The economy, not just in the U.S. but around the world, is pretty much in the toilet. While I haven’t kept up with unemployment statistics in the EU, it’s not a stretch to imagine that people are having trouble paying their bills across the continent and that job prospects for folks who have been laid off are mighty slim right about now. What people in the U.S. may not have in common with our European counterparts is the results of the stupidity that was the housing bubble and the rampant speculation that went with it.
Two years into The Great Recession, many folks, even many who still have full-time, full-pay jobs, find themselves upside down on their mortgages. Also referred to as being “underwater,” being upside down on your mortgage means, roughly, owing more than your house is worth on the open market whether that value is determined by comparable sales or by tax assessment. The most immediate negative consequence of being upside down on your mortgage is that you can’t sell your house without having to pay the bank a ton of money you haven’t recouped in the sale of your house. The only morally upright option you have is to stay in your house and continue to make payments. This course of action is according to one LA Times reporter actually detrimental to the health of America’s economy.
This reporter’s thesis is that “…with home prices stagnant in much of the country, payments on mortgages that are underwater could absorb billions of dollars that might be used for other forms of consumer spending — a drag on family finances, the housing market and the overall economy.”1 On its face, this seems logical: Money spent on mortgage payments is money that can’t be spent on consumer goods. But let’s unpack this and find out what’s really going on.
This thesis, that paying on debts you owe, is detrimental to the economy is predicated on the idea that the housing market won’t recover to it’s former levels. This likely true, and it should be true. The housing price bubble was built on a lot of falsehoods. Consider the article’s expanded rationale:
Theoretically, the Hineses could walk away — stop making the mortgage payments that consume a big part of their income. But defaulting would ruin their credit and have other negative consequences. So, [Mrs. Hines said], they’ll keep paying and hoping for the best.
Unhappily for the rest of the country, that’s not the end of the problem: The Hineses’ financial bind will ripple throughout their community and the larger economy.
The real estate market depends on such homeowners being able to sell and move up; without them the trade-up market can’t grow.
Meantime, the Hineses will keep delaying that new roof, depriving a local roofer of business. They’re unlikely to redecorate or upgrade the kitchen either, as millions of families were doing before the recession — more potential losses for local businesses, not to mention the car dealers, clothing and consumer electronics stores and manufacturers of the products that the Hineses won’t buy.
Weighed down by the huge debt on their house, they also will be a lot more cautious about how they use credit cards. Big family getaways in the summer? Forget it, Hines said.
Multiply such sentiments by millions across the country and that translates into lackluster private spending, which accounts for 70% of the American economy.
First, the real estate market doesn’t depend on them being able to sell, it depends on others being able to buy. I know that seems like hair splitting but the willingness to sell doesn’t automatically translate into interested, capable buyers even in the best of markets. However, in a market where jobs are insecure there are no capable buyers.
Second, this larger, expanded rationale ignores two basic facts about a lot of the upside down mortgages in the country: 1) the majority of the people in upside down mortgages chose the dwellings they chose for quality of life reasons (proximity to a job or desired recreation, schools or other elements that benefit children) that have nothing to do with their ability to resell their house at a higher price than they paid, and 2) buying a house you don’t intend to die in is always placing a bet that you’ll be able to sell the house at a profit.
Theoretically, those folks who bought for those quality of life reasons still have all the same reasons for being in that dwelling. And the fact that you made a bet (that housing prices would continue to go up) and lost does not give you license to ignore your financial obligations.
The idea that it’s OK, or even the vaguely acceptable that the reporter seems to make it out to be by tossing off the ramifications with a single sentence, to walk away from the bet you placed in the housing market is a little bit like saying that if you took a cash advance from your credit card to play roulette in Vegas, started winning, took a line of credit, kept playing and lost both your winnings and the line of credit and you now owe the house ten grand that it’s OK to put a $300 dinner on your room tab.
Finally, big family getaways don’t make for economy boosting spending. The Stewart/Colbert “Rally to Restore Sanity and/or Keep Fear Alive” on Saturday reportedly drew a crowd of 215,000 people many of whom hung out in town afterward spending money in DC’s restaurants and bars. All of that is nice, but one really good weekend, or even 50,000 families taking big getaways, isn’t going to save an establishment that is working on month 22 of less monthly income than they need to pay staff, suppliers, or the rent. Consistent, mid to low level spending – $100 a month at Amazon.com; two new pairs of sneakers instead of one at the start of the summer; new winter coats instead of hand-me-downs; that iTunes account that is used for more than subscribing to podcasts – is what the economy needs not short, large, and unreliable infusions of cash.
It still frightens the hell out of me that such a huge portion of our economy is based on us buying more stuff (stuff is so hard on the planet, after all). Then again, it also frightens me that the big brains that are supposedly running the economy didn’t grasp the fact that they measure economic health with housing starts and that the biggest thing they could have done two years ago to help us was bulldoze about a million vacant properties. After all, who needs new houses if there are existing houses to buy.
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