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There's good news and bad news on the housing front.
The good news is that the numbers of borrowers who have fallen behind on their mortgages or are seriously delinquent are beginning to recede. Meanwhile, foreclosures appear to have plateaued, albeit at historically high levels.
The bad news is that all the folks who have stopped paying their mortgages eventually will lose their houses and will no longer be able to live rent-free. And when that happens, there will be a hit to personal income, at least the way government economists count it.
The bigger housing headline Tuesday was that the S&P/Case-Shiller house price index fell for the seventh straight month in January, albeit at a slightly slower-than-expected rate of 0.2%, which brought the year-on-year decline to 3.1%. That's despite all the extraordinary exertions by various parts of the government, from tax credit for first-time and certain other buyers to the Federal Reserve holding short-term rates near absolute zero and buying over $2 trillion in Treasury and agency mortgage securities.
Weighing on home prices have been huge number of homes for sale, especially those that have been foreclosed upon. The good news from the February report from Lender Processing Services, a leading provider of mortgage data from the loans it processes, is that fewer foreclosures are being initiated. But there is a big backlog to work through, in part because of the "robosigning" scandals where servicers failed to provide proper documenations of foreclosures.
What's startling is that the average loan in foreclosure has been delinquent for a record 537 days, according to LPS. Moreover, 30% of foreclosures have been on loans that have been delinquent for two years or more.
Clearly, that's coincided with the deterioration of the labor market and an under-employment rate that still hovers around 16%. And strapped families juggling bills, credit cards and auto loans now tend to put mortgages at the back of queue. They know if they don't make a car payment, it will be repossessed in short order, leaving them with no way to get to work. They also know they won't be foreclosed upon and evicted for months if they stop sending in their monthly mortgage check.
Then there are those who "strategically" default knowing that it will be a year or more before foreclosure. And many rationalize it's throwing good money after bad to pay off a mortgage that exceeds the value of the house.
Leaving aside the ethical question of deliberately defaulting, not making mortgage payments has left more money in the pockets of Americans. Indeed, the way the government counts things, this has given a sharp boost to personal income, according to an exceptionally sharp-eyed analysis by Michael Feroli, an economist with JP Morgan Chase.
Rental income has been soaring, but this "rise has little to do with landlords getting more from their tenants. In fact, it has very little to do with what speakers of the English language would normally consider 'rent.'"
Feroli, who, unlike most economists, has a commendable facility with English, explains most of the decline in mortgage debt is due to foreclosures. "In this sense, some of this rise in aggregate rental income is related to what some have called "squatter's rent" -- the monetary benefit to the household sector from not staying current on their mortgage obligations -- though most squatter's rent is outside the official data. With delinquencies coming down, rental income should see slower growth in the future."
He goes on to explain one of the odder quirks in the national income accounts. The Bureau of Economic Analysis assumes homeowners are landlords who rent to themselves. As landlords, they receive rent as income and have to pay expenses, especially the mortgage. Gross rent has been gradually increasing, Feroli writes, but not nearly enough to account for the rising net rental income. Most of the drop in mortgage expenses is the result of foreclosures, which typically result in distress sales at lower prices and smaller loans, if any.
As I pointed out here last week (Is the Government's Mortgage Mission Accomplished?" ) one-third of existing home sales in February were for cash, a record. These would have no mortgage expense deducted against their imputed rent.
The so-called squatter's rent from folks' not paying their mortgages but still living in their houses isn't counted in the official personal income data, Feroli explains. But looking at households' cash flows, disposable income would include the interest expense saved on delinquent (but not foreclosed upon) mortgages. This measure of squatter's rent rose to an annual rate over $60 billion last year, but has since declined to a $50 billion annual rate because of lower delinquencies. So, this "benefit" is declining.
Just as foreclosures have bolstered households' reported income, much of the improvement in households' balance sheets also has come from foreclosures, which reduce liabilities and boost net worth.
Other than government statisticians, who would think you're richer for having lost your house to foreclosure?
Comments? E-mail: randall.forsyth@barrons.com
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