A solution to the consumer spending mystery

It's a theory: Americans are refusing to pay their mortgages and using the cash windfall for a spending spree

Published April 15, 2010 4:21PM (EDT)

Credit Writedown's Edward Harrison offers a provocative answer to the question I posed yesterday regarding how to explain robust consumer spending by Americans who are somehow managing to pay down their debts and go shopping without enjoying any increase in wages.

[S]trategic defaults [are] giving a lot of people money in their pockets that would have otherwise gone to servicing debt and this ha[s] increased consumption.

Harrison's theory is that millions of Americans are walking away from their underwater mortgages, but staying in their homes living "rent-free" while banks dawdle on the foreclosure process.

Harrison recounts a string of horrifying anecdotes about Americans blowing off their mortgages and going on vacations to Hawaii, and quotes CNBC's Diana Olick quoting Moody's Chief Economist Mark Zandi:

With some 6 million homeowners not making mortgage payments (some loans are in trial mod programs and paying something but still in delinquency or default status), this is probably freeing up roughly $8 billion in cash each month. Assuming this cash is spent (not too bad an assumption), it amounts to nearly one percent of consumer spending. The saving rate is also much lower as a result...

I'm not sure I would say this is juicing up spending, but resulting in more spending than would be the case otherwise.

However, if homeowners who have stopped paying mortgages but are continuing to stay in their homes are part of the reason why consumer spending is growing, it might not be wise to expect that phenomenon to last very long. Calculated Risk highlights a report from RealtyTrac on a recent surge in foreclosures.

Foreclosure filings were reported on 367,056 properties in March, an increase of nearly 19 percent from the previous month, an increase of nearly 8 percent from March 2009 and the highest monthly total since RealtyTrac began issuing its report in January 2005.

By Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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