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Baby boomers will be poorer than their renting children when housing deflates!


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2012 Oct 27, 11:54pm   2,876 views  5 comments

by EconPete   ➕follow (2)   💰tip   ignore  

http://www.cepr.net/documents/publications/baby-boomer-wealth-2009-02.pdf

This analysis looks at the net worth of baby boomers in two age groups and determines who is wealthier; homeowners or renters. This paper was written in 2008 without the knowledge or understanding of the effects from massive government intervention that has altered the results of their projections. It is safe to assume that without a 0.25% Federal Funds Rate, the New Home Buyers Credit, the foreclosure moratorium, and complete nationalization of Freddie and Fannie these projections are accurate.

The socialization of the housing market is not sustainable and this paper gives insight into the net worth of both renters and homeowners once this artificial propping of the market subsides. On page 11 at the bottom it says “in every quintile of net worth, the homeowner in 2009 will have less-not more-wealth than their non-home-owning counterparts. At the lowest quintile, homeowners are projected to average 33-38 times more net debt than other households [renters] in the bottom fifth.”

Another scary truth in the executive summary says “This analysis indicates that the loss of wealth due to the collapse of the housing bubble and the plunge in the stock market will make the baby boomers far more dependent on Social Security and Medicare than prior generations.” At the exact time the government should be pumping up these funds, they are issuing tax reductions in a hope to re-inflate false asset prices.

At the very bottom of the article “Implications for Policy” touches the fact that baby-boomers were actually negative savers in the time they should have been accumulating real wealth instead of watching their bubble assets inflate. Here this article warns readers of the dangers of bubble formation from Fed Policy. The problem is that our ignorant government thinks that the best way to fix the problem is to re-inflate the bubble and make it worse!

At least if the baby boom generation knew the impending consequences of not saving, extracting “wealth” from home equity (anti-saving), and investing in financial assets that will all be sold to younger, poorer generations, they would at least have a few years to save real money to prepare for retirement. See, the stock market and housing is not saving, it is a transfer. When you buy stock the money is immediately handed over to the seller which they then spend, thus no money is ever saved, which it is why it is not saving.

Now the responsibility of saving, now providing, for their retirement will be on generation X and generation Y which will start a vicious Ponzi-scheme cycle where future generations support past generations because they were collectively too stupid to support themselves. At least Socail Security and Medicare were supplementary before, now people are dependant on them. But, that is exactly the problem that government intervention creates. Government existence creates a moral hazard since people know that worst case scenario, they will still be safe. This change in the incentive system is due to a restructuring of consequences to their actions causing unforeseeable ramifications. In this case; millions of people saved nothing for retirement and will expect their children to for them!

In the short run a government policy will solve some need. In the long run the adjustment in individual’s decision making process will result in a reversion of the benefits of that program to the point that the exact thing the policy is trying to prevent, it creates. In this example, Social Security and Medicare in the long run actually contribute to people being poor instead of doing the exact opposite! But hey, if the government can come up with new snazzy solutions like socialized healthcare they will solve all the other problems they created……Right?

#housing

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1   EconPete   2012 Oct 29, 6:46am  

Another take on the paper by Dean Baker and David Rosnick can be found in this article.
http://money.cnn.com/2009/02/25/real_estate/boomer_wealth_evaporating/
There’s a nice quote from Peter Schiff on the bottom.

2   bg   2012 Oct 29, 11:44pm  

I can't seem to paste from the link, but I thought Patrick would like the part at the bottom of page three where renters were better off than owners. It is the foundation of many of his arguments :-)

3   upisdown   2012 Oct 30, 12:05am  

Homeowners that over-bought or bought what they didn't need, or cashed out equity to spend on ridiculous things couple with very little savings or 401k's, then are going to sell their biggest and most likely only asset at the very same time as the rest of the aging and retiring boomers. And, to top it off, not only are incomes and wages stagnant, but the upcoming generation is loaded down with college debt and underemployed.

80 million boomers or an average of 13,700 per day for the next 15 years or going to unload their biggest and only asset to a market of people with high debt and falling incomes. Some seller's market, huh??

4   BobMSN   2012 Oct 30, 1:10am  

The society can support underperformers or unlucky ones by tax and welfare in some extent. But if the government policies encourage and reward underperformers and cheaters by sacrificing and punishing the hard working people, the government will eventually run out of the resources to support the unlucky one. But politicians will never tell you the truth that someone got to pay whatever they have promised to the society.
No one is entitled anything unless you owed it.

5   upisdown   2012 Oct 30, 3:58am  

Who cares about that stuff, the people that are skilled, educated, and very productive aren't capturing enough of the productivity that they help create to move things along.

Why are you concentrating on the weak end or bottom of the economy because that's not where the money is?

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