Transfer of wealth

There’s doom and gloom everywhere you turn. The S&P is plumbing lows not seen for ages. Housing markets continue to crater. Everywhere you look economic growth, industrial production, export volumes are falling off cliffs. Is there anything to feel good about?

I think there’s one aspect to the current economic and financial crisis that has had too little attention (Dean Baker is a notable exception). The value of the houses and 401-Ks of my generation may be plummeting, but that’s creating the opportunity for a younger generation to purchase assets that were both out of reach and clearly overpriced. That’s not a call on my part for the employed young to rush out and buy houses and stocks — the worst may well be still to come. But it’s when some stability returns to markets, people who were previously priced out of whole swathes of expensive places like the Bay Area will be able to buy. It’s also healthy that more people may view the benefits of home ownership versus renting with some skepticism. It’s not for everyone.

Rather than the many cries for action to boost the housing market, we should be glad that asset bubbles are deflated. It’s a transfer of wealth to younger generations, even if that’s painful for my generation. Let’s hope that when economic growth emerges from our current travails, it has firm foundations and isn’t based merely on an unsustainable bubble.

13 thoughts on “Transfer of wealth

  1. Jeff

    You are ignoring the massive transfer of debt to the younger generations. They will hate us for what we’ve done to their future.

    1. Lance Knobel

      I haven’t ignored it. I was taking a less examined angle. As to the debt, we’ll see how massive it is. The US already had many trillions of dollars of debt, which was a long-term problem. We’ve added a trillion or two to deal with the crisis, which I think is the right thing to avoid a true economic cataclysm. It should be possible to manage that debt down without over-burdening future generations.

    1. Lance Knobel

      Oddly, I sent the exact same map to a friend earlier today. There are a handful of “blue” places on the map. Most of the Bay Area has become considerably cheaper.

  2. keenan

    This transfer of wealth will only amount to something if a rebound is sustainable over the long haul Many of the people who bought at previous lows are beginning to see their cost basis erode as well. Yes, once at the bottom it will be a great opportunity for the “next generation” but not if it rises and crashes again in 10-15 years. Investing cycles are long for the avg person, however it is beginning to feel like they are getting shorter and shorter and if that is the case, it will only be a good time for those who can time the next crash.

    1. Lance Knobel

      It’s not probable, but I hope our society can avoid another housing bubble. What I have no belief in is anyone’s ability to “time the market”, except by chance and luck.

  3. Joshua Allen

    I assume you are being sincere, and I would love to see any silver lining in this situation, but your analysis is unfortunately quite flawed.

    For starters, price is a function of supply and demand — your house prices are not plummeting because you “are being generous to the youth”, the prices are plummeting because the youngest and most vulnerable have lost their jobs and therefore can’t buy houses.

    And no entry-level buyer can get a house loan right now anyway, since the banks know darn well that millions will lose their jobs in the next 18 months, and 6 million more will be foreclosed in the next 2 years.

    The stats on this are overwhelming — the people losing their jobs, houses, and who are bearing the brunt of declining house values are all the younger people, immigrants, single mothers, etc. The idea that older, responsible buyers are feeling the brunt more than the younger buyers, is flat out wrong.

    To be honest, this comes across as a guilty conscience and rationalization — and perhaps a misguided sense of selfish injury at decline in net worth: “Homeless young people, when you are standing in bread lines next year; don’t feel so bad! I took a $200k reduction in net worth to make houses cheaper for YOU!”

    The “logic” is somewhat seductive, and I’ve seen a few people in my same relatively comfortable situation make the same comparison — the theory is that, if we took a $300k drop in net worth against a base of $1 million (for example), and the single mother was in a home with only $50,000 equity, and now we “responsible” people are faced with higher taxes to bail her out, then WE are the victims. I mean, $300,000 + increased taxes vs. less than $50,000 — we are getting screwed 10x worse than she is, right?

    But this logic tragically wrong. There is no comparison between losing a fraction of your net worth and losing your livelihood, savings, and being forced into unsafe and uncertain choices. There is NO comparison.

    I know that it doesn’t feel it that when you look at your 401k, but the truth is that we just buried the young and are perpetrating an injustice on the young 10x worse than was the case 2 years ago. In dollar terms, it’s true that the younger people “make out like bandits” relative to us. But in *real* terms, you know damned well that you wouldn’t want to be in their shoes.

    1. Lance Knobel

      First of all, you know nothing about my personal finances. You’re making vast assumptions on no knowledge.

      Second, I’m not by any means arguing that my generation — or any generation — made a noble choice to lower asset prices. I’m merely making the point that lower asset prices have benefits as well as harms.

      I certainly recognize the evidence on the enormous harm being done globally by the financial and economic crisis. The impact is overwhelmingly affecting the most vulnerable, not the most comfortable. On that, we agree.

      But I do disagree with you on the role of supply and demand in housing prices. The speed and scale of the plunge is precisely because of the extended period when housing prices defied the laws of supply and demand, in many areas of the country. That’s the nature of a bubble. The bubble was so enormous that it had to pop — and we’re dealing with the consequences now. At some point housing prices will find a more natural level, one that is a reflection of supply and demand.

  4. Joshua Allen

    Actually, that’s a very good point. As you stated, the deflation of practically any irrational bubble definitely helps out most of society (including the young) in the long run. And you’re right about the futility of timing the market.

  5. Joshua Allen

    I’m not sure we’re so far apart on supply and demand. Bubbles are, almost by definition, situations where demand is irrationally and unsustainably inflated. And as Munger’s law states, “if it can’t go up forever, it will eventually fall”.

    Deregulation and principle agent conflicts led to a situation where credit was extended to people who had no hope of paying it off, and the credit (as well as the belief that “prices will always rise, so I could flip the house at no risk”) created inflated demand.

    As many have said, we are now in a long period of permanently reduced consumption patterns (which means higher savings, i.e. lower demand for goods).

    I suppose I’m very sensitive to the “good for young people” thing, because of the rhetoric of people like Santelli on CNBC who claim that the poor single mother is robbing us “responsible” homeowners. I find it absurd that the bankers can claim “We never could have know what would happen!”, and get a bailout, while simultaneously arguing that the single mother who was advised by the bankers to take an ARM, “should’ve known better, and should pay the price for such a stupid risk!” The truth is, bankers professionally manage risk, they get paid exorbitantly for being highly educated in risk assesment, and if the single mother “should’ve known better”, the same applies 70 x 7 to the banker. I have never heard a single person say that the banker should’ve known better, but I regularly see angry mortgage holders claim that their bailed out neighbor should’ve known better. It’s very sad.

  6. Nick de Souza

    I think part of the problem is the definition of next generation. If you take “next generation” to mean first time buyers who still have thirty years to work before they can retire, then the outlook is very gloomy indeed. Not only are they saddled with negative equity but they will have to work until they are 70 to get a pension. But Lance I admire your attempts to provide silver linings – keep them coming!


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