Sunday, July 27, 2008

The Housing Crisis is Destroying Household Wealth

Just a quick note today.

I came across this article in the Baltimore Sun. These statistics pretty much floored me:

"It seemed like a good idea.

Baby boomers who never got around to saving as much as they hoped promised to keep working past retirement age. The joke in the generation has been: "I'll just work forever." And the intent has shown up repeatedly in research.

But now along comes an economic downturn, and people are losing jobs. It looks as though Plan B, a lifetime of working, might not be an option to rescue undersavers after all.

"It's a perfect storm," said Jack VanDerhei, a Temple University professor and fellow at the Employee Benefit Research Institute.

Too many people approaching retirement age have saved too little, accumulated too much debt, stretched too far on homes that have lost value and never made good on the promise to save more tomorrow, he said.

With home prices plunging and the stock market down sharply, Dean Baker, co-director of the center, said: "The vast majority of near-retirees have accumulated little or no wealth. This means that they will be completely reliant on Social Security and Medicare to support them in their retirement years."

According to Baker's calculations, if house prices decline no more than they have already and stay fixed through 2009, "the median household would have 24.7 percent less wealth than the median household in this age group in 2004." If real house prices fall 10 percent more, the median household would see a 34.6 percent loss in wealth compared with 2004. If homes fall another 20 percent, median household wealth would drop 45.6 percent"

My Take:

That final paragraph floored me. This destruction of wealth will destroy many baby boomers hopes for retirement. I see no reason why housing prices won't drop another 20%. They doubled in the bubble areas in the past 10 years and prices have only corrected about 15% so far.

The lending products are no longer available to support the current housing prices, and interest rates are rising. The fact that the average person will see their household wealth drop in half if housing prices drop another 20% is astonishing!

Housing prices must drop back to the historical levels of 3-4 times income. Its the only way most people will be able to qualify for a mortgage going forward. This means we have a long way to go on the downside in terms of housing prices. Another 20% down should be expected instead of being the worst case scenario.

The baby boomers better start saving. Home equity can no longer be counted on as a retirement. Its time to sell the Hummer and throw the cash in savings!

The rippling effects of this housing crisis continue to amaze me. I don't see how our economy grows with such a massive destruction in wealth. The faster home prices correct the better.

There will be no sustained economic growth until housing gets back in line with incomes.

4 comments:

Avl Guy said...

This is where many may veer from my position; I think it’s beneficial that the Boomers and their Elders have as much skin-in-this-game as possible, the game being the debt-driven widespread devaluation of assets.
I'll keep this short: we need everyone to participate in sharing the pain downward, and carrying the load upward; 2) Boomers & Elders were warned for 20 years that these private & public debts/deficits and long-term obligations were unsustainable, yet they took no self-sacrificing bold actions; 3) they took no action because they believed the promises that the $-problems would wait until some unlucky future generation was forced to deal with it; Boomers and their Elders mistakenly believed they could consume their hyper-inflated, debt-fueled assets in old age; and 4) this is very fair because I dont think the Boomers’ kids will ever be experienced or savvy enuff to unravel the mess and rebuild if it fell alone on their shoulders, they never even lived in a world without credit cards & ATMs, as their elders did. Let Bernanke’s, Paulson’s, Angelo Mozillo's their cubicle-dwelling minions and yes-boys and yes-girls, lazy voters, etc, and all our contemporaries keep full skin-in-this-game until we’ve suffered enuff to fix it or lose these inflated, debt-fueled gains to deflation.
Harsh? Yes.
Fair? Definately.

Jeff said...

avl

Well said sir!

I totally agree. Its time to get off the crack pipe.

We will be paying this off for the rest of our lives but maybe people will learn to respect the value of a dollar.

50 years from now I will be that grandfather that talks about the Great Depression that I was forced to live through.

The markets are going to get creamed. No one is buying Paulsons crap anymore.

Lets hope we learn something from all of this. Maybe a little discipline?

Avl Guy said...

Indulge my idealism for a moment: 50 years from now, you will bore the grandkids with the story of the wrenching acceptance of new realities and the all the painful changes in consumption, production, transportation, and living, that were undertaken by many socio-economic classes as America adapted in fits & starts to Peak Credit, Peak Debt as well as Peak Oil...and suceeded...in 2028

Jeff said...

I wonder what this world will look like 50 years from now. I hope I stay healthy enough to see it!