The Center for Economic and Policy Research published a study in June entitled The Housing Crash and the Retirement Prospects of Late Baby Boomers. It is from the data source as the wealth distribution (wealth concentration) data on the wealthandwant.com website (the FRB's Survey of Consumer Finance), but limits itself to a single age cohort: those who will in 2009 be ages 45 to 54.
It starts with the net worth, house values and mortgage balance data for that age cohort from 2004, and then considers 3 scenarios:
- The first scenario assumes that real house prices fall no further than their level as of March 2008.
- The second scenario assumes that real house prices fall an additional 10 percent as a 2009 average.
- The third scenario assumes that real house prices fall an additional 20 percent for a 2009 average. (Real house prices are currently falling at the rate of approximately 1.5 percent a month.)
Within the age cohort, the study divides households by net worth quintiles, and then looks at homeowners and renters separately. The results are stunning.
- In the first scenario, families in the 45 to 54 age cohort in
2009, who were in the middle grouping of the wealth distribution in
2004, will have on average just $113,600 of wealth in 2009, 26.2
percent less than families in this age group in 2004.
- In the second scenario, families in the middle quintile will have $97,600 in wealth, 36.6 percent less than families in 2004.
- In the third scenario, families will have $81,500, 47.0 percent less than families in the middle quintile for this age cohort in 2004.
At 45, they still have 20 years to assemble some assets on which to retire -- if all goes well:
- children all receive full scholarships for college, or otherwise pay for it themselves
- no aging parents need hands-on care or financial assistance
- their own health remains good and their health insurance effective
- their mortgage carrying costs don't rise
- they remain employed year-round and reasonably full-time
At 54, they still have perhaps 10 to 12 years, if all goes well both personally and in the economy. But if they are still paying 30% of their income for housing, there may not be a lot of money available for saving and investing, particularly when wages are not rising and jobs are not easily come by. [Have you stopped to think about what it is in how we structure ourselves that helps keeps wages down and jobs scarce? Explore wealthandwant.com, perhaps starting with themes like wages, wages tending to a minimum, job creation, housing affordability, cost of living, lowering the price of land. Check out the links in the right sidebars on those pages, too.]
We've gotten used to considering "building home equity" to be muscular work. Well, the reality is that with the exception of the increases in home equity that result from paying down a mortgage, the "heavy lifting" has been done by the community. That is, our houses depreciate -- at roughly 1.5% per year -- and it is increases in land value which have been driving up home equity -- and borrowing repeatedly against this rising home equity is the engine which has driven recent spending, since wages for the bottom 95% of us have been fairly stagnant in recent years. Many homeowners, particularly in California where Proposition 13 has created artificial scarcities of housing and driven housing prices sky high, have experienced years where the increase in the value of their homes (that is, land) has exceeded their gross income for the year, and far far exceeded their savings.
The goal used to be to enter retirement with the mortgage paid off. This generally meant buying a home with a 30 year mortgage in one's 20s or 30s, and not moving and not refinancing. Or it meant buying in one's forties, and experiencing an increase in income sufficient to pay off the mortgage some months or years ahead of schedule. And then applying that income toward investments toward retirement.
Among the striking findings in this 11-page report are the final line each scenario in Table 2: The percentage of homeowners who would need cash to close were their houses to be sold -- 11% in scenario 1, 22% in scenario 2, and 32% in scenario 3. Their 2009 mortgage balance would be higher than the market value of their homes less transaction costs. This puts them in a poor position if a job opportunity opens in another part of the country.
And along with that, many workers were covered by pensions. On of the other notable points in this study is that only 35% of this age cohort has a defined benefit pension.
Are all these people at fault, or is the problem something in how we structure ourselves? Are all these people just having unavoidable bad luck, or have we structured something into our economy that produces this effect?
I'll return to a pair of quotes from Albert Einstein, as we consider what to do about this situation:
- Insanity: doing the same thing over and over again and expecting different results.
- A clever person solves a problem; a wise person avoids it.
So what does a wise society do? It prevents problems, by structuring itself wisely and justly. Land value taxation is the necessary, if not sufficient, reform to achieve that.
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