When you take on debt, you’re supposed to pay it off. That has generally been considered the good, responsible approach. But in light of the real estate market crash, and the relative ease of walking away from your mortgage, the argument can be made that it’s plain stupid to continue paying for an underwater mortgage, that by doing so you’re basically throwing money away. Irresponsible or not, in many situations it’s simply in one’s best interest to strategically default. But is there a case to be made that walking away would help the economy as a whole?
Sounds more than a little, um, crazy. But an LA Times story demonstrates how homeowners who diligently keep making payments on their underwater mortgages aren’t helping the country out of its economic doldrums. The Hineses, a family from California that bought a home in 2004 for $430K, that currently owes $415K on that home, serves as an example of how paying the mortgage actually hurts the economy. The home in question here is now worth under $250K. I know, ouch. The Hines family isn’t walking away (at least, not yet), but they’re in limbo: Unable to sell the home or buy another home, and hesitant to replace the roof or put any money into the home because that seems like throwing more good money after bad.
The story reads:
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.
There’s only so much Wall Street investing and government spending can do to heal (or further damage) the economy. More and more, it seems like it’s going to be up to the American consumer to get the economy back on track. We’re all expected to take one for the team, pretend the last couple of years didn’t happen, and spend money we don’t have, all for the good of the economy.
Consumers, stubborn creatures that they are, are hesitant to do so. Why? Their short-term memories aren’t quite as short as some would prefer. So the nation is in the middle of a staring contest, with consumers on one side and the real estate and job markets on the other. All which doesn’t bode well for the economy. The LA Times explains:
In prior downturns, the housing industry and consumer spending powered the economy back to strength. Home building not only created construction and finance jobs but also fueled manufacturing of glass and lumber, furniture and appliances, and a host of other goods and services.
This pattern isn’t being repeated now—largely because rampant consumer spending and debt and a runaway housing market were a big part of the problem in the first place. The other “problem” is that today’s consumers are happier with their smarter, post-recession shopping habits, and they it seems unlikely they’re going to revisit the 2006 shopping scene anytime soon.
What if the American consumer has simply grown tired of the consumption treadmill? If it means buying more and more crap, the American consumer might not really feel like rescuing the economy.
But thank goodness for the foreclosure mess, and for lenders facing more defaulters than they know what to do with. Because banks can’t kick defaulting homeowners out onto the streets in a timely fashion, defaulters get to keep the money they would have otherwise spent on mortgages or rent. And they’re spending that money elsewhere, for the good of the economy. How unselfish of them, right?
The situation amounts to a “stealth stimulus,” as the WSJ puts it:
[Housing market consultant Ivy] Zelman says her research suggests defaulters do spend much of the money on consumer services and goods. “People are taking what they would have been spending on a mortgage and spending it somewhere else,” she says.
Nationwide, defaulters who haven’t been kicked out of their homes are receiving an unofficial stimulus that totals $2.6 billion per month, and much of that money trickles into the economy in the form of car payments, or shopping excursions to the mall, or restaurant meals. So, apparently it’s OK to not pay your mortgage—so long as you spend the money elsewhere. You’re only doing what’s in the best interests of the economy.