Monday, May 5, 2008

To think about

I just found this lecture by Harvard Law School professor Elizabeth Warren, "The Coming Collapse of the Middle Class" (via Energy Bulletin of all places). The precarious economic foundation she documents is another reason to expect house prices to return to more sustainable levels.

She begins with a focus on the span of one generation, from 1970-1 to 2005-6. Median incomes rose for married couples, but fully-employed males made slightly less. The increase was only because women went into the workforce.

Savings fell from 11% of take-home pay to below zero. Revolving debt rose from 1.4% to 15% of income. In other words, they now spend all of mom's income plus what they used to save plus went into debt.

What did they spend it on? Spending is less on food, clothing, appliances, cars, in real terms, than a generation ago. The five big increases were:

  • 76% increase on mortgage payments, despite lower interest rates, without major average house size increase;
  • 74% increase in health insurance, and that's for those with employer-sponsored insurance;
  • More cars per family;
  • Childcare;
  • 25% increase in taxes, from higer rates with two earners.

Additional notes

  • 3/4 of income to big, fixed expenses
  • Greater risks of lost income with both parents earning, such as family emergencies;
  • One-income families can't compete;
  • 100% house cost increase for families with children - parents are buying school quality [as we see in Santa Monica];
  • Now believe college diploma necessary for middle class - parents' cost of launching next generation more expensive, from pre-school to college;
  • Much greater rate of bankruptcy filing - job loss, medical problem, family breakup - more children in households filing bankruptcy than divorce;
  • Some middle class join a larger upper class - sort-of-rich that don't hit risks, while others become underclass on debt treadmill, living on edge of a cliff, never with the security of past middle class.

Second, Paul B. Farrell today includes:

6. 'Great Recession' will dominate the next president's term

Our oblivious leaders in Washington and on Wall Street (the same ones who denied our problems for three years before the mid-2007 meltdown) are already happy-talking a pre-election recovery. In his Portfolio article Jesse Eisinger warns: "The next president will take office during what may well come to be known as the 'Great Recession,' the worst financial crisis of the post-World War II era," he warns. "The economic revival of the past few years -- once celebrated on the right as the 'Bush boom' -- was a mirage, conjured up by excessive borrowing and irresponsible lending." In 2009, a new president will be forced to raise taxes and fund a "New, New Deal." Yes, it's that bad, even worse than you think.

Where would you raise taxes? Where the money is, the people who buy expensive houses. Think that will affect north-of-Montana prices?

His other subheads reinforce the "eye of the hurricane" view:

7. Wall Street's clueless, will miss next big turning points too
8. Consumer-confidence collapse signals systemic shift
9. No bottom in sight for declining home prices
10. Wall Street's leading guru-of-gurus very worried


Wooster said...

Ugly stuff. I get skewered when I talk about my thoughts about the future of the USA on its current trajectory. I'm called a fatalist all the time. It's always good to see that I'm not alone. I can always read the forums over at though. Those guys are negative.

Corntrollio said...

Westside, check out this article on how government figures on unemployment, inflation, etc. are hugely flawed. The government figures show a much rosier picture than what most economists say, and this fits along well with your post, especially with the idea of a New, New Deal.

Anonymous said...

Savings fell from 11% of take-home pay to below zero.

Just an FYI: 401(k) contributions are not calculated into the savings rate. So, if you saved $15k (the 401k max) pretax, and your employer 50% matched, you have $22.5k/yr growing tax-deferred every year.

in 1970, using todays dollars, $15k pretax would be about $8k after tax. So, one could lower their after tax savings to zero, and have almost triple saved in their 401(k).

Yes, Americans save less, but it isnt as bad as that statistic tells you.

Now the debt problem....Americans, quit buying s**t you don't need!

Dan said...

Warren's thesis is clear, compelling, and wrong.

The case here is a bit too extreme, but gives you a sense of why:

Anonymous said...

5:04PM -- there's no way in hell those tax numbers are correct.

Corntrollio said...

5:04p -- For a family making $67,800 with $9670 in child care and two kids, using the IRS calculator on their website for 2008, I get only $3389 in federal taxes (based on taxable income of $66,150, after you subtract the health insurance payment if deducted by employer), add 6.45% payroll tax for an additional $4300, plus a small amount for state tax depending on where they live (based on federal tax base). Zywicki says the family would pay over $22K in taxes. Is he including sales tax, plus property tax and other random taxes? Because I'm getting about $7700 + state tax + sale tax, property tax, car tax, which still doesn't come close to $22K.

Anonymous said...

None of these doomsday folks have it right and the prices north of Montana will not go down just because the poor middle-class will be suffering from economic hardship.

That's because there is a very limited supply and plenty of wealthy people who can pay cash.

Las Vegas hurting? Who care.

Just like Manhattan Beach, Santa Monica will be immune to all of this turmoil since real estate is all local.