April 6, 2009

Poll: 70% Have Cut Back on "Luxuries", 40% on Necessities

Forty percent said they had cut spending on luxuries, and 10 percent said they had cut back on necessities; 31 percent said they had cut both. -- New York Times/CBS Poll
Of course, if 40% have cut back on luxuries, and another 31% on both luxuries and necessities, then 71% have cut back on luxuries.

But the stark number is the total of about 40% that have cut back on necessities.

This leaves open the question of whether eating out is considered a luxury or a necessity by respondents. But if eating out is a luxury for many now, then what necessities might be cut by as many as 40% of Americans? Variety of food eaten at home might be one necessity that could be cut back on. Auto maintenance might be another. Health care is certainly being cut back on by many.

We can only hope that the necessity of good nutrition is not being cut back too much by too many.

Americans took on an additional $5 trillion in mortgage debt from 2001 to 2007. Since roughly 51 million homes had mortgages at the end of 2008, this amounts to roughly $100,000 more mortgage debt owed on the average home than in 2001. Even at a favorable mortgage rate of 5.25% for instance, that $100,000 costs about $550/month in extra mortgage payments vs. payments levels of 2001, for an average home. Of course, some owe the same payment as in 2001 (not having moved or refinanced or taken money out), but many owe an extra amount considerably more than this average.

The interest cost of $5 trillion at 5.25% is some $260 billion per year.

That $260 billion per year (eased down a small bit with every foreclosure) is money that could have been spent in the economy on other goods and services, resulting in diverse and lasting employment for many millions of Americans.

This extra mortgage interest over just 3 years is about as large as the stimulus package.

This is what we are up against.

But there is one form of great relief and source of new strength for the U.S. economy in this dark reality.

With as many as 8 million foreclosures by 2012 (one estimate), possibly as much as $2 trillion of this debt burden could be removed from households (who become renters at typically much lower monthly costs).

Such a large amount of debt-relief (monthly living cost relief) would help the economy immensely.

We have a ways to go yet, as only 1.4 million foreclosures have accumulated since July 2007.

But Congress, which appears at times in thrall to vested interests or under the spell of clever lobbyists, does not appreciate the crucial economic stimulus foreclosure debt-relief brings to the U.S. economy. House prices return back to normal levels sooner due to foreclosures, allowing a recovery in buying (and eventually building) sooner.

We need a clearing, a chance for people to get out of homes far too expensive for them. We need these Americans back -- back in the economy -- able to live in a more economically participating way: with money to spend on more than only a gigantic mortgage payment (any payment more than around 1/3 of income). We have yet to see whether large numbers will benefit from Obama's foreclosure prevention plan to ease payments down to 31% of income. But many underwater home owners would often be better off, and the economy in turn, to let go of a home that is too expensive, lowering their monthly shelter costs even further, and have more money to spend on the other parts of life.

Such as the necessities.


  1. Hal,

    You have neglected the effect of taxes which would nominally return 25% of that interest expense back to homeowners pockets.

    Bald Eagle

  2. BE, as you know when fewer taxes are paid in one way (such as a mortgage interest deduction) while the budget is in deficit, then those taxes will only be paid in some other way, such as future tax increases or via inflation tax resulting from deficit spending. The government and the people are in the same boat, and we pay one way or the other for the total spending of government + housing costs. In the meantime, the interest payments indeed happen at a 100% level for those not in default and go out the door to the MBS holders, many of them around the world (such as to the large Chinese holding of agencies). One way to understand the inflation tax is to realize that without it we could have 1995 level prices for example. So we do pay that cost in full. I calculated a typical mortgage interest deduction vs the standard deduction ($10,900) for a median house. It's not much in most cases, as other deductable items tend to be much less than $10,900 for most families of course unless a individual family also has large medical bills that same year. The deduction is more meaningful for more expensive houses, but not so much as one would guess at first.

    But the real bottom line is we end up paying for that deduction via other taxes or inflation. You can't get something for nothing.

    Should foreign holders of MBS should have to take a haircut due to foreclosures in the US? I think so. It's unfortunate that we have guaranteed these bonds, but that is another topic.

  3. "Variety of food eaten at home might be one necessity that could be cut back on."

    It is, Hal, it is. See my post, Standing in Line, on my work as an interviewer in the 2010 National Hunger Survey.