Zombie Idea: Defaulters’ Retail Spending Spree ?

In April 2010, we discussed the false meme that defaulting homeowners were about to cause a surge in retail spending (Are Defaults Really Driving Retail Spending?). That blessedly data free idea turned out to be wrong. But as the backers of Supply-Side economics will tell you, its hard to keep a bad idea down. Thus, the same Defaulter/Retail spending theme has once again resurrected.

How did this pop up again? A wild-assed JPM estimate that defaulters had $50B in additional spending dollars led to a lame Bloomberg article on ‘Squatter Rent’ boosting spending; James Cramer mentioned it in passing, and from there, it spread. (Global Macro Monitor brought it to my attention).

Didn’t we see this movie some time last year?

Let’s take another crack at this, beginning with our two-handed economist: On the one hand, there are some 6.4 million mortgage holders behind on their mortgage — some are paying nothing, some are only a month behind and trying to catch up, some are in default. (I expect this to turn into another million foreclosures in 2011).

On the other hand, more than 15 million people are out of work, with little or no income.

Not paying the mortgage when you have no income does not suggest any sort of shopping spree — other than essentials like food, gas, auto insurance, electricity, etc. (Better hope no one in the family needs health care).

In terms of stimulus, that is baseline spending that will not rev up the economy anytime soon.

The key issue is that there is less income, the default means less spending (not more). The banks are the ones who are not receiving the cash, and that has actual ramifications. Call it a variant of the broken window fallacy: The monies not spent paying the Mortgage means banks have that much less to loan out. Most defaulters’ overall spending is down, not up; When total net spending slides, that is hardly stimulative. And, the lack of mortgage payments to banks ends up reducing their total capital, and ultimately, that will pressure lending and investment downwards.

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What started this entire debate last year was an amusing March 23 2010 post at Calculated Risk (HAMP applicants tanned and juiced) of an attempted mortgage mod by some free spending, nail salon loving bimbo; Paul Jackson extrapolated that on April 5 2010 to the whole economy (For Consumers, Time to Shop Until the Mortgage Drops); From there, it got picked up by CNBC’s Diana Olick (Mortgage Defaults May Be Driving Consumer Spending). It was like a bad game of telephone.

One anecdote, zero data.

No doubt, not paying your mortgage frees up cash — assuming you have any. But we have no hard data on the amounts. JPM made a seat of the pants $50B estimate, but thats all it was.

What data we do have on this are retail sales numbers — and they are a weird mix of high Gasoline sales (price increases), cheaper low end stores (Dollar stores, WalMart) and luxe goods (Rolex, BMW, Tiffanys).

Reconcile that retail sales data. High end is doing well, low end is doing well.

What would help add weight to the claim of Defaulters driving retail spending? Maybe if the stores in the middle — above Target and Kohls, below Nordstrom or Bloomingdales — stopped struggling. That might show that people are no longer retail slumming, and that folks other than the wealthy are splurging. The average American family’s balance sheet (in default or not) makes this less likely.

One run in this analysis are store specific issues that prevent us from drawing broader conclusions based on how some retailers are doing. Home Depot and Lowes are mired in the Housing mess; Sears is an Edddie Lambert induced disaster; Lord & Taylor or Macy’s might be a good tell — assuming they have no issues unique to them (absorbing a Merger, excess debt, etc.)

The bottom line remains that the money not paid to banks for mortgages ultimately hurts something else somewhere elsewhere eventually.  Even if you can find  data showing defaulter shopping sprees driving retail — and so far, there is nothing but anecdotes — there is a price to be paid for that down the road with reduced bank lending and investments.

Previously:
Are Defaults Really Driving Retail Spending? (April 16, 2010)

Mortgage Defaults and Retail Sales

See also:
‘Squatter Rent’ May Boost Spending as Mortgage Holders Bail Bloomberg, (May 6, 2011)

Cramer’s Eureka Moment Mad Money Recap (May 23, 2011)

The New Economic Stimulus: Default on Your Mortgage? Global Macro Monitor (May 24, 2011)