Foreclosure Stimulus to Boost Tech's Four Horsemen

There is a secret concerning high foreclosure rates that investors have yet to grasp. It's all about turning lemons into lemonade, something American consumers do so well. Analysts project 1 in 33 homeowners will face foreclosure over the next two years. These foreclosures will free up an additional $4 billion a month in consumer spending. Maybe this wave of foreclosures isn't so bad after all. If you eliminate the average monthly house payment by the standard 6 month foreclosure process then you can count on a $40 billion foreclosure stimulus being added to the economy. Maybe we should stop fearing a consumer collapse and start looking at the numbers.

Annual core retail sales are up 10.2% over the last three months. This data shows that those consumers who are supposedly 'strapped' are willing to take off the chains. We live in an era where disposable income is king. Americans feel more urgency to pay down credit cards than to make payments on a home that is underwater. The fear of foreclosure is quickly replaced by the freedom of additional spending money. This newfound money will provide thousands of dollars a month to those consumers struggling to pay the extra $100 a month on gas. There are three things that you can always count on: death, taxes, and the resiliency of the American consumer.

Further analysis into the numbers shows us exactly what this generation is unwilling to sacrifice from their budgets. Technology. Times have changed. Necessities have evolved. Those, like CNBC's Joe Kernen, who feel that consumers won't spend on cell phones or computers because of high gasoline prices are completely wrong. Modern demands have transformed tech from a cyclical gadget industry into an essential survival tool for everyday life. People are willing to foreclose on their house rather than lose access to social networking, email, video conferencing, text messaging, internet surfing, etc... Modern consumers would eat pancakes for breakfast, lunch, and dinner before they would get rid of their Blackberry or iPhone. The proof is in the fundamentals. The latest comes from Research in Motion's (RIMM) 100% revenue growth for the quarter! Amid a slowing economy tech earnings still shined with double digit growth in Q1 2008.

Jim Cramer wonders why tech goes up every time oil drops? Money has to flow somewhere and we are seeing that tech is next. Lets compare stock prices of tech's four horsemen in the current market low vs. March's low. On March 10th, Apple (AAPL) was at $119, today it's at $168. Google (GOOG) was at $413, now $528. RIMM was at $93, now $123. Amazon (AMZN) was at $63, now $76. When money exits the commodity market because of government regulations, it will relocate to high growth technology. Don't bet against the consumer, and don't bet against tech.

Disclosure: Long AAPL

Comments

[CLH]

Very interesting. You may be right. At least I hope so.

[linenoise]

So..... where are these people that are going to buy all these products.... going to live?

[mrtaxx]

People who foreclose are going to need another place to live, maybe they will rent, so the amount of money freed up will be substantially less then you suggest. The fact that people will have to pay for another place to live suggests you article is lacking additional needed thought.

[ramankandola]

It makes sense... and with gas over $4 dollars a gallon.... we would see a lot of people online wondering @ their places... good for google, amazon, yahoo... i guess !!!!

[Reinko]

This is a brilliant article; when folks cannot afford their house any longer this is good for tech.

I even have a much more brilliant plan to save the economy:

We let the Treasury sell one trillion of AAA rated Federal bonds to the Chinese.

With this trillion every US citizen gets a fully loaded assault rifle together with 2 gallons of whiskey (that is good for weapon and whiskey producers).

After that we will see the hospital and grave yard industry booming and booming.

We make sure the population has no shortage of bullets and whiskey.

After some time when half of the population is shot dead, we observe a giant benefit:

All wealth in the nation is now distributed over only half the folks, hence the average American is twice as rich...

That will make the entire economy booming and booming and booming!

[Toni]

And AAPL will prove that today, just look at the close.

LOL

[Markham]

This article would make sense if the only people with housing costs were homeowners. Not to mention the fact that it would be fiscally irresponsible for these homeowners to spend their new found savings on technology toys, as opposed to using it for savings and debt reduction.

Nothing good comes out of encouraging financial irresponsibility, we only have to look to the present for evidence of that.

-M

[nhsrikanth1]

I think he is talking about the six month foreclosure process during which the "owner" continues to live in his/her house but is not obligated to make mortgage payments. I assume that this includes the period when the owner starts defaulting before the lender gets wind of it and start the foreclosure process. It is only after this 6 month process will an owner be evicted and will need to rent.

Even then, the costs of home ownership is more than what one would rent (based on anecdotal evidence, a person who loses a SF home is more likely to rent a 2 bed apartment not a comparable home). This again provides the person with more disposable income.

On the flip side, a person who lost his/her home to foreclosure is likely to lose credit (either outright or by way of much higher interest rates) and that may limit their spending.

[Lavrentii]

Agreed about the American consumer as an economic phenomenon that can be accounted on.

If one doesn't already have one by birth and breeding, one will mutate one upon being issued their social security number- the consummate consumer gene.

In America, it's a jungle out there, and there is every type of organism to deal with the remains (making lemonade?) left laying at the side of the path as Americans pursue their genetic calling. And, that is not a bad thing. I'm inclined to believe it may even be spiritual. It's what we are here to do. There is such a thing as being smart about it, and, we can be nice to each other in our pursuits, too.

