What Happens When You Don't Pay Rent?

(CBSNewYork) -- Rent is due once again. So are mortgage payments. As the calendar turns from May to June, people around the country owe what for most is their biggest single monthly expense -- housing.

Experts generally recommend that households cap their housing expenditures at about 30 percent of before-tax income. Many renters, especially in more expensive areas, spend as much as 50 percent. When incomes drop to zero, making that monthly payment can become very difficult. If people can't pay their rent or mortgage, how does that affect the larger economy?

The official unemployment rate neared 15 percent in April and could top 20 percent in May. (The actual unemployment rate is likely far higher.) Another three million Americans filed for unemployment in the second to last week of May, the most recent time period for which statistics are available. That means more than 42 million people have lost their jobs since the economy tanked.

As of the middle of last week, 93.3 percent of renters still paid some or all of their May rent, according to the National Multifamily Housing Council. That's slightly worse than May of last year and slightly better than April of this year. It's much better than might be expected given the current economic climate. Almost four million people, around 7% of mortgage holders, had stopped paying by the end of April, a significant jump.

One-time stimulus payments of $1200 per person and an additional $600 per week in unemployment benefits certainly helped many keep current on their housing payments. Reduced payment deals worked out with landlords and banks probably played a part as well. But another round of consumer stimulus is far from certain. The extra $600 in unemployment, made possible through the CARES Act, will run out at the end of July. And forbearance from creditors generally doesn't mean forgiveness; that money must eventually be paid.

With the job market unlikely to recover anytime soon, more missed rent and mortgage payments seem inevitable. That will have a domino effect that hurts communities, including the people unable to pay their bills in the first place.

"There is a very simple principle in macroeconomics, and that's somebody's income is someone else's expenditure," says Yeva Nersisyan, associate professor or economics at Franklin &  Marshall College. "And so, if someone stops their spending -- their expenditure -- then someone else is not going to earn income. And that really has multiplier effects in the economy, because if this person or entity doesn't earn income, then they're going to cut their spending, and their spending was someone else's income, and so on."

This textbook lesson plays out in countless ways everyday throughout the economy. But let's narrow the scope to just housing. If one renter doesn't pay rent, their landlord doesn't receive income. After a short period, the landlord may then be unable to pay their mortgage on the property. If the bank doesn't receive the mortgage payment, it will eventually classify the loan as delinquent. The property owner would eventually be forced to sell or risk being foreclosed upon.

Property taxes are generally coupled with mortgage payments. If a landlord or homeowner doesn't pay them, state and local governments have less money to use on salaries and local services.

Any single missed rent, mortgage or property tax payment won't have a noticeable effect on the larger economy. But the situation grows a little worse when those missed payments go on for months. And the situation could grow drastically worse given that upcoming May unemployment figures could exceed 20 percent of the workforce. Many of them have little hope of finding a job anytime soon or receiving additional aid beyond July 31, when the extra unemployment insurance expires. On top of that, consider that over half of all American adults don't have an emergency fund that could cover three months of expenses.

Various eviction moratoriums temporarily protect vulnerable renters from losing their homes. New York, for example, recently extended it's moratorium through August 20. But property owners still need to make mortgage and real estate tax payments in the meantime. According to Nersisyan, "you have to worry about the landlords and their lenders and so on, because there are financial relationships that don't just go away."

Barring an unlikely V-shaped recovery, many property owners will risk losing their property. Enough foreclosures and quick sales could start to depress property values. State budgets will also be woefully underfunded. Almost every state has a balanced-budget amendment. "So their current expenditures and income have to match," says Nersisyan. Faced with a declining property taxes along with a steep drop in sales tax (consumer spending has dropped off a cliff), a budget shortfall is inevitable.

"They are then going to engage in cuts," Nersisyan continued. "And that would mean cutting public services, of course, firing firemen, teachers, police men and women."

That would increase unemployment even more and further inhibit any economic recovery. "When state and local government revenue starts falling and they start cutting their spending, that's a drag on economic growth," says Nersisyan. All those former firemen, teachers and cops will inevitably spend less money because they're unemployed.

One missed rent payment goes mostly unnoticed in times of prosperity. Millions of missed rent payments can depress an economy in times of economic hardship. The coronavirus pandemic has forced the national economy into a tailspin. Adding in a housing crisis certainly won't help it recover.