I’ve talked in the past about some of the approaches to rescuing the housing market and providing economic stimulus, such as the Treasury Department lowering mortgage interest rates, the California Foreclosure Prevention Act, the Countrywide settlement, and the Housing and Economic Recovery Act of 2008.
Despite all of these measures we remain in housing limbo, with millions of homeowners underwater on their mortgages and unable, or unwilling to make their payments; yet with few being foreclosed, as lenders and the government desperately search for alternatives. The reality is that we will likely remain in limbo until we as a society develop the political will to either move ahead on foreclosures, or bail out homeowners.
However, one effect of this housing limbo is the free rent we’re effectively giving to those homeowners, and the contribution this free rent provides to the local economy.
When homeowners quit paying $1500 per month on their mortgage, that cash is available for other parts of the family budget. I’ve purchased 150+ foreclosures, and I can’t remember a single homeowner that wasn’t broke when it came time to move. Rather than saving, they’re going out to dinner, subscribing to sports packages on TV, and buying iPhones or netbooks. Many of those purchases would have to be delayed, or foregone altogether, if they were still paying their mortgage.
By allowing banks to stall on foreclosures and keep non-paying assets on their books, we’ve enabled a redirection of resources that provides a short-term boost to the local economy, a stealth stimulus package. Whereas paying that money to the lender through mortgage payments would probably take it out of state, and maybe even overseas to China; shopping locally with that same money keeps it working in the local economy, and benefiting local businesses.
In addition, local governments are benefiting from increased sales tax revenues. Some may say that this gain is offset by the loss of property taxes, since people who don’t pay their mortgage also quit paying their property taxes. But property taxes will eventually be paid, with accrued interest on the next title transfer. Thus there is no loss of property tax revenue but rather a simple delay in payment.
With rising unemployment, this (perhaps unintended) stealth stimulus couldn’t come at a better time for local economies. When I go out to dinner I look around and wonder—how many folks around me are out tonight thanks to a delayed foreclosure, and no mortgage payments.
This is a joke, right? You actually admire the fact someone doesn’t meet contractual obligations on a loan but instead buys stupid gadget crap (made in China) and goes out to eat crappy food at a chain restaurant?
Admire? What here says that? I’m not the judgmental type… I’ll leave that to you.
I’m simply pointing out a reality. One that I think has interesting implications depending on how you personally think things play out from here. For example if you believe (which I don’t) that there will be a wave of foreclosures that forces people to start paying for housing again… how might that impact unemployment?
There are cities, countries that following that same logic. And those cities and countries are poor. Take for example Detroit, there are plenty of abandon buildings, there are people who buys sneakers, alcohol, etc instead of paying for investments. A lot of African nations ask for there loans to be forgiven. They stay in perpetual poverty.
Why you ask. Because, people, cities and countries that don’t practice finance discipline end up poor. Banks will stop lending people who don’t pay loans money. Moral hazard is the main reason why countries fail.
The best way out of this housing crisis is to let people fail. Let banks fail. By letting failure happen, people will learn and not make the same mistake again.
America has a lot of room to grow, I don’t buy that we will be in a great depression.
Great points Joe, but I see no signs that we are headed that direction anytime soon. Too big to fail, extend and pretend, and printing our way out seems to be the course du jour.
How do we find the political will to let people (and companies) fail?
Eventually we will have no choice but to let companies and people fail. Other countries will find an alternative to park there money forcing the US to raise interest rates to attract investors.
America is far ahead of the game than China and India, however, they are closing the gap fast. More money will start flowing that way forcing the US to compete.
Interesting…..
I had a thought like this a while back but it was related to the rise in personal savings rates seen in the States. I don’t know if the math adds up or not, but I figured some people stoppped paying their mortgage and have started saving for a rainy day.
Gerald, One important thing to keep in mind about the way they measure personal savings rate — debt deleveraging is considered “savings”. So as I understand it the much ballyhooed rise in personal savings actually has nothing to do with people putting money in bank accounts.
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