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The Upside of Foreclosure

Sigma Investment Counselors

March 10, 2012

The upside of foreclosure; an unintended temporary stimulus to the economy?

An article in this weekend’s Barron’s magazine highlighted several interesting foreclosure statistics. At the end of 2011 nearly 1.9 million homes had some sort of foreclosure filing activity. In addition to the sheer number of foreclosures, legal issues with regard to robo-signing have slowed the process significantly, allowing millions of people whose homes are in foreclosure to remain in their homes paying no mortgage, interest or taxes for extended periods of time.  At the end of 2011, the foreclosure process took 348 days nationwide. In Florida this number is 806 days and in the State of New York it is 1019 days!  Settlements over the legal issues combined with what appears to be a slight improvement in the housing market will serve to expedite the foreclosure process.  However, in the meantime the author of the Barron’s article calculates that this non-payment of principal, interest and taxes has led to approximately $42 billion of spendable cash that has been used for other purchases.  The author also points out $42 billion represents about 10% of US retail sales. In other words, this $42 billion has served to mask what would otherwise be a significantly weaker consumer. In addition, the broad economic data reflects this foreclosure “phenomena”. While it will take a few years before the foreclosures are no longer a 2-3 year process, it begs the question:  As the foreclosures work their way through the crowded pipeline will the economy have enough momentum to compensate for the 10% of lost purchasing power being spent by those currently in foreclosure?  I like to be optimistic but finding 10% of new consumer purchasing power in an economy growing at 2+% will be challenging.  Only time will provide the answer.  In the mean time we should view the consumer spending numbers and trends with a much more skeptical eye.

Your thoughts are welcome.

Denise M. Farkas, CFA

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