Are Defaults Really Driving Retail Spending?

Every now and again, I see an economic commentary that is so ass backwards, I am compelled to call it out. Today is one of those occasions.

The commentary in question comes from the usually astute Housing Wire. Paul Jackson makes the case that voluntary mortgage delinquencies are driving retail sales.

I disagree.


Our tale begins ~6 months ago, during the Q&A portion after a speech at a conference. I was asked this question by an attendee:  “How much of current retail sales are being driven by mortgage delinquencies and defaults?”

My short answer was “Very little.”

Given that we have lost 15 million jobs, that wages were static for a decade, and that the underemployment levels are near 17%, the progression of events from Employment to Housing to Retail are fairly obvious (to me at least).

From 2002-2007 or so, ultra-low rates combined with an abdication of lending standards to excite Real Estate. We had a credit bubble, and a housing boom. Combined, that brought 10-20 million marginal new buyers into the Housing market. These folks were renters or small condo owners who were not typically suburban housing buyers previously. Many were people who “reached” for homes they couldn’t afford. In addition to the low rates and lending standards collapse, these buyers utilized 105% LTV or piggybacks, had a very high debt service ratios, maintained unstable incomes and  often used I/O loans and even Neg Am mortgages.

There was zero margin for error. Then the trap door opened.

In my Q&A session, I described timeline of the credit bubble bursting and the housing boom busting. The sequence is fairly straightforward:

1. Home prices fell 33% (peak to trough)

2. Recession begins

3. Unemployment ~doubled to 10% as 15 million people lost their jobs. Under-employment was rampant.

4. The Real Estate market collapses. 5 million foreclosures so far, approximately 7 million people more than 30 days delinquent on mortgages.

5. About 4 years after real estate topped out, 2 1/2 years after the stock market peaked, 2 years after the recession began, and one year after the bailouts occurred, the economy has begun to shows signs of life.

That is the chronology.

For the family that is in a home they cannot afford, the standard chronology is like this: Someone loses a job, or has their hours cut back. As the family’s income comes down, they spend on necessities: Food, gasoline, water. People are living on their credit cards, so that has to be paid. Other non-necessities get postponed (Student loans? Ha!) Eventually, the income reduction leads to a place where its food or mortgage.

The mortgage loses.


What do we know about Retail Sales? They have gained strength for 7 consecutive months. There gains have been concentrated in a few areas:

• Luxury sales rose 22.7%
• Furniture sales rose 13.8%
• Appliance sales rose 6.9%
• Auto sales gained 24% from year ago levels

Those people voluntarily not paying their mortgages are not buying luxury goods, for the simple reason they cannot afford them. The people behind on their mortgages in these days of tight credit are not qualifying for car leases or loans. And if you plan on abandoning a house in 6 months to a year, are you really buying appliances and furniture?

I think not.


On to the post in question.

Paul Jackson, the Editor-in-Chief at Housing Wire who posted a train wreck of an anecdote as a substitute for actual analysis. His post, ‘For Consumers, Time to Shop (Until the Mortgage Drops)” used a quote from Bill at Calculated Risk.

Jackson took the following — he called it a “case study” as the typical ‘HAMPlicant.’ They had an $1,880 monthly payment on their mortgage they’d defaulted on, yet their bank statements for the past 30 days included the following expenses:

• visits to the tanning salon
• visits to the nail spa
• some kind of gourmet produce market
• various liquor stores
• A DirecTV bill that involved some serious premium programming or pay-per-view events
• Over $1,700 in retail purchases, including: Best Buy, Baby Gap, Brookstone, Old Navy, Bed, Bath & Beyond, Home Depot, Macy’s, Pac Sun, Urban Behavior, Sears, Staples, and Footlocker

No one will dispute that this person is financially irresponsible, shows a “wanton disregard for minimizing spending”  and is not worthy of a mortgage mod. If you want to call them an idiot, I won’t argue.

However, one person is neither a trend nor proof of conclusion.

I have no problem with occasionally dropping an anecdote to add some color to a dry analysis. However, to take an outrageous example and draw a conclusion that its the norm is simply a recipe for getting the big picture wrong.

And I will even grant you that hundreds, maybe thousands of people who are behind on their mortgages are spending irresponsibly. Perhaps tens of thousands are. But there are over 7 million late mortgage payers, and 15 million people under or unemployed. That works out to be less than 1% of the delinquent homeowners. I’d like to see data

I wanted to double check the sourcing, so I tagged Bill at Calculated Risk last night. He confirmed the guest poster —Shnaps — was a mortgage industry insider. He also confirmed that he and Shnaps had discussed this individual. Shnaps stated that based on all of the data he reviews professionally and mortgage mod applications he processes, our tanned and manicured applicant was the exception, not the rule.

Jackson (apparently) never took bothered to ask. [UPDATE: Paul emailed me he did] Instead, he took an extreme example and drew a false conclusion from it. Unless he wants the usually excellent Housing Wire to become just another purveyor of Recession P0rn, he needs to consider doing actual research.

A few of the usual brain dead media suspects picked up his post as proof of some talking point or another. Merely repeating other people’s weak ass comments isn’t news — its somewhere between

Disappointingly, Diana Olick of CNBC also got drawn into the silliness. her work is more often than not excellent. Not this time, omitting both in depth research into retail sales and analysis of the actual data.

She should know better.


HAMP applicants tanned and juiced
CalculatedRisk, 3/23/2010

For Consumers, Time to Shop (Until the Mortgage Drops)
Housing Wire, April 5th, 2010

Mortgage Defaults May Be Driving Consumer Spending
Diana Olick
CNBC 12 Apr 2010

Mortgage Defaults Drive Consumer Spending: Experts Weigh In
Diana Olick
CNBC 12 Apr 2010, 14 Apr 2010

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