Why aren't there more bankruptcies? Why do most seem to be centered among failing retailers and not much more?
We just got figures for November and they extraordinary: only 34,440 with chapter 13 filings for individuals down an astounding 45% -- 137,000 versus a year ago even as commercial numbers soared 40%, 654 vs. 449, according to Epiq Systems via the Wall Street Journal.
You are probably asking yourself what is the point of stimulus if individual bankruptcies are so low?
Simple: evictions are banned, and that ban extends to January 1, 2021, when 6.7 million renters representing 19 million people lose their protection. There's not much protection, though, among commercial renters, hence the soaring bankruptcies.
Or, to put it another way. The bankruptcy numbers for individuals are phony given that rent is the principal payment that must be made.
Still these numbers demonstrate just how strong the economy was going into the pandemic and what happens when our service economy stops providing service because so many people don't need it or even want it for fear of getting sick. Sure, they have kept their car payments up. Those are sacrosanct because, as we discovered during the Great Recession, if you lost your job you would rather turn in your home keys than your car keys. A home doesn't let you keep your job or look for one, a car does.
But these two numbers will soon cross over without a stimulus package. So many retailers and restaurants have struggled to make it this far but the electric, the heating, the insurance, the workers comp and, of course, the rent, are about to crush those owners who have operations without new customers and a loss of old ones. They have a chance to renegotiate the rent but they are in a perilous position because with the vaccine on the horizon they have to hope to catch a break from landlords, something that's fine for those who own the buildings, but not fine for the real estate investment trusts that need to show better, paying occupancies to please Wall Street and keep them from eliminating their distributions.
What happens when the ban lifts on the individuals? About 3.6 million people are evicted each year, according to the Princeton University Eviction Lab and it's reasonable to believe, given the spike in unemployment, that we will have a rush of eviction notices that are much larger than that.
I have talked about the need to protect the small businesses to give them business interruption insurance. Now, though we are going to start a process where individuals will file bankruptcy rather than pay the rents and the landlords of the country, and more importantly, the banks, will have huge problems on their hands, problems so big that you will see a potentially huge hit to the bottom lines of many banks, especially the community banks.
It's that moment where we are going to see if the service economy grinds to a halt as the money that is normally being spent on rent but is fueling lots of purchasing at retail, will most likely cease.
Right now the Senate, particularly Senator Mitch McConnell, doesn't seem to understand that the community banks are going to have the examiners crawling all over them to raise reserves. Same with the big dogs. That's when I expect a true hit to the economy if you don't see a pick-up in job growth tomorrow.
Remarkably, most real estate investment trusts that own homes are fortunate enough to have lots of suburban homes that are in great demand. But, once again, it's the remaining business in the cities that could see a very big decline in sales when the renters are forced to pay what they haven't paid. You can also expect still one more exodus from the cities, where the renters are concentrated, to the suburbs.
Why we are having this happen so close to the vaccine is insane. But it's lost in Washington. The false fuel to the rest of the economy isn't being talked about. I think it's time to put it in the equation. It looms post the holiday season. It's setting up for a very tough January without help from Congress. So, don't be lulled into thinking that bankruptcies are low. They are really soaring. And there's no one there to stem them when the eviction notices slam the country.
