Wednesday, October 13, 2010

Follow-up: Census data confirms lost households, especially of college grads.

Dr. Housing Bubble
Removing a generation of college students from purchasing homes...
18 Sep, 2010

The net worth of U.S. households fell by $1.5 trillion in the second quarter of 2010. Recent data from the Fed shows that even during the recovery, U.S. households continue to move backwards in making financial progress. Who are we really kidding here? Does this feel or have the taste of a recovery to anyone? In fact, new data now coming out from the Census shows that from 2008 to 2009 the U.S. lost 1.3 million households. That’s right, because of the economy people have had to consolidate households...

...Many young potential buyers won’t be able to buy a home because theoretically they already did with the cost of their education. The numbers don’t look pretty for recent graduates with red all over their balance sheets before they even start their professional life...

...Now I have heard some say, “well when I went to school, I walked through the snow in shoes made of paper bags and worked to pay for my tuition.” College costs have changed since that time and just like the housing bubble at its peak, even the crappiest home in the worst part of town was selling for a premium because everyone qualified for a toxic loan. As things stand today in the student loan market, that is still the case with loans covering virtually any college. And just like Fannie Mae and Freddie Mac the government subsidizes the bulk of student loans. We even have nice old Sallie Mae.

We know student loan debt is immense. Over $829 billion in student loan debt is outstanding. The implication for housing is large. It is safe to assume that this debt isn’t with households that have paid off their mortgage long ago. These are people entering their household formation years. The average student loan debt is now the price of a brand new car...

...So right off the bat, a good portion of disposable income is going to go to servicing this debt. Unlike a bad mortgage, you can’t walk away from student loan debt. So there is a major liability already on the books for many prospective buyers. Compare this to a blue collar worker back in the 1960s with no debt purchasing a home. No need for a college degree to buy a home with one income. Today, you have this new college graduate that is probably making less on inflation adjusted terms from this blue collar worker and is unable to purchase a home without taking on more debt or combining two incomes. You have to wonder how many college graduates with large amounts of debt are unable to purchase homes because of their student loan debt? Keep in mind that 1 out of 4 Americans have a 4-year degree so this is supposedly a group that is prime for purchasing real estate...

...The decline in households is troubling and shows weaker macro trends. How many recent college graduates with massive debt unable to find jobs moved back home? This is a group that would be out getting their first apartment and creating a new household. The decline is significant and shows the real structural challenges facing our economy. It is also a reason why multi-unit commercial properties have record vacancy rates...


And the number of Americans who can afford neither mortgages or rent is growing, Dr. Housing Bubble continues:



...This is horrible news on many levels. Where are these people coming from? Many are coming from the middle class. For many in this group they were part of the 1.3 million reduction in households. This housing and debt bubble has deeper societal ramifications that are now playing out. This goes beyond stabilizing home prices but reshaping what we want out of our economy. For too long the focus has been on housing and keeping prices inflated. Yet the latest household income data shows that U.S. households now make less than $50,000. With that said, home prices should be lower to reflect what people can afford...

...We are reaching peak debt with higher education. Many are catching on that simply having a 4-year degree in any major from any school will no longer be a ticket into the middle class. In fact, even going to a good school but choosing the wrong degree may leave you with a good education but no earning potential. Try explaining that to the student loan collectors. This is only another bubble but the implications are deep for housing. Without any reforms, you have a large cohort of younger Americans that will put off home buying for many years because of other debt commitments. What will this do to future projections of housing? Just like the toxic mortgage funnel, we have new factors that change the calculus of housing for the next decade. The shrinking household number is a reflection of our massive misguided bias to home buying. Who really wins here? We already pointed out that the net worth of Americans fell by $1.5 trillion in Q2 of 2010, a supposedly good time for the economy.

It is clear that massive debt pushed by the banks is the issue here. The same too big to fail banks are also the top pushers of student loan debt (and credit card debt). It would be one thing if they pumped out their own money but they are now wards of the country and have mismanaged so many things that we are setting ourselves up for another crisis soon. That is why the student loan bubble is now converging with the housing bubble....


On the upside, it is possible that the combined incomes of multi-generational living arrangements (and co-housing arrangements with friends instead of relatives) could improve the quality of life and economic stability for everyone in the home. If approached correctly, this sort of situation can be a benefit, spreading the household expenses over more wage earners and providing more hands to perform household duties and childcare instead of having to pay someone else to do it. For centuries, millennia actually, multi-generational households have been the norm and served as a first line of defense social safety net for children and the elderly.

It is only in the past century that the adults - the Baby Boomers - have considered themselves not responsible for either the parents or their children's welfare. The "me" generation is going to have to get over itself, to say the least.

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