The Reprioritization of Consumer Debt
By Peter Atwater Nov 24, 2009 10:35 am
We're robbing Peter to pay Paul -- straying far from a suatinable recovery.
Recent data no longer support this.
As most Minyans know well, mortgage delinquencies and defaults across all categories of borrowers continue to reach new heights. At the same time, though, the credit card industry is reporting that delinquencies and charge-offs have stabilized.
This isn’t normal -- at least from a historical perspective. (Traditionally mortgage delinquencies peak prior to credit cards).
This morning’s Wall Street Journal suggests that “moral contagion” may be playing some part in this behavioral change. (Financially distressed and/or underwater homeowners are suspending mortgage payments in anticipation of being offered restructured terms.) And I suspect that increasingly a significant amount is pure necessity: Families must eat.
I’ll leave it others to root out all of the causes of the change, but the result is clear: People aren’t paying their mortgages at a time when they’re paying their credit card bills.
The questions this raises, however, are disturbing.
For example, in thinking about our 2009 economic recovery, how much GDP growth over the past nine months was really a function of the reallocation of mortgage payments to consumer spending?
And looking ahead to 2010, what happens to the economy when consumers have fully exhausted the cash flow “windfall” of free, albeit temporary, housing?
Further, what does all of this say about the future of home prices, as well as the ultimate cost to the government (as the backstop for Fannie Mae (FNM), Freddie Mac (FRE), the FHA, and the Federal Home Loan Bank System)?
And finally, looking even longer term, what does this mean for future mortgage rates in America if mortgage debt is the last, rather than the first bill paid?
I can’t underestimate the importance of this issue. It cuts across America socially, economically, and politically. If, as the data suggest, millions of Americans have stopped paying their mortgages to put food on the table and gas in their car, the underpinning of our economy is at great risk.
The reprioritization of payments doesn’t equal a sustainable recovery.
Position in SPY options, SRS and JPM debt obligations
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Reply
2009-11-24 11:17:48
good questions...
I liked the way the writer just stated the facts and asked the basic questions that bug everyone in this market. Houses are NOT like stocks. Taking losses on houses affects everyone really. Who can blame them for not paying the outrageous terms they "agreed" to before. It luckily is a two way street. I cannot condone breaking a contract like a mortgage, but the foul play lenders managed to get away with will now be paid for...
Bottom line: you either pay out the nose or bleed from it...
Bottom line: you either pay out the nose or bleed from it...
2009-11-24 12:25:02
buying is the new renting
Traditionally, like 40 years ago, mortgages were for 10 years, or 20 at the most, and because housing prices were cheaper and wages higher (in inflation-adjusted terms), first-time home buyers tended to be younger. So the prospect of actually paying off a mortgage seemed an attainable goal. But in our current economy, mortgages are for 30, 40, even 50 years and people delay buying homes longer. Add in constant refinancing, and a typical mortgage seems like a lifetime commitment. In other words, renting, with a little tax break thrown in. Any wonder that people who are upside-down feel that walking away is no big deal? They don't see themselves "owning" their homes in their lifetimes. Walk away, take the hit on the credit score, start over. It's what businesses do all the time.
2009-11-24 12:42:05
Rational Hosue Prices
One problem is that the price of housing became distorted due to the incentives of cheap money and often overlooked, the tax treatment of capital gains when selling a primary residence ($500K deduction etc).
To fix this it would help if both gains and losses from residential housing where treated like gains and losses from any other capital asset.
To fix this it would help if both gains and losses from residential housing where treated like gains and losses from any other capital asset.
2009-11-24 14:21:33
Important Distinction
This is how it is morphing then. Toddo is saying the "beast" is different, and you are saying this is what the new beast looks like.
This leaves the door open for massive defaults if the employment picture does not improve.
This leaves the door open for massive defaults if the employment picture does not improve.
2009-11-24 16:16:15
buying is the new renting
Today's younger, lower-to-upper middle classes are much more concerned about the convenience and flexibility of their plastic than their home, especially when they cannot discern an ongoing investment value given today's upheaval.
2009-11-24 20:26:07
buying is the new renting
Traditionally, there is no "investment" value of a home. Accounting standards reflect this: the only part of real estate that appreciates is the land under the house. A building depreciates as it requires constant maintenance to retain value.
From a personal finance viewpoint, the value of a owning a home is when it's paid off. It's much cheaper to pay taxes and maintenance only on a house then it's equivalent rental value. If people don't pay off their homes, in the end, they are just renting them very expensively.
From a personal finance viewpoint, the value of a owning a home is when it's paid off. It's much cheaper to pay taxes and maintenance only on a house then it's equivalent rental value. If people don't pay off their homes, in the end, they are just renting them very expensively.
2009-11-25 11:23:46
Re: Sign of the Times Buzz
How can I be outraged now?
The government backs this plan. We voted for them. Wall Street backs this plan. We own shares in them. The people back this plan, they get to stay in their house and continue to spend until the bank catches up to them. I would say that comparing a bailout of your home where the emotional ties are far greater than that of a car company are apples and oranges except if you live in Detroit.
After reading MV for over 2 years, our plan has also morphed as to what to do. As much as one can preach to enact change, people need to want to listen and change. And until you break those consumers (and I mean really break them financially) they will not understand the consequences of their actions and will continue to act in that manner.
So while I call "foul" on the proclamation that using the above sample as indicative that there is no "outrage", there is outrage. It also has been morphed and will be deferred until a later date.
What we need to be is diligent in protecting our assets using whatever instruments we can, and continue to act responsibly like we always have. Outrage will be saved for those that are not listening, and it also will be back end loaded just like the bar tab for this last round of asset inflation.
The government backs this plan. We voted for them. Wall Street backs this plan. We own shares in them. The people back this plan, they get to stay in their house and continue to spend until the bank catches up to them. I would say that comparing a bailout of your home where the emotional ties are far greater than that of a car company are apples and oranges except if you live in Detroit.
After reading MV for over 2 years, our plan has also morphed as to what to do. As much as one can preach to enact change, people need to want to listen and change. And until you break those consumers (and I mean really break them financially) they will not understand the consequences of their actions and will continue to act in that manner.
So while I call "foul" on the proclamation that using the above sample as indicative that there is no "outrage", there is outrage. It also has been morphed and will be deferred until a later date.
What we need to be is diligent in protecting our assets using whatever instruments we can, and continue to act responsibly like we always have. Outrage will be saved for those that are not listening, and it also will be back end loaded just like the bar tab for this last round of asset inflation.
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