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Home Publications Blogs Beat the Press The Collapse of the Housing Bubble Was Great News for Young People

The Collapse of the Housing Bubble Was Great News for Young People

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Friday, 15 March 2013 04:29

The NYT had an interesting piece on new research from the Urban Institute showing that young people are faring very poorly in the economy. In presenting the list of problems facing young workers it included the collapse of the housing bubble.

In fact this was great news for young people in terms of their ability to buy homes. (The impact on the economy was of course devastating.) Since the overwhelming majority of young workers were not homeowners prior to the collapse of the bubble, the drop in prices means that they can buy a home for close to 30 percent less than what they would have paid 6 or 7 years ago. This is effectively a transfer of tens of thousands of dollars from older generations to the young. This is very good news for them.

Comments (16)Add Comment
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written by foosion, March 15, 2013 4:55
Great news for young people? Only if they have a job with good pay. On the one hand, they are faced with lower housing prices. On the other hand, they don't have jobs with which to afford housing.

They might prefer another scenario: a better economy with higher housing prices.

Compare the Federal govt, which is faced with low costs to build and repair infrastructure. Low costs and the ability to borrow vast amounts at low rates. Only a fool wouldn't take advantage of that.
Thanks to Alan Greenspan and Robert Rubin for Avoiding an Intergenerational War
written by Last Mover, March 15, 2013 7:02
Makes sense. In their immaculate wisdom, masters of the universe like Alan Greenspan and Robert Rubin anticipated the coming intergenerational war and took action to avoid it by allowing a housing bubble to replace lost wages for the working population, then timed it to bust when the younger generation needed it most.
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written by Kat, March 15, 2013 8:14
Makes sense. In their immaculate wisdom, masters of the universe like Alan Greenspan and Robert Rubin anticipated the coming intergenerational war and took action to avoid it by allowing a housing bubble to replace lost wages for the working population, then timed it to bust when the younger generation needed it most
Wow. He really is the maestro.
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written by skeptonomist, March 15, 2013 8:20
Most of the people who first bought homes during the bubble - say 2002-2007 - were probably on the young side. Older people who had already entered the market before then did not lose, since prices are now back to the long-term trend, not below it. Some older people (if they were really smart) may actually have cashed in when prices were high as they retired. Apart from flippers, most younger people probably had to hold on and take their losses. On the whole, the bubble probably resulted in in a wealth transfer from the cohort who bought during that time to older cohorts, though whether this is significant or not is another question.

Also a major feature of the bubble was making home loans available to low-income people who would not have qualified before when regulations were tighter and financing practices were different. These people probably also tended to be young as well as low income, and they as a group were losers by buying at elevated prices. Of course the major winners were not so much oldsters as the finance industry, which is still making money with various kinds of processing of the loans.
still unclear why housing is considered wealth...
written by pete, March 15, 2013 10:44
I have future housing costs. I can hedge those costs by purchasing a house. If the house goes up, implied costs go up, but I hedged by buying a house. No net wealth there. Somewhat of a transfer from renters to owners, but no net wealth. Imagine my mom sitting on a $500,000 house. If she sells, she has to rent something...why is that wealthy?

Now suppose I own stocks. If expected future cash flows go up, then my stocks rise in value. I have more wealth. Seems to be a completely different kind of wealth, with no transfers.

The youth, with lower future expected incomes, face lower housing costs comensurate with that. If their future incomes looked rosier, they could buy more house, and housing prices would rise, cancelling out the gain in future income. Thats what has happened in California vs say Detroit. No income, no real estate value. It is not wealth, it reflects wealth.
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written by watermelonpunch, March 15, 2013 4:55
They might prefer another scenario: a better economy with higher housing prices.


How about a better economy, but without housing bubbles & inflated housing prices, period?

Housing prices, I believe, are still kind of high considering incomes, no?
Mortgages are much harder to get
written by Dylan Barr, March 15, 2013 5:41
The problem with this thesis is that younger workers have higher and higher student loans, lots of debt, worse jobs, and they face much stricter mortgage qualifications than pre-crash. So if you are a really wealthy young person, it's amazing! You can buy that house with daddy's money for cheaper, while those who need mortgages are worse off, thereby widening the gap between the rich and rest of us, which will widen more and more based on these differences for decades to come.

