patrick.net

Jimbo: Federal taxes have generally been less than spending. Federal spending has generally been increasing during the last 50 years. It was about 16% of GDP in 1950. It peaked at about 23% in 1985. It has declined steadily since then. It was recently about 18%. This includes all federal government spending including Social Security, Medicare, defense, etc…

The boomer social security shortfall can be fixed without taxing the hell out of younger generations if we increase the tax now. Tax increases are not in the vocabulary of the current president. However, economists estimate that an increase of one percent would eliminate the entire projected shortfall. The shortfall would also be eliminated if we continue to experience strong productivity growth in the coming decades. But that is a bit of a gamble.

I say raise the FICA by one percent now.

Looks like you are right Zephyr. I confused overall tax rates with federal tax rates.

A cyclical downturn will be a reduction of activity – not a complete stop. In fact it will be only a very small reduction for most businesses. It can be severe for others, such as housing. However, even housing will continue, but at a slower pace.

It is wrong to say that producing housing is producing no value. Housing is part of our infrastructure like schools, roads, grocery stores, etc. These things are needed to enable continued growth of the economy. The workers must live somewhere. To the extent that we are now overbuilding, we will have to compensate later with reduced building. However, in the long run we must keep up with population growth.

Jimbo: Overall tax level of 29% of GDP in the 1980s sounds about right. State income tax, property tax, and sales tax would fill the difference.

Perhaps a thread on women’s needs contibuting to the bubble. My girl wants a house but I will not give into the pressure, she has no idea.

I'm amazed at how much this kind of pressure can drive otherwise rational men into irrational spending. My husband tells me almost daily how grateful he is that I'm not a big spender. I hear stories all the time about co-workers who try to put their wives on a budget, but ultimately end up fighting a losing battle. I know so many women who have to have the big house, the clothes, the jewelry and the car.

And oddly, this does have a little to do with this thread. I wonder how a spoiled generation like the boomers, who raised another spoiled generation are going to convince the rest of us to pay significantly more taxes to support them in their old age. Granted, the next President (especially if a Democrat) may raise taxes. But no President who wants to get voted in for a second term is going to crazy, at least in the first term. But even if taxes are raised, the boomers will never see the kind of money they would need to support them in the way they have been accustomed to from social security.

I have long asserted my opinion that the troll lives an imaginary life fueled by fantasies lived online. I say we just delete his comments (Harm?) and be done with it. His act doesn't change enough to stay entertaining; now he's just an annoyance.

no President who wants to get voted in for a second term is going to go crazy.

It's all in the proofreading.

TWIT

I could kind of live with keeping the troll if I thought he had anything new to say. But I haven't read anything unique since he started posting. He has no imagination and it's *yawn* boring. He's a terrible storyteller. No depth, no character development, no forward motion in the story....

I know a few boomers who are prepared for retirement. But my husband cringes at how many clients he has who are late 50's with no retirement and no plan. I don't know statistically where the boomers stand on retirement savings, but again savings rates are at an all time low. Is all their money in RE? If so, is that a wise move?

I have long asserted my opinion that the troll lives an imaginary life fueled by fantasies lived online. I say we just delete his comments (Harm?) and be done with it.

However personally satisying that might be, as long as Sauce more or less behaves himself, he gets to stay. Sorry :-(

However personally satisying that might be, as long as Sauce more or less behaves himself, he gets to stay. Sorry

Aw heck.

I always wanted Sauce to *be* a porn producer.

At least he'd *be* interesting.

opnr that is pretty much my plan with my duplex. I am hoping that the tenants, how pay half the mortgage now, will pay all of it plus taxes and insurance in 20 years, by the time I am ready to retire.

That way even if I blow it with my investments, I can still live on Social Security. But I am not planning on blowing it. I put aside the max into my 401k every year, and so does my fiance.

Jimbo: To paraphrase Warren Buffet: Someone sits in the shade today because someone else planted an acorn long ago.

Make time your ally…

I am shocked and disturbed by how many people make almost no financial plans for their future.

I started my planning before I was out of college. The key is to spend less than you earn, and invest what you save. Then time is your ally.

Astrid: We had a burst bubble in the 1990s. People did lose interest for a while.

The saving mantra, live beneath your means. Does anyone follow this anymore?

Astrid

I think if there becomes a public perception that RE has become too speculative due to Prop 13 maybe something would change. But right now people are dependent on Prop 13 to keep their homes affordable, and I don't think there is a link in the mind of the herd that propery prices and Prop 13 are related.

During the Great Depression GDP fell by 50%, and 25% on an inflation adjusted basis. Today we are at such a dramatically higher living standard. To put it in perspective, IF we had a recurrence of the Great Depression like drop in GDP, our living standard would fall back to the level we had in 1988.

The disturbing thing to me is the YOUNG 20’s and 30’s who are doing the speculating!

My husband is a financial consultant and had to deal with this age group in the tech boom. They drove him NUTS! There just isn't a more spoiled and clueless group of people. They have also had it way too easy. The tech boom was immediately followed by the housing boom, and that allowed too many to shift their speculating from one area to another without suffering long term losses. I thought at the time the losses in the tech boom would be enough to slow the young investors, but you'd be amazed at how many are funding their speculating with money from the parents. And yet if you talk to them, they earned all their money themselves and they are the most brilliant people in the room. Reminds me of someone, can't think of who though......

Another perspective: On an inflation adjusted basis, incomes are double what they were 50 years ago.

I do not have those stats handy at the moment. But I believe the effect would not be materially changed.

Except for occasional brief periods, housing has always been important to the economy.

