Local spending is up, may be linked to mortgage delinquencies

Parts of the local economy remain mired in recession, but you wouldn't know it from taxable sales figures.

Taxable sales, which the state Department of Taxation tabulates each month to gauge spending on retail goods, have been on a tear, with jumps of 5 percent to 10 percent year to year virtually every month since mid-2010. Clark County's taxable sales jumped to $2.54 billion in July, up from $2.35 billion in July 2010.

The gains are notable because they came despite subpar consumption among tourists, who have yet to return to prerecession spending levels, and local unemployment of more than 12 percent. Las Vegas had 39,700 fewer jobs in July than in July 2009, and the city added just 15,000 positions to its jobs base of 811,100 in the past year. Yet, local spending at car dealerships, restaurants and clothing stores has surged.

So what gives?

Local experts say at least some spending may trace to mortgage delinquencies. With tens of thousands of local households stopping loan payments, that's a lot of extra cash looking for a place to land.

"While some people don't have the means to continue to pay their mortgages, others have simply opted not to service those obligations because they're substantially underwater on their loan to value," said Brian Gordon, a principal in local research firm Applied Analysis. "There's a significant amount of capital in the economy that may have otherwise been going toward housing payments."

Added Steve Brown, director of the Center for Business and Economic Research at the University of Nevada, Las Vegas: "I think there's a good chance that unpaid mortgages are affecting taxable sales. If they have a job, people who aren't paying their mortgages might have some extra disposable income."

No one tracks data that show whether consumer spending really comes courtesy of delinquent mortgages.

But there's no doubt that big numbers of locals aren't paying their home loans.

MANY DELINQUENT LOANS

An August report from the Mortgage Bankers Association showed just how many local loans are in delinquency.

Of the 467,540 loans statewide in the second quarter, 9.85 percent, or 46,053 loans, were past-due. Another 6.09 percent, or 28,473 homes, were in foreclosure. That means 74,526 households statewide were not making mortgage payments.

To understand how that could affect spending, consider the money consumers save by skipping their housing payment. It's tough to find consistent numbers on the average monthly loan payment in the Silver State, but a Sept. 18 report from California housing research firm RealtyTrac pegged an average statewide mortgage delinquency of $25,180 over 18 months of nonpayment. That translates to just less than $1,400 a month. Multiply that by the 74,526 loans past due or in foreclosure, and you get $1.25 billion a year, or $104.3 million a month - a good start on the $158.5 million jump in statewide taxable sales year over year in July.

Because Southern Nevada has about 75 percent of the state's population, assume it has about 75 percent, or 55,895, of its delinquent mortgages, and 75 percent, or $78.2 million, of that extra discretionary cash, Gordon said. Clark County sales rose $129.6 million in July.

Those numbers don't mean delinquent homeowners are skipping out on the mortgage to whoop it up with boats, cars and fur coats.

Las Vegas foreclosure attorney Jacqueline McQuigg said her clients are saving the money to "have a small nest egg" for moving to a new place. Plus, legions of locals aren't paying their mortgage because they can't. They've been out of work for months or years. And many locals who did keep their jobs suffered steep pay cuts, McQuigg noted. They don't have money for the mortgage, and they don't have money for fun, either.

"The time period for a short sale or even a foreclosure has been reduced. I advise clients to expect to vacate their homes in six months or less," McQuigg said. "Faced with rental deposits, they probably do not have much in the way of extra funds for other purposes."

But plenty of delinquent homeowners still have jobs, and some have strategically quit paying, others say.

Chris Rubeis, a real estate agent with Realty Executives in Las Vegas, said the "vast majority" of late homeowners aren't saving.

"Time after time, when we get to the closing table, the lienholder asks for payoff of the deficiency, and the homeowners claim they don't have the money," Rubeis said.

And with Assembly Bill 284 grinding foreclosures to a halt, homeowners know they can stop paying and keep living in their home longer without worrying about getting kicked out, Rubeis added. Some homeowners who still have jobs and decent incomes may also think it makes sense to stop paying because loan-modification programs require owners to be delinquent on their payments.

"It's certainly more common than ever. The stigma of short sale, foreclosure or bankruptcy is long gone," Rubeis said. "Seventy percent of the market is underwater. Those people are saying, 'I bought for $300,000. My house is worth $100,000. Why should I stay? I'll never get the equity back.' So they stop paying."

Once they quit paying, it's "common sense" that the consumer economy would get a boost, Rubeis said.

"If they're still working, they have all this extra money."

What's more, it may actually be smarter to spend that surplus cash than to save it: The lender could come after money-bearing accounts, but it can't grab cars or TVs, Brown said.

But other factors could be helping sales.

ADJUSTING TO THE NEW NORMAL

For starters, taxable sales simply couldn't drop forever. Many of the 88 percent of Las Vegans who have jobs are used to the new normal, and have decided it's OK to spend again.

Gordon said the sales uptick is modest, reasonable and sustainable based on current incomes. Also, after putting off spending on big-ticket items such as cars, some consumers have to upgrade.

Personal incomes are rising, too. Data from the Federal Reserve Bank of St. Louis showed per capita income in Nevada of $36,964 in 2011, up from $35,919 in 2009, thanks partly to growing stock portfolios and resulting dividend payments. That's an additional $1 billion a year, or $85.3 million a month, going into Nevada's economy.

Population growth may be helping, too, as Census reports show Clark County expanding at about 1 percent a year, Gordon said.

And if you look at 2009, when Nevada's delinquency rates were much higher, there's no evidence unpaid mortgages helped the economy. The past-due rate in the second quarter of 2009 was 12.14 percent, while the foreclosure rate was 9.13 percent. Yet, taxable sales plummeted to postboom lows that year.

Times are different now, though, and that could mean a bigger effect on taxable sales. Delinquent homeowners were likelier to be under financial stress in 2009, either from job loss or pay cuts, whereas today's market has more homeowners who have decided strategically not to pay, Gordon said.

"There is increased consumer spending, and it is potentially supported by the fact that some people aren't paying their mortgages, and are using that money in the local economy," Gordon said.

That has positives and negatives.

Part of economic recovery means putting people in a position to spend again, Brown said.

"Even though some people might find it (stopping mortgage payments) morally objectionable, it can be a good thing," he said.

But foreclosures hurt neighboring home values, and falling appraisals create a reverse wealth effect that discourages others from spending as much.

"I think it's more bad for the market than good for it," Rubeis said. "The majority of people aren't letting their house go. The people who do let their house go are bringing everyone else's values down, and that is going to be really detrimental to us all in years to come."

Contact reporter Jennifer Robison at jrobison@reviewjournal.com or 702-380-4512. Follow @J_Robison1 on Twitter.