Thought provoking point of view, Mr. Schwarz.

[billddrummer]

I like the way you put this. And you correctly pointed out that the foreclosure process frees up monies that would ordinarily be spent on mortgage payments for at least 6 months, if not more.

I'm personally familar with a case where the foreclosed homeowner was able to remain in the house through the 4 month default period, and an additional 9 months while the foreclosure process took place. Altogether, this homeowner lived rent-free for over a year. Multiply that by the number of borrowers, and you get a significant amount of revenue. Now, many people will continue to make payments on their installment obligations while letting the house go, figuring they'll rent at some point in the future. And those people could save enough for security and rent deposits relatively easily, since no mortgage payments are coming out of the monthly budget.

I've heard anectdotal evidence that former homeowners have trouble qualifying for rental properties if a foreclosure appears on their credit reports. But if I were a lessor, I'd consider the (typically) lower rent vs. homeowner expenses (not only the mortgage, but taxes, insurance, maintenance and fees) and could make a reasonable case for allowing foreclosed homeowners to rent from me. The monthly outlay for renters is far lower than for homeowners, all things being equal.

With a glut of properties for rent in this area, some landlords seem more willing to base a rental decision on a person's income rather than their credit.

[wildbill]

It seems to me that the article is only looking at this only from the point of view of the homeowner, not the net effect on the economy. Yes, if the defaulting homeowner decides to stop making any payments on the mortgage he/she may use those funds on other things. However, the lender/investor is losing the use of that monthly payment. Therefore, doesn't the lender's/investor's loss balance out the defaulting homeowner's "gain" so that the net effect on the economy is zero?

[user8240]

"Annual core retail sales are up 10.2% over the last three months."

Hello, the economic stimulus package,which mailed out about $50
billion in checks in April and May, provided the lift to income and consumer spending

[mollytjm]

for young people, having the newest, coolest tech stuff has replaced clothing labels as status. people in foreclosure will rent something they can afford. often, the foreclosure was on property way over their heads, purchased because they thought real estate would never drop. so some of these people will have $ to spend...but one fact in the article is absolutely true...Americans are addicted to their toys, especially their communication, games & computer toys. Apple products will be among those purchased. It's a rocky stock market, but Apple, the company, will continue to do well and, as it has in the past, make money for it's shareholders as will some of the chip and other manufacturers. And anyone under 40 would absolutely go on that pancake 'diet' rather than give up their tech toys. some of us over 40 would too!:)

[AvlGuy]

Wow, I don’t think there's a lot of ‘street sense’ showing up in here about how real people behave outside of economic theories and Wall Street. Yall sound like well-healed owners who haven’t rented recently or never experienced a foreclosure during a recession and inflation.
Rents have risen significantly in a many markets. Pre-2008 rent price data is worthless in some areas. When homeowners become involuntary renters, they typically also pay monthly to store tons & rooms of stuff, an expense that doesn’t show up as an apartment rental expense. Mentally, going thru the 4-6-12 months of stress and drama of losing a home just doesn’t equate to impulses to cheerily upgrade every dang gizmo gadget in response to the newest ad. Ice cream and DVDs and music downloads might be the more likely impulse buy to cheer-up sagging spirits.
And only gadget upgrades out of necessity are what they will do, these teeming thousands of stressed-out ‘new’ renters penned-up in crowded apts built of cheap materials that they aren't allowed to fix, repair or upgrade. They're also stressed because the only apt they could get is even FURTHER from the schools, jobs, services they need, and now they have to spend more on gas. Not really a marketer’s dream when peddling the next generation of a gadget people already own.
And finally, most sub-primes are not so savvy as to not make whatever pmts they can while vainly negotiating even after the NOD...many also move out far in advance of a sherriff’s arrival. Maybe more Alt-A foreclosures are savvy enuff to save while waiting out the process. Ditto for the primes, maybe. The house flippers and speculators usually are juggling so many financial mis-haps that i dont think they're accumulkating savings during the foreclosure period.

OK, I just described how human beings typically behave in a foreclosure. Who are u guys describing?

[TERN]

Shopping until they are dropping, eh?

Where will they get the credit for the pricey iphone contracts?
I see more upside for Ebay, when they all try to sell off stuff to pay for the moving expenses and security deposits.

[DWest]

Incredible lack of thought behind this article. The author thinks foreclosures will indirectly benefit technology spending. The Center for Responsible Lending estimates that "for each of the millions of foreclosures on home loans originated in 2005 and 2006, the home values of more than 22 homes will suffer...The total decline in house values and tax base from nearby foreclosures will be $223 billion."

So for your $40 Billion foreclosure stimulus, the citizens who actually pay their mortgages lose $223 Billion in net worth, state coffers see decreased income and have to raise taxes and banks that have to eat the loans have less capital to lend. And you think this will sell more iphones? Please retract this trash.

[wimbo]

This is one of the most bone-headed thought processes I have heard. What amazes me even more is the # of people who find his points valid. America is in true decline with this kind of nonsense taken as truth. Home foreclosures freeing up income? Now why do you suppose they cant afford the mortgage- job loss, tax debt, overextended credit, etc, etc. Yeah sure better go buy an Iphone, lmao!