Delinquent Homeowners Spending Cash

Delinquent Homeowners Spending Cash


Statistics can be deceiving unless you understand what they are composed of. Consumers were reminded of this fact when economists reported that consumer spending has risen. On the surface that sounds like good news for the economic recovery. But is it?

One of the reasons that consumer spending has risen is not necessarily a positive indicator. Millions of people are delinquent on their mortgage payments which has freed up cash. In other words, because they are not making their house payments they have more money to spend on other items. Instead of saving the money they would have spent on their mortgage payments, millions of people are spending it on other items which is driving up the consumer spending numbers.

Homeowner DebtAs houses went “underwater” a number of homeowners made a decision to just let the house go back to the bank. An underwater home is one where the market value of the home is less than the mortgage value. These homes are very difficult to sell because someone must come up with the cash difference between market value and mortgage value. In many areas of the country, house prices have fallen by 30% to 50% and the amount of cash needed to sell the home is out of reach of most middle class Americans.

Also causing consumer spending numbers to rise is the fact that the affluent are spending again. But they are buying one-time high priced items they had postponed buying and are not increasing their day-to-day spending.

What all this means is that the economic recovery is far from stable. The number of job openings is increasing but many of these jobs are on the lower end of the pay scale. This information was reported by the U.S. Department of Labor. Wages are rising but at a snail’s pace. Though lower middle class and low income spending will benefit the economy, it will not lead to a rapid economic recovery. What is needed is for the job market to recoup its losses so unemployed Americans can get back to work. With employment increases will come spending increases and that is how the economic recovery will accelerate.

It is almost like the riddle that asks which came first – the chicken or the egg? In this case the question asks which is coming first – economic recovery or consumer spending? Some of the increase in consumer spending reported for April was actually a one-time spending splurge after two years of counting pennies

Consumers are in a big of a quandary. They need to save and they need to spend and doing both requires careful household budget planning. The economy cannot count on the wealth or affluent to keep the recovery advancing. The money of the affluent is closely tied to the condition of the financial markets. The volatility in these markets as recently as last week proves that the financial world is far from achieving stability.

The U.S. Department of Labor reported that as much as 40 percent of all consumer spending was attributable to the top 20 percent of American households. But consumer confidence is at an historic low.

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