Thursday, 12 March 2009

The Wealth of the Baby Boom Cohorts After the Collapse of the Housing Bubble

It is the economics research paper of the year.

Two economists - David Rosnick and Dean Baker - from Center for Economic and Policy Research, look at the impact of the US housing crash on the wealth of the baby boomer generation. They confirm what we all suspected; the boomers are busted.

Their key findings were:

  • The median household with a person between the ages of 45 to 54 saw its net worth fall by more than 45 percent between 2004 and 2009.

  • If the median late baby boomer household took all of the wealth they had accumulated during their lifetime, they would still owe approximately 45 percent of the price of a typical house and have no other assets whatsoever.

  • The situation for early baby boomers is somewhat worse. The median household with a person between the ages of 55 and 64 saw its wealth fall by almost 50 percent.

  • As a result of the plunge in house prices, many baby boomers now have little or no equity in their home.

  • The author's projections show that for both age groups (45-54 and 55-64), the renters within each wealth quintile in 2004 will have more wealth in 2009 than homeowners.

    Anonymous said...

    I'd like to see some UK numbers.

    Electro-Kevin said...

    I'm 44 - thank God !

    Of '55% drops in house prices' the ever ebullient Ajay Ahuja has this to say:

    'These were the headlines and boy I hope they are right!

    If property prices were to fall by say 50% then that means everything you see now for sale could be bought for half price.

    A £50,000 property could be bought for £25,000. This means if it yielded 10% it will now yield 20%.

    If we look at borrowing rates predicted over the next 2 years then we are looking at sub 5% all the way.

    So expect to make 15% on everything you buy IF these experts are right. So if you invest £1m you can expect to earn £150,000 per year. And to top it off you can do this with very little money in, roughly £50,000.

    So house price fall predictions are great as income goes through the roof.

    House price rise predictions are great as capital goes through the roof.

    Either way the property investor wins.

    If I be honest I know which I prefer. I prefer income. Capital is all well and good as you can use it as security to raise finance however income is great as you can spend it!

    Do I think property prices will drop by 55%? I hope so! However seems very unlikely as us investors provide the cushion to the crash and I do not expect to see properties around me yielding 20%. 10% maybe but not 20%.

    Also the biggest problem with all these stats that get reported is that the population of the sample i.e. the physical number of data items being used to calculate these stats have shrunk massively during this credit crunch.

    Nation house price stats have little relevance if there are very few transactions making up the stat. You may see house prices falling in the stat but when you go to Rightmove you do not see the properties! If you do, you ring it up and it has gone (probably to an investor).

    I hope you can appreciate that no matter which way property prices go it is ALL good for the investor.

    Roll on 2009.'

    Mark Wadsworth said...

    EK, back on planet earth, rental yields at the peak were in the order of 3% to 5%, if they go to something sensible like in the mid 1990s, that's 9% to 12%, so prices would have to fall by two-thirds overall.

    Anonymous said...

    Is "net worth" an expression whose meaning is so universally agreed and so widely known that there is really no need for the authors to define it?

    Call me a sceptic, but I wonder what's buried in the detail.

    Anonymous said...

    AH, cALCULATED RISK SAYS "This is the Households and Nonprofit Net Worth as a percent of GDP.

    This includes real estate and financial assets (stocks, bonds, pension reserves, deposits, etc) net of liabilities (mostly mortgages)." What happens when someone retires and turns his pension capital into a monthly pension or annuity? Does that large lump of capital get subtracted from his net worth; is a capital sum imputed to his net worth to cover the pension payments yet to come?

    Anonymous said...

    Anyone in those age groups - especially the older group - who has still not paid off their mortgage has been gossly irresponsible.

    The sympathy-meter is reading zero.

    (For the avoidance of doubt - I am 57 and have NO debts. I suppose my house is worth less than it was last year, but hey, I bought it to live in, not to profit from.)

    Anonymous said...


    For gossly read grossly.

    For bought it read built it.

    Electro-Kevin said...
    This comment has been removed by the author.
    Electro-Kevin said...

    Anon 08.48

    Some poor sods saw their pensions decimated by Brown. Their only option for funding retirement was to speculate on property - some did it through BTL others did it by buying bigger houses with a view to downsizing later. Admittedly quite a few partied.

    I started relatively late in life (first mortgage at 28) Then we had children and sacrificed my wife's Systems Analyst wage (lucrative SAP contracts) because we didn't believe in baby farms.

    Both boys are happy, well adjusted, healthy, buzzing with intelligence and far too cheeky by half. They've just got into grammar school which is great, though their parents are feeling rather impoverished and haven't had a proper holiday for five years.

    I still have a sizeable mortgage so have I been reckless ?

    Ed Balls would say my kids are highly privileged by wealth. They're not, I can assure you of that. They're privileged by parents who are prepared to make real sacrifice.

    K T Cat said...

    Great post.

    Off topic: I just blogrolled you. I apologize for not having done it sooner.

    Anonymous said...

    "I started relatively late in life (first mortgage at 28)": so did I, back in the 70s. Could it really make sense to start much earlier?

    "we had children and sacrificed my wife's ..wage...because we didn't believe in baby farms. Ditto.

    If you've not yet had to deal with the Aged Parents in Decline, you don't know how bad it can get yet.

    Best wishes.

    Electro-Kevin said...

    Dearieme - I'm dreading it.

    Mine have been thrifty. Her's not so - they've stranded themselves in Cyprus with a meagre UK pension.

    I'm wondering whose are going to be the bigger burden. I guess mine because they dared to take the trouble to provide for themselves properly.

    Anonymous said...

    Anybody who retires with debt is a deeply irresponsible person. They should not guilt trip their children into having to care for them in old age. They must find a way to survive on their UK pension. No guilt trips: sorry.

    Anonymous said...

    Just you wait, Anon, the money's not the worst of it.

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