Wednesday, November 25, 2009

America's Stealth Stimulus Plan: Allowing its Home "Owners" to be Deadbeats

I was looking through the avalanche of economic data today, and it struck me how once again Americans are spending well over their income growth.  I thought to myself, well part of this are all the programs where the American government is subsidizing consumption.  In fact we're at the point one of every six dollars of consumption are from goverment, meaning you only need to "earn" 5/6ths of your spending power. [Jun 5, 2009: 1 in 6 Dollars of Income Now Via Government; Highest Since 1929]

But something else hit me... I've written about this in the past in conceptual terms but never put it into an analysis.  The true stealth stimulus plan in America is letting so many of its people live "rent free" as they sit in defaulted homes not making a mortgage payment.  This "cost savings" allows them to shop and spend, and otherwise support the American consumption society.  While it is hard to keep track of all the stimuli, try to think back to the Bush spring 2008 stimulus.  (that was about 37 stimuli ago) That goosed GDP quite well for two quarters.  But we now have a quasi permanent stimulus plan that goes on quarter, after quarter, year after year.... and its equivalent to have a permanent Bush level stimulus (using VERY conservative figures). 

Let's look at this from a more analytical eye.

1) The number of households in America is approximately 111,000,000 (111 million)

The home ownership rate, after peaking near 70% (the long term trend was 65%ish but we've tried every trick in the book the past decade to get another 5% into the "ownership society), currently it sits under 68%.  I will use 67.5%

That means 111M x 67.5% = 75M households in America "own" a home.

2) We saw just last week that more homes in the US were in deliquency or foreclosure, than there are for sale - about 9.6% in delinquency and 4.5% in foreclosure.  So 14.1% of home "owners" are living "rent free" - i.e. freeing them from a home payment.  Of course some of these people are in dire circumstances so let's not be too flippant about it, but others have chosen to make a calculated decision to walk away from underwater homes and until the banks show up to take the house back they have no housing payment.

So of the 75M households in America owning a home, about 14% are not making a payment. 

That means 10.5M households in America are living in a shelter where they either can not, or choose not to make a mortgage payment.

3) Now comes the tricky part, trying to figure out the average note payment.  I truly have no idea so let's make an educated guess.  The median value of a home in America is roughly $170K, and the average loan to value is about 70%. 

About 1/3rd of American homes are owned free and clear of a mortgage meaning the other 2/3rds have notes to pay.  Obviously those who are not making payments fall into the 2/3rds category.  Hence if we exclude the 1/3rd of Americans who owe nothing on their mortgage, the remaining 2/3rds have a much higher loan to value than 70%.  Is it 80%? 90%? No idea... it really makes little difference in our analysis.*

On a $170K home owing 90% means a $153K mortgage, whereas owing 80% means a $136K mortgage.  Reasonable people would agree the average owed by the 2/3rds who have not paid off their note would be somewhere in that range. 

Next we have to back into some sort of monthly mortgage payment; just looking through some ammortization tables, and realizing some people have bad credit, some average, some good on a $145Kish type of median US mortgage the monthly payment is probably somewhere near $1200-$1300.   I am excluding property taxes from this analysis which is another cost that people are avoiding - which is why my numbers are going to be conservative.

So excluding property taxes let's say the average person's mortgage payment is $1250. 

Going back to point 2, 10.5M Americans are skipping out on their payments.  At a monthly payment of $1250 that is a monthly "stimulus" to the economy due to "not paying a mortgage" of $13.1 Billion

Annualized that is just under $160 Billion a year of "stimulus" to the US economy via deadbeats; i.e. the Bush 2008 rebate happening quarter after quarter, year after year.  Again, I contened the real number is higher than that as property taxes are not included.  If I increase the monthly payment "avoided" by $250 (to account for property taxes) we get very close to $200B of extra money flowing through the US economy that should be going to pay for a roof over one's head.

*note: if you disagree with my conclusion on the average LTV level, or average mortgage payment that is fine.  Simply plug in whatever you think the average mortgage payment is in America and multiply it by 10.5 million households for the monthly figure.  I don't think a $1250 mortgage payment is atypical in America, in fact I might be understating it.


Now obviously in a 6-24 month period it is not the same people who enjoy this stimulus.  Some finally are kicked out of their homes, while other new 30+, 90+, 120+ day late borrowers take their place.  So it's a "rolling" stimulus if you will, relatively stable in terms of absolute dollars but rolling from 1 household to another as they go through the stages of default.

With the changes in accounting rules earlier in 2009 that allow "mark to myth" rather than mark to market, there is little incentive for banks to foreclose quickly, so instead of the pre2007 timeline to kick people out of foreclosed homes there are many anecdotal stories of people living "rent free" for 14, 16 months (if not longer).  Plus of course all the mortgage modifications, many of which fall right back into default 6-12 months later... further kicking the can, and extending how long this stimulus can last (perhaps into 2012 if we really do "things right")

So on top of the "sacrifice our grandchildren's standard of living stimulus" (spent $1T+ of money to manipulate interest rates downward so people can refiannce at lower rates) we have a stimulus no one is talking about.... the Deadbeat Stimulus.  So as we smugly cheer how American seem to yet again be able to spend more than they earn, let's clap for our neighbors who once again have "figured out the system".    Those of out there paying their mortgage (like I do)... well, we're the suckers in the system.

Now if we could only figure out a similar scheme for the renters of America (the other 37.5% of households) we could really get this economy screaming upward into a rampant recovery.

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