Astrid Good point about the double incomes. I'm with you, quality of life is way more important than the quantity of stuff one has.

astrid: The main reason we need a college education for a middle class life is competition from the 50% of the HS pop that goes to college. If you don't go you are in the bottom 50% (future).

Things really have improved in real terms, not just published GDP. Fifty years ago the middle class lived at a level that is not much better than what would be considered the poverty level today.

I don't think anyone would dispute that people are living much more lavishly these days. What concerns me is the lack of saving that is going on. Large numbers of people are relying on their homes to end up funding their retirement, and I'm just not sure how realistic that's going to end up being.

If you pay off your mortgage before you retire, then your cost of living will be much lower. There will be some wealth effect for those who sell at that point and move to a lower cost area. People who think their homes will simply make them rich are deluding themselves.

Large numbers of people are relying on their homes to end up funding their retirement, and I’m just not sure how realistic that’s going to end up being.

Many people counted on the NASDAQ to fund their early (35 yr old) retirements as late as April 2000. I talked to some... wanted to laugh... but felt sad instead.

Peter,
I sincerely apologize for any snips (you know) earlier (a month or two ago). Didn’t mean to cause any harm.
Your comments are appreciated.
Hymie

Please explain. You are confusing me now. :)

I guess it's the nature of bubbles to fuel unrealistic expectations.

Fifty years ago the middle class lived at a level that is not much better than what would be considered the poverty level today.

Living standards are really difficult to compare with technological changes. There are so many "indispensible" things (internet, A/C, airbags) that were not widely available in 1950.

I started my planning before I was out of college. The key is to spend less than you earn, and invest what you save. Then time is your ally.

Zephyr, many of my friends have the same "plan" too. However, some are planning their retirement using the "average historical return" of the broad equities market without considering that:

1. past result is no indictor of future performance
2. end result is path dependent even average return remains the same

I think technology is mostly evil. It speeds up the course of human history. However, since human civilization has a destruction tendency, technology will only speed up our demise.

I think technology is mostly evil. It speeds up the course of human history. However, since human civilization has a destruction tendency, technology will only speed up our demise.

I don't think technology is evil. The Roman empire showed us that humans can find a way to self destruct all too easily.

Sorry for going way out of topic. Back to housing...

Face Reality, you are right that a home can be a retirement tool because it is a significant asset and its value follows inflation. My only concern is that people have unrealistic expectations about homes. Some of my friends think that real estate can help them retire in their 30's and so they stretch every bit to get into as many houses as possible. I have a bad feeling about this...

Face

A home can fund a retirement if it is close to being paid off. But these days people are not staying in their homes the way they used to. People are a lot more transient than they used to be. With home prices going up, and people generally moving up into bigger houses, there is likely to end up being equity lost. If people bought a home and lived in the same home for 20 years or more the way they used to, then assuming the home would provide a large part of the retirement would be a lot more realistic.

Jack

Do you think it's two different groups of people that invested in the tech and RE booms?

I'm not arguing the existence of an echo boom, it's just that stats suggest it's not as big as the original boom. I do think there is an overlap with later boomers and the echo boomers as you suggest, and this will mitigate the effect of boomers selling out of the market- at least for a while. The funny thing is that this part of Zephyr's argument isn't what I primarily disagree with.

He states that we've seen the worst in housing corrections already. But I disagree. I don't think the major 'once in a cycle' downturn has occurred yet. If I'm not misunderstanding what he's said, he's used the late boomers and echo boom as an argument that there are enough people who will need housing in the near future to offset large scale selling off. My argument is that there is also large scale speculation in the market that is driving up prices and lately inventory as building has increased to meet demand. This doesn't even factor in all the other reasons (NAAVLP's and so on) that the housing market is shaky. I think Zephyr’s arguments are based on an “all things being equal” premise when comparing past market cycles to now. But I’m not sure that applies anymore.

But the tech and RE booms came so close together I thought it was essentially the same group of investors- at least initially- that fueled the furor.

Cheer up. Scheudenfreude isn’t everything, but it’ll help with some of the bitterness. If things get really bad, lets all buy a farm in the Willamette Valley together, grow barley and hops, and brew beer Good riddance to technology.

No bitterness. Just indifference. What is an echo boom anyway?

I think we may need to switch to duck-and-cover mode very soon. I have a strange feeling that the bust is coming sooner and sharper then I thought.

I do think that the uptrend will resume after this downturn though. Thanks Zephyr for providing a fresh prospective.

If people bought a home and lived in the same home for 20 years or more the way they used to, then assuming the home would provide a large part of the retirement would be a lot more realistic.

My argument is that there is also large scale speculation in the market that is driving up prices and lately inventory as building has increased to meet demand. This doesn’t even factor in all the other reasons (NAAVLP’s and so on) that the housing market is shaky. I think Zephyr’s arguments are based on an “all things being equal” premise when comparing past market cycles to now. But I’m not sure that applies anymore.

Bingo. SactQt, I think you've hit the nail on the head here. While I haven't been around as long as MerrillClient (or Zephyr?), I did live through the last RE boom/bust cycle here. I see qualitative and quantitative differences between this bubble and the last.

I don't have all the stats (Posse ?), but I can bet that (even though some of these loan products existed back then) use of "exotic" mortgage products is higher today than at the peak of the last cycle -- MUCH higher. I would also bet that a higher % of buyers today have shaky credit, and are using less collateral (down-payment) AND buying more homes on 100% credit than in any previous cycle. My guess is also that this RE bubble has spread much wider and is closer to being a truly "national" in scale than the one in the late 80s.