Tuesday, May 11, 2010

Are Mortgage Delinquencies an Economic Stimulus for the Valley?

With over 18% of mortgages in San Joaquin County over 90 days delinquent, it is safe to say there are a lot of people not making monthly payments for their housing right now. Mark Zandi of Economy.com compares this effect on a nationwide level to a mini-tax cut that is helping to support consumer spending.
All told, borrowers who aren't making mortgage payments are probably skipping roughly $100 billion annually, an amount equal to 1 percent of consumer spending, according to Mark Zandi, chief economist at Moody's Economy.com. Zandi likens the money to "a form of stimulus, a little tax cut."
Not all of that "tax cut" is being spent on iPads, vacations, and lattes. "Presumably these homeowners know they're going to have to start paying again" to live somewhere, says Zandi. He suggests that falling delinquencies on credit cards and auto loans may be a sign that homeowners are using mortgage money to pay down other debt.

Presumably, the effect is even larger in the Valley. Here are some very crude back of the envelope calculations using San Joaquin County as an example.

I estimate that there are at least 15,000 households in San Joaquin County in this category at the moment and it could be as high as 25,000. The average mortgage payment is a little over $2000 per month, so we are looking at $30-50 million per month in missed mortgage payments, let's call it $500 million per year. Total personal income in the county is about $20 billion per year, and disposable, after-tax income is probably around $15-16 billion. So, the skipped mortgage payments are equivalent to boosting local disposable income 3%.

The rental value of those housing units (what these households will probably pay on the other side of eventual foreclosure or loan modification) is probably about half the mortgage payments, let's call it $1000 per month. So one could argue that the end of the foreclosure crisis will drain $250 million per year out of local spendable income. Add it to the growing list of reasons it is going to be a long slow recovery.

Of course, if that rent is paid to local landlords that $250 million becomes income to someone else in town, but presumably income to a household with greater wealth and lower propensity to consume the extra income (and it may be servicing debt on their rental property too.)

I have no doubt this has helped cushion the recession locally, a lot of the local real estate losses are being endured by mortgage investors far, far away. As horrible as this recession has been in the Valley, it really could have been much worse. I am much less convinced that there will be a big drag on the recovery when more people in the Valley start paying for housing again, but it is something to ponder and debate.

One thing is for sure. The Valley Economy is not boring.

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