Foreclosure Cliff

We can thank Ben Bernanke for the phrase “fiscal cliff” – a phrase many observers have tried to soften by pointing out they think it’s more like falling down a slope, sliding down a curve, or even tripping over a curb. I can understand trying to find other metaphors to replace the nearly always fatal results of going off a cliff.

But maybe those observers missed one effect that Bernanke knows drives the economy more than any else: housing.

You’d think we’d know by now that America’s economy depends on housing more than any other industry. Certainly the fact that unemployment is still nearly 8% while corporate profits have roared to all-time highs is a clue. So is persistently low consumer confidence in spite of those stellar profits and a stock market that has nearly doubled over the past four years.

But housing is at least stabilizing nationwide, and even heading upwards in the regions hit hardest by the housing bust that started the “Great Recession” in the first place.

But we’re not out of the woods quite yet, and one aspect of the impending spending cuts that begin January 1st is almost certain to change that progress on the housing front into a full blown retreat. And that retreat will start immediately, not gradually over the year, as do the other effects of the law passed in 2011 following the Debt Ceiling hostage crisis.

Starting this week, two million unemployed people now collecting extended Federal unemployment benefits will get nothing. What if a million or more of them have mortgages? Will they be able to pay? Not bloody likely. People who have been out of work longer than six months generally don’t have much in the way of savings left.

That’s the reason extended unemployment is such a huge winner when used as a stimulant for the economy. Unlike infrastructure spending, which takes months or years to begin to have a “multiplier effect” in the economy, extended unemployment benefit money gets recycled into additional activity almost immediately. Most economic studies show that roughly $2 of increased GDP come each dollar of unemployment benefits.

Contrast that with deficit spending resulting from tax cuts. That kind of spending only gives pennies in GDP growth for each dollar borrowed to subsidize those cuts.

The reason Bernanke called the impending fiscal policies in the “sequestration” a cliff was probably not because those who do have jobs will have more taxes taken from their pay, though they certainly won’t be spending more money and growing the economy with those smaller paychecks. That’s a small and gradual effect. The reason he called it a cliff is that the most destructive single thing you could do to our economy is to hurt, yet again, the largest asset of all but a few of us – our homes.

So before we say that it doesn’t matter when they fix the gun-to-the-head spending cuts and tax hikes that begin this week as long as they fix it over the next few weeks or months, consider what will happen to the value of your house if your neighbor goes into foreclosure next month. Two million neighbors are already having a hard time making their payments for the basics like housing and food. Surely some of them will fail when their main source of income is suddenly shut off.



7 Responses to Foreclosure Cliff

  1. Robin says:

    “…two million unemployed people now collecting extended Federal unemployment benefits will get nothing. What if a million or more of them have mortgages?”

    Umm…what if they don’t? This seems a big assumption to me. People who have been out of work for years know their unemployment income won’t last forever and tend to reduce expenses. Keeping the mortgage seems like something that would be low on the priority list. Cut losses, rent a cheap apartment, move to a lower-rent district…all of these options seem more likely than clinging to one’s mortgage payments when work is nowhere to be found. I say this as one who knows what it’s like to be dead broke, btw.

    • hhill51 says:

      I’m guessing that decision is heavily influenced by the presence (or lack) of a second income in the house, and children, especially of school age. Sure, people will try to sell the house and downsize as the unemployment period extends past six months, but we’re talking about behavior at the margin for two million households. How many do you think will have foreclosure triggered? I’m just saying that foreclosure is one of the negative multipliers in the economy that has an outsized effect as it hurts the values throughout the community, far more than 2% smaller paychecks, for example.

      • Robin says:

        How many do I think will have foreclosure triggered? Probably almost no one. Most of the people who can’t find work of any sort simply don’t have marketable skills and therefore probably never earned enough to own a home in the first place. Those with some get up and go either got up and left already or found some way to bring in income. I realize this sounds harsh but realistically anyone who’s just sitting around, waiting out their unemployment period with no prospects at all, is most likely the sort who never took charge of their financial situation and therefore never had enough income to own a home.

  2. Jill says:

    Currently 5,350,000​ homeowners are not paying their mortgage and
    only 1.7 million are actually in foreclosure. There are millions of American living in free housing and most likely not even paying property taxes. What a subsidy!

    RM charge offs now at 1.99 percent and delinquencies (100 largest banks) now at 12.13 percent (highest since 3rd quarter of 2010).

    The banks either must raise reserves or tighten lending standards.

    • Robin says:

      Yeah, big numbers but not a subsidy. The banks can choose to foreclose on any legally-contracted mortgage any time they like. If they’re waiting to foreclose on a legal loan, it’s because they’ve made a business decision to do so — in other words, they expect higher profits by waiting.

  3. Dave Hanse says:

    You lost me when you said one dollar of unemployment benefits creates two dollars of GDP. If this were so, then we could increase GDP with impunity. Not possible.

    • hhill51 says:

      Hey, Dave….

      It’s simple, really. Receiver of benefit dollar spends it (especially if it’s an unemployment check), thus producing $1 of private-sector GDP. Person they give the dollar to spends at least part of that dollar, so GDP grows by that amount, as well, as so on. If the amount of each dollar after the first one were simply that 50 cents is passed on to new activity, the total additional GDP is the sum of series of 1 + 1/2 + 1/4 + 1/8 +… = 2.

      The problem is when dollars go fallow, and don’t get spent, since each person’s spending is someone else’s income. That’s the fundamental problem with borrowing money to give tax breaks when the receiver of the tax break just squirrels away most or all of it.

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