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