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Are Mortgage Deadbeats Juicing Up the Economic Numbers?


Simple math is all that's needed to prove delinquent mortgage holders aren't causing an economic growth spurt.

As if on cue, perma-bears reacted energetically to my article yesterday entitled US Perma-Bears Running Out of Excuses to offer ever more creative excuses for why retail sales rose so strongly in March of 2010.

One of the favorite excuses offered -- and one that's being widely circulated among perma-bears all over the web -- is that people that are defaulting on their mortgages are taking that "saved" money and going on a spending spree. It's argued that "deadbeat shopping" is driving up the retail sales numbers and that as such, the growth in retail sales isn't sustainable.

Some very smart people seem to have become impressed with this argument. So let us take a serious look at the claim.

Deadbeat Math

Let us first assume that the median monthly mortgage payment of deadbeat mortgage holders is $1,200 per month.

It's quite obvious that not all of this $1,200 will be available for spending. First, many are defaulting precisely because they're unemployed and have no income. Therefore, in those cases, none of the $1,200 will be spent. Second, many will either save much of that money for precautionary reasons or use it to pay down other debts such as credit cards.

What about the effect on retail sales caused by vast numbers of people that are cutting down drastically on their spending to be able to meet their obligations? What about all of the people that abandon their mortgage only to go and rent somewhere else? Never mind. None of this helps the bear case, so let us just ignore these inconvenient commonsensical facts.

Let us be extremely generous toward this "deadbeat shopping" hypothesis and assume that 60% of the value of defaulted mortgages is effectively applied by deadbeats towards consumption (an absurdly high number). This means that spending by deadbeats, not related to their mortgage, rises by $720 per month.

Multiply that by the 7.9 million delinquent mortgages and you get a total figure of $5.7 billion per month in deadbeat consumption money.

Now, let us assume that mortgage delinquency is rising at a ridiculously high rate of 4% per month. This means that total consumption from deadbeats is rising by about $228 million per month.

This is peanuts, folks. This represents about 0.026% of monthly Personal Consumption Expenditures (PCE) which are averaging about $863 billion per month. This doesn't even amount to a rounding error in terms of PCE and/or GDP growth.

Let's take a look at retail sales, which totaled $363.2 billion in March of 2010. If every single penny of the "deadbeat money" were spent on retail items (highly unlikely) it would still have contributed less than 0.07% to the 1.6% MoM growth rate of retail sales in March. Again, this amounts to a rounding error.

In sum, "deadbeat mortgage shopping" is an insignificant factor in the current economic recovery. Indeed, the margin of statistical estimation error for the PCE and retail sales numbers is of a significantly greater magnitude than the deadbeat mortgage factor. Deadbeat shopping is quite simply, a non-issue.


The idea that deadbeat mortgage holders are juicing up the economic numbers is one of the most ridiculous urban legends I've seen in a while. It makes for good grist, but it's simply a mathematical impossibility. There are many other reasons I could cite to prove how ridiculous the claim is, but the simple arithmetic proof provided above suffices.

This example is interesting to contemplate because it provides a very clear proof of the fact that people that are predisposed to certain beliefs -- in this case the belief by perma-bears that the economy isn't recovering and cannot recover -- will tend to believe almost anything that seems to support their point of view.

Another thing that's very interesting to ponder is that many of the folks that have fallen for this notion that deadbeat mortgage money is juicing up the economy like to fancy themselves as "independent thinkers" that don't believe in everything that the government statistical agencies publish. Yet the skepticism of many of these folks seems to stop right there. For it seems that these same folks will believe almost anything published on the web by bush league perma-bear pamphleteers and rumor-mongers. Exhibit A: The fanciful stories about deadbeat mortgage holders going on shopping sprees and temporarily causing a growth spurt in the US economy.

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