Sunday, May 15, 2011

Squatter's Rent/Stimulus

A J.P. Morgan Chase analyst estimates that the value of "squatter's rent" will total $50 billion in the U.S.  That's a significant sum, about 0.4% of total U.S. personal income.  (Note: Squatters rent refers to the value of free "rent" enjoyed by those living in homes in foreclosure or seriously delinquent on a mortgage.)

Last spring, I made a similar estimate for San Joaquin County although I called it "squatter stimulus."  At that time, I estimated the squatter stimulus was equal to roughly 3% of the County's personal income, based on the 20% of serious delinquency rate on San Joaquin County mortgages at the time, and the estimated rental value of a typical house in the foreclosure process. 

In a bit of good news, the serious delinquency rate in San Joaquin County has declined to 15% according to the lastest data I saw.  This suggests that the total of households leaving delinquency due to a completed foreclosure, short sale, or mortgage modification is greater than new delinquencies.  Before getting too excited about the decline in delinquencies, it is important to realize that a typical historic delinquency rates on mortgages is about 2% (and a lot more of these delinquent mortgages were successfully resolved without foreclosure since a lot of these owners had equity in the homes creating a strong incentive to sell or get current).  So we are likely past the peak, but there is still a long, long way to go.

Declining delinquencies also reduce the amount of squatter stimulus in the County, and I suspect it is now about 2% of personal income.  Obviously, squatter stimulus is not a sustainable or desirable basis for consumer spending, but it is a factor to note when considering how local consumer spending will evolve in the recovery.

From the San Francisco Chronicle on squatter's rent:
"Squatter's rent," or the increase to income from withheld mortgage payments, will be an estimated $50 billion this year, according to Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. The extra cash could represent a boost to spending that's equal to about half the estimated savings generated by cuts to payroll withholding in December's bipartisan tax plan.

"We've had a lot of government transfers to the household sector; this is a transfer from the business sector to households," Feroli said. "It's a shock absorber that has helped the consumer ride out the storm."

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