWO plans...god forbid. Time To wake up to ourselves i think>>???

[Steven Kass]

I agree with Matt: "Since monthly consumer spending is around $700 billion, 3.7 billion doesn't seem very significant."

Perhaps the stock market rally just entice households who can afford it to spend more. The "wealth effect".

[alanhaft]

I agree with Kevin:
.... we forget people are getting their tax refunds and buying the necessities of life food, clothing, a couple of luxuries, and other necessities from their increased tax refunds as well. The increase refunds are because they have lower income and qualify for more credits....

I believe people will not buy as much as they did 2 years ago for a long long time......

[Mike Fuller]

Walking around San Francisco yesterday, without trying, I saw well over a dozen stores going out of business,numerous vacant office floors, and a few chains closing branch stores. Six years ago, when I wanted to move my company to San Francisco, there was no affordable office space.
Most of the stores closing are small, true, so individually they do not have much impact.
Collectively, they are the canary in the coal mine.

[NowWhat]

Depends on where you live I suppose....It is booming on the east coast but I do not see any jobs however Unemployment comp is higher here.

[TerraHertz]

The 'One World Government/New World Order' types have stated publicly many times that America must be destroyed before the NWO dreams can be realized. They've been working towards this for decades.

Those who believe the many, many increasingly untenable SNAFUs in American political, legal, economic and international affairs are entirely the result of incompetence and venality are sadly mistaken. What we are seeing, is the slow and deliberate stacking of dynamite around the foundations of the republic. What all of these 'disasters waiting to happen' have in common, is that each and every one has a 'pin'; a means by which some simple action can cause the final blow-up.

In the case of these 'frozen' defaulted mortgages, it's pretty obvious what will happen eventually. Many millions of home 'owners' who believed they could eventually come to an agreement with their lenders will very suddenly and all at once find themselves on the street. And that's the best case. The worst case is they'll find themselves being moved en mass to 'emergency government housing' aka The [Death] Camps.

At some point (probably this year, maybe as late as 2012), all these pins will be pulled at once. It's going to be spectacular. But no fun at all for those living it.

There's only one way for America to avoid this planned fate. Remove the head of the Creature. Immediately. The obvious "and by force if necessary" is redundant.

[Tim]

"It's going to be spectacular."

TerraHertz, I think your way out there with your causes and predictions. I think the Inner Party Members are really just incompetents and that's why we're in this mess. If what you predict really comes to fruition it really would be spectacular given the fact that the American people are armed to the teeth.