It may seem churlish to hector the New York Times for turning its attention to the sorry financial prospects of the young. But this sort of attention would be more useful if it shed more light, rather than wistfully evoking standards from the old normal.
The article last week, Younger Generations Lag Parents in Wealth-Building, points out that your typical “young” person, as early 30s or younger, is behind on wealth accumulation compared to previous generations. That’s hardly surprising, given the combination of the fall in home prices for those who purchased before the bubble burst, high student debt loads for many, stagnant wages, high unemployment, and short job tenures (any unemployment will at least lead to no savings, and will often lead to loss of savings).
This is the peculiar premise of the piece, which comes after the obligatory anecdotes:
Strong and sustained job and wage growth would cure many of the ills facing younger workers, experts said. But their delayed or diminished wealth accumulation might still have a lasting impact on their finances.
Huh? How do you “accumulate wealth” if you can barely pay the bills and have at best only a meager emergency reserve above that? Are you supposed to speculate in options and hope you get really lucky?
You get similar layered hidden assumptions, such as (emphasis ours):
For instance, the researchers said, if a person delayed the purchase of a home to age 40 instead of buying at age 30, that might result in a $42,000 loss in home equity by the time she reaches 60, given trends in wealth accumulation over the past few decades.
One fellow financial writer pinged me, incensed at the premise that buying a home was inevitable and a preferable way to invest (this individual is a happy long term renter). And I have to say my parents’ experience bears that out. My mother has a decent-sized retirement amount, even though they rarely owned a home before he was 45 (we moved frequently, a couple of times lived in company-owned homes, rented while he went to business school at an advanced age and again much later when we moved to a community where there were no suitable homes to buy but some decent rentals). She’d been in the home they live in now for 36 years. I calculated the appreciation after brokerage on the likely sales price and it’s only 2% compounded, a negative return in real terms. The overwhelming majority of her wealth is liquid, and that’s a lot more comfortable than beingreal estate rich and cash poor. (Mind you, my father never had a great income or big corporate pension, but he was very parsimonious and so saved a lot, plus did form his own little company when he was 50 and socked a ton of his income into a pension plan he set up then).
Purchasing a home makes NO sense if you wind up selling it prematurely, say due to moving to find another job or due to divorce. Brokerage and other sales costs are 5-7% of the sales price and hard to avoid (homes sell themselves only in bullish markets; brokers are hard to circumvent in less robust markets).
And why would buying a home at 30 be preferable to renting and using the money you’d spend on buying a home on investing? You have to believe the returns on home ownership are superior to that of other types of investing. Now they might well be, but the seemingly superior returns of real estate are due primarily to the assumption of appreciation combined with leverage. But leverage also increases risk and with short and unstable jobs, homeownership has downsides that this article completely ignores. The big benefit of housing is as a forced saving vehicle, but banks have made it so easy to extract equity that this virtue of home ownership has also been substantially diminished.
Finally, the article ignores the other elephant in the room: with ZIRP, asset prices are inflated, by design. A young person is going to have trouble amassing any kind of nest egg because the financial returns aren’t going to be there unless they are a very skillful or lucky investor. The most important principle of investing is “buy cheap” and that is perilously difficult to do right now.
This is another indicator of the backwardness of the point of view of the article:
With the wage and jobs picture bleak, and fixed pensions largely gone from the private sector, the answer to the conundrum of shoring up savings for younger workers might lie in new government policies, the Urban Institute scholars said. They suggested encouraging retirement accounts by making them automatic unless an employee opted out, or modifying the home mortgage interest deduction to push more money toward homeownership for lower-income workers.
You can’t get blood from a turnip. And you can’t have meaningful savings with crappy incomes. The answer is much more aggressive policies for job growth and support of labor bargaining power. But the Times could never bring itself to challenge the neoliberal paradigm of squeezing labor to provide more returns for the few who actually do have dough.
This piece is cross-posted from Naked Capitalism with permission.
2 Responses to “Bizarre New York Times Article on Lousy Finances of the Young Gives Undue Prominence to Housing as an Investment”
Nice article; appreciate the perspective.
Apart from other things, the author seems to be missing that point that, assuming his mother's house is paid off, she is now living in it for the price of the property taxes and utilities, compared to market rents which have to cover the landlord's taxes, utilities, mortgage and profit (otherwise why would he or she be renting). It also ignores the security of tenure that goes with home ownership. When you are young and single, it is easy to pick up and move, however when you are elderly or have children in a good school area, it can be disastrous to be uprooted because the landlord decides to sell or move in it himself. Finally, the self-imposed pressure of paying off a mortgage can impel people to save more, as opposed to spending. Case in point: there are many young adults still saving expenses by stillliving at home….how many of them are actually socking away any of these savings?
Sure, times are tougher, but scaling down the expectations would make a big difference. My mother did not get a car or even a washing machine until she was well into her forties.