econlife - What Happens When Landlords Don’t Receive the Rent by Elaine Schwartz

Our story starts with Emily. After the Philadelphia restaurant where she works laid her off, she had to cut her rent payment in half. Jobless, she could not afford the whole amount.

That takes us to Emily’s landlord, to his mortgages, and eventually to the Fed.

The Rent Nonpayment Path

Because an estimated 40 percent of all apartment dwellers in New York City cannot afford the rent, there could be two million unsent or diminished checks. Like Ed Edge, Emily’s landlord, the city’s building owners are small businesspeople. Ed said he had 14 tenants in four buildings that normally send him $9,300 a month. However, after the pandemic layoffs, at $4500, his first checks were close to half of what was due.

Ed owes $8,000 each month for the mortgages that finance his rental units and some renovation debt. Here, as the source of his mortgages, Wells Fargo and a company called New Rez enter the picture.

But this is just the beginning.

Mortgage Securities

Next, we need “mortgage servicers” to collect the payments from people like Ed. At the same time, groups of mortgages are combined in (what I call) “packages.” They then are bought by investors whose return is based on the mortgage payments.

Oversimplifying, let’s just say that our path took us from…

• Emily the renter,
• to Ed the landlord,
• to Wells Fargo the mortgage provider,
• to mortgage servicers that collect payments from homeowners and landlords,
• to investors buying “packages” of mortgage securities that pay interest.

Now, because of the pandemic, there might be one last step along our path.

Our Bottom Line: The Federal Reserve

Knowing that investors would not get paid because people like Ed canceled autopay to mortgage servicers, the Federal Reserve has said it will purchase mortgage securities. Through the Fed’s CMBS (commercial mortgage-backed securities) Program, they are buying bond “packages” worth billions in the open market.

During the week of March 30, the New York Fed bought commercial mortgage-backed securities worth $1.03 billion. The Fed said that their purchases would continue.

So, we have Emily who could be eligible for unemployment money through the CARES Act and the owners of commercial mortgage-backed securities getting Federal Reserve dollars. We could say that the beginning and end of our path are rather similar.

My sources and more: For the pathway that links the renter to the mortgage security, Planet Money, this NPR newscast, and City Lab had the details. Next, do read this Reuters article for how the Federal Reserve is stepping in. (Our featured image is from Bloomberg via City Lab.)

Ideal for the classroom, econlife.com reflects Elaine Schwartz’s work as a teacher and a writer. As a teacher at the Kent Place School in Summit, NJ, she’s been an Endowed Chair in Economics and chaired the history department. She’s developed curricula, was a featured teacher in the Annenberg/CPB video project “The Economics Classroom,” and has written several books including Econ 101 ½ (Avon Books/Harper Collins). You can get econlife on a daily basis! Head to econlife.

econlife - How to Measure Our Misery by Elaine Schwartz

An economist could say that three “lows” and one “high” bring happiness:

• low inflation
• low unemployment
• low interest rates
• high growth

Taking the flip side, they also let us identify misery.

The World’s Misery

Economist Arthur Okun (1928-1980), created the first Misery Index. By adding together the inflation rate and the unemployment rate, he had a measure of economic distress. I guess it makes sense that when purchasing power dips and joblessness climbs, there are fewer smiles.

Now though other economists have taken the idea a step further. Johns Hopkins Professor Steve Hanke tells us that we should add interest rates and growth to the equation. More precisely, he totals the unemployment, inflation, and bank lending rates. Then, from that number, he subtracts the percent change in per capita GDP growth. When the first three rise, they are the “bads.” But if the last one goes up, it is a “good.” You can see that high numbers are alarming.

From a list of 98 countries, these are Dr. Hanke’s most miserable five in 2017:

The States’ Misery

Returning to the Okun approach, we can use data from a 2016 paper to see the most  miserable states during the Great Recession. To get his numbers, an SMU economist added his inflation rate formula to the unemployment rate. (The NBER dates for the recession were December 2007 to June 2009.)

From a list of the 50 states, these were the five most unhappy:

U.S. Misery

Returning to the Okun approach, for the worst U.S. numbers, we can look back to the stagflation of the early 1980s when we had a stagnant economy and inflation. Now though, combining exceedingly low inflation and unemployment, our March misery index was 6.46:



However, even with such a low index number, the U.S. is not among the 10 least miserable countries:

Our Bottom Line: Misery Index Questions

Like all statistical yardsticks, a misery index can be a handy tool. However, we should also remain aware of its defects:

• With unemployment, we are looking at the tip of the iceberg. Although we can have too low a participation rate, too many discouraged workers who left the labor force and part timers who want full time jobs, still the unemployment rate can be attractively low.
• As for the inflation rate, the index assumes that low inflation numbers are good, even when they are too low.
• And thinking of unemployment and inflation together, equal weighting could sometimes be misleading. Unemployment can generate much more misery than inflation.

So, even with the U.S. Misery Index approaching its 60 year low, we might be sadder than we think.

My sources and more: The more you look, the more misery indexes you find and the more interesting it becomes. The Hanke list and some analysis were at Cato while this paper had the U.S. states numbers. Meanwhile, there were many possibilities at Bloomberg.

Please note that several sentences from today’s post were in a previous econlife.

This post was slightly edited after publication.

Ideal for the classroom, econlife.com reflects Elaine Schwartz’s work as a teacher and a writer. As a teacher at the Kent Place School in Summit, NJ, she’s been an Endowed Chair in Economics and chaired the history department. She’s developed curricula, was a featured teacher in the Annenberg/CPB video project “The Economics Classroom,” and has written several books including Econ 101 ½ (Avon Books/Harper Collins). You can get econlife on a daily basis! Head to econlife.

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