I'm saving to buy a house with cash that is abandoned and fix it up with my own labor. It's my only option unless I want to give a landlord my money forever. The fucked up thing is that if I could get a mortgage, the payments would be HALF of what I have to pay for rent, for a nicer place than I rent! If I can pay my rent, and my mortgage would be half of that, you'd think I'd be able to pay it. But fucking banks don't give a fuck.
And, more importantly, they now know the importance of suitable investments.
written by Perplexed, March 15, 2013 10:24
"In fact this was great news for young people in terms of their ability to buy homes."

Those paying attention also know now why the high leverage and lack of diversification in housing makes this an unsuitable investment for most of them. For most young investors, if their stock broker had sold them this investment instead of their real estate and mortgage brokers, they could have sued and recovered for selling them an unsuitable investment. They now have the option of avoiding the risk of being buried in an underwater mortgage or filing bankruptcy like their slightly older friends and siblings. They also know that nothing has been done to protect them from financial industry fraud and that large financial institutions and their minions are immune from prosecution for defrauding them. Too bad their slightly older friends and siblings didn't have this kind of advanced knowledge. Hopefully they'll heed the warnings and invest more carefully.
missing a point
written by Eclectic Obsvr, March 15, 2013 11:55
I agree with most of the comments that find your post missing some very important points. I certainly think that you were trying to make a serious point but clothed it a general mischaracterization. It should have been more about new entries into the housing market with good financial positions versus how that looked during the housing bubble i.e. if you had inflated assets then the market conditions were relative as opposed to an absolute high expenditure. Still, an important point from a general aspect is that some younger families or singles jumped in as a matter of life necessity during the bubble and suffered the most and many have had their credit history ruined as a matter of having to either go bankrupt or walking away from an unaffordable morgage that was 'underwater'.
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written by watermelonpunch, March 16, 2013 12:24
I took the point of this whole thing to be that it's not about young vs. old... it's about average people vs. well off people.

This seems to be a running theme these days to try and change the conversation from being about struggling poor & middle class or formerly middle class people vs. the wealthy... and frame & refocus it to be about young vs. old, as a slight of hand political tactic.

I commend Dean Baker in trying to point out the fallacious arguments involved in this trickery going on in the national conversation.
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written by Chris Engel, March 16, 2013 6:37
Most of the young that are buying houses are mini-Romneys, with well-off parents financing the mortgages (in various forms).

I can't cite any data to support this off-hand, it's merely an observation I've made amongst my fellow 20-somethings and 30-somethings in my social and work circles.
But the cost of renting is rising
written by Rachel, March 16, 2013 9:31

And we read stories like the first one up when I typed in "investors buying homes." From June 28, 2012, Bay Citizen: "Investors buy nearly half of Oakland's foreclosed homes."
lower house prices bad for young inheritors
written by Blissex, March 16, 2013 6:17
Oh no, because of a lot of young people stand to inherit vast capital gains as a windfall from their parents and other relatives.

Thus the absurd popularity of the abolition of the inheritance windfall tax, and in the UK for state subsidy of elder people's care, to avoid them selling or re-mortgaging their properties driving down prices.

Falls in house prices are good news for workers, especially minority and immigrant workers, who move around, and don't expect windfalls from affluent parents.

They are good news actually for everybody, because houses are like cars a consumption item, even if so many affluent rentiers think they are "investments".
Eloquent NYT Sunday editorial on ripe-to-cut tax break spending
written by JaaaaayCeeeee, March 16, 2013 9:17
http://www.nytimes.com/2013/03...em.html?hp

of course, unless this kind of reporting gets out of the editorial pages, and into the the sections of the paper, voters will stay misinformed, voting against their self-interest, and think opposing views stupid. TV news and pundit claims will be unaffected, until this stuff is news, not just opinion.
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written by liberal, March 16, 2013 10:32
Blissex wrote,
They are good news actually for everybody, because houses are like cars a consumption item, even if so many affluent rentiers think they are "investments".


Not really. The house is, yes, a consumption item, though one which (AFAICT, having owned both) perhaps depreciates more slowly.

The land under the house is most definitely not a consumption item. Most (not all, of course) land will appreciate, not depreciate. Which is precisely why land is an investment item.
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written by liberal, March 16, 2013 10:42
pete wrote,
No income, no real estate value. It is not wealth, it reflects wealth.


Absolutely. Land isn't "wealth" in the sense that land is not accumulated capital: the land itself is not a product of labor; it was already there. But despite that, sites have varying values, with some being quite valuable.

This was all settled no later than Ricardo, though some people don't understand it applies in great measure to our more urbanized and industrialized economy, too.

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Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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