More on strategic defaults and retail sales
David Rosenberg was out over the past week with some pretty large numbers supporting the thesis that strategic defaults are driving retail sales. In his daily piece last Friday, he said:
To repeat, what has driven consumer spending in the past year (retail sales up 9% YoY in March?) at a time when household credit contracted $235 billion and 2.3 million jobs were lost were the following:
- Government income assistance: $243 billion
- Tax reductions: $63 billion
- Government wages: $27 billion
- Decline in savings rate: $22 billion
- Strategic mortgage defaults: $120 billion (courtesy of Gene Balas from Columbia)
That is a cash flow boost of $475 billion, or equivalent to 5% of consumer spending, and offsets the negative impact from lost private sector wages by a factor of nearly 4 to 1! No wonder the retailers are ripping! But the question remains one of sustainability.
The parts above about government income assistance, tax reductions, and government wages should show up in the national income and product accounts under disposable income. But, the reality is that personal income is not supportive of increases in retail sales. So, it’s unclear why retail sales would be increasing except due to a decline in household savings or income not spent on defaults.
On Monday, Rosenberg came back with more on this topic. He said:
Strategic debt defaults are freeing up cash flow for the consumer at this time — we did our own estimate and found that the decline in household debt-service payments in the past year that could not be explained by the behaviour of interest rates alone, has amounted to a huge $190 billion. Whether its $120 billion as we cited from a Columbia U study on Friday, or $190 billion, this cash flow cushion that formerly distressed homeowners are receiving is massive. Whether it is sustainable or not is another question.
His numbers are even well above Mark Zandi’s who I quoted yesterday via Diana Olick as saying that defaults were freeing up $8 billion per month for spending. That works out to almost $100 billion a year.
Honestly, those numbers seem incredibly high to me. If you take the 7.9 million people who are non-current on their loans according to LPS, a leading provider of mortgage processing services, it would mean that every mortgagee who had defaulted was spending an extra $1000 per month in retail sales. That’s enormous. The numbers to get to the Columbia or Rosenberg estimates would be even higher.
Bottom line: I think the anecdotal evidence is compelling that defaults are goosing retail sales. The question, though, is by how much. While we can make estimates, this is unknowable. $1000 per month per defaulter seems impossibly high to me. But, given the anecdotal evidence and the sheer number of people in default still living in their homes rent-free, the number is not negligible.