Oct292015
Who cares if Millennials ever buy homes? Baby Boomers
Baby Boomers need Millennial buyers to purchase overpriced homes to fund the Boomers’ retirements.
Have you noticed all the financial media stories about why Millennials aren’t buying homes? Who cares whether or not Millennials buy homes? Shouldn’t the Millennials themselves be the only ones who care whether they rent or whether they own? Shouldn’t the choice be one for them to make in consideration of their own lifestyles, needs, and goals? Who benefits from a concerted effort to cajole Millennials into buying houses?
Besides Millennials themselves, only two major groups of people care about Millennial homebuying: real estate industry professionals, and Baby Boomer homeowners. People in the real estate industry that make money on transactions — homebuilders, lenders, realtors — they want Millennials to buy homes for obvious, self-serving reasons. The banks needed to reflate the housing bubble to restore collateral backing to their bad loans as a matter of solvency and survival. Though repugnant, this behavior is at least understandable.
The often overlooked group of interested parties is the baby boomers who want to sell their homes to fund their retirement. The baby boomers needed to reflate the housing bubble to restore the lost equity they planned to live on in retirement. In other words, Millennials are being asked to support the Baby Boomers’ entitlements; so far, they just say “no.”
Once they had the illusion of wealth created by the false price signals of the bubble, many Baby Boomers changed their behavior; many Boomers slowed or stopped saving in other ways, many Boomers made bad consumptive purchases disguised as investments, and many other Boomers simply pissed away their illusory wealth on consumption through mortgage equity withdrawal. As a result, Baby Boomers are overly dependent upon the resale values of their homes to fund the entitlements they’ve become accustomed to.
The powers-that-be catered to the Boomer’s wishes. If you think about it, 4% mortgage rates are a direct transfer of housing wealth from Millennials to Boomers.
Consider the following: the chart below shows the monthly cost of ownership from 1988 to 2015, and from 1989-1991 and again from 2011-2013, the monthly cost of ownership was approximately $1,850. Twenty-four years apart, the cost of ownership on a monthly basis was unchanged, yet house prices were nearly double. Why is that? Because in 1989, mortgage interest rates were north of 10%, and in 2012, they were 3.5%. Every penny of appreciation from 1989 to 2012 was a direct result of declining interest rates.
The housing bubble created a great deal of false wealth, and baby boomers were the recipients of an artificial boost in home prices due to 25 years of falling mortgage interest rates. At least 30% of the value of their homes was created totally by increased borrowing power of subsequent buyers.
Today’s 4% mortgage rates represent the end of the road for the artificial appreciation based on falling mortgage rates. Future generations won’t be so blessed – and they know it — which is why many don’t buy homes even if they have the means to do so.
And therein lies part of the problem in the housing market today: future generations aren’t enthusiastic about overpaying for real estate, and sales volumes suffer at inflated prices. Today’s buyers don’t make the direct connection between their home purchase and funding baby boomer’s retirements even though the connection is very real; today’s buyer’s simply don’t want to pay so much for houses with little future appreciation potential, particularly when they know house prices can also go the other way.
Why millennials should buy a home today
By Quentin Fottrell, Oct 27, 2015
Sachita Kumar did something that few people her age appear to be doing in 2015: She bought a house.
“We decided that we just didn’t want to pay someone rent, so we decided to own something,” says Kumar, 26, a telecommunications consultant. She and her husband bought a townhouse in Somerset, N.J. and, unlike many Americans in their age group, they were able to afford the substantial 20% down payment. “A reason a lot of millennials don’t own is because of that,” Kumar says.
There are many practical reasons why millennials hold off on buying. Young adult employment has risen to around 7.7%, according to the Pew Research Center, up from 6.2% in 2007. Kumar has advice to those who can afford it: “You should definitely buy.”
Take it from a 26-year old telecommunications consultant. After all, she’s an expert.
She has a point. There are only two metro areas where renting is cheaper than buying for people aged 25 to 34, recent data from real-estate website Trulia found. Renting is 5% less expensive than buying in Honolulu and 2% less expensive in San Jose, Calif., but buying is a no-brainer in 98 of 100 metro areas. It’s also 11% cheaper to buy than rent in the New York and New Jersey metro areas, where Kumar bought, and 10% cheaper in Newark, N.J. and San Diego. And it’s more than 40% cheaper to buy than rent in Houston and San Antonio, Baton Rouge and New Orleans, Syracuse, N.Y., Fort Lauderdale, Fla., and Miami, Oklahoma City, and Detroit.
This Trulia study gets lots of mileage, but whenever a realtor study suggests a course of action that favors generating a large real estate commission, do you suspect the results are bogus?
You should.
Zillow and Trulia established a small modicum of trust among buyers when they were competitors who catered to them, but since the merger, they have become sellouts rivaling realtor.com with their self-serving bullshit.
Millennials have received a lot of criticism for holding back the housing market by not buying as many homes as economists (and would-be sellers) would like. …
Why would housing economists care? Perhaps because most of them are employed by realtors, lenders and homebuilders?
What’s more, home-price growth has continued to outpace rent growth since 2012, he added, but many people — especially in big cities like New York and San Francisco — are unlikely to be able to afford to buy in the same neighborhoods where they rent.
Isn’t this in direct contradiction to the earlier point that owning is cheaper than renting?
And yet there may be a less obvious reason, aside from the financial commitment, why so many Americans are reluctant to buy: Bureaucracy. “There is a substantial amount of paperwork,” Kumar says. “The bank goes through everything like the FBI. It’s a very gruesome process and takes months.”
We tried skipping all that onerous paperwork during the 00s, and it didn’t work out so well. It was so bad we had to pass Dodd-Frank to get banks to do their jobs and assess the borrowers ability to repay the loan.
This kind of manipulative nonsense reporting is obvious to even casual observers. Notice these comments from the article:
George Kralin
More are living at home because both rentals and home prices are overvalued. Baby boomers have pretty much destroyed the economy
Corbin Dallas
Are you listening, millennials? I mean that is what these articles are all about – to coerce you into buying a house so a lot of people can make a lot of money.What’s that you say? Prices are in the stratosphere, credit hurdles are way too tight, and you are afraid that after the Chinese investors realize their foolishness, they will bail and flush the whole real estate market in the process?
I don’t blame you, at all.
weston whitham
“Why millennials should buy a home today” Yes, always buy a home at the top of a housing bubble.ted bear
Buy so the baby boomers can get out from under? Sounds like a plan perhaps if you want to be a bagholder.
So what say you Millennials? Will you get out and buy a house, or will you continue to be a generation of housing losers?
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Who cares if Millenials buy homes? Millenials.
Millennial Homebuying Attitudes Mixed Due to Financial Woes
http://themreport.com/news/data/10-23-2015/millennial-homebuying-attitudes-mixed-due-to-financial-woes
“One surprising piece of data that the survey showed was that over 80 percent of Millennials believe owning a home is an essential part of financial success, while a little over 70 percent of Boomers feel this way.”
I’m surprised it’s only 80%. Previous generations almost uniformly embraced homeownership. I’m not surprised the numbers have fallen among Baby Boomers, many of whom were wiped out during the bust.
“There is a substantial amount of paperwork,” Kumar says. “The bank goes through everything like the FBI. It’s a very gruesome process and takes months.”
It is so hard saving a few paystubs, statements, and tax returns as PDFs, and then emailing or uploading them to a creditor’s site. It’s just too much work. They should just trust what I tell them and lend me hundreds of thousands of dollars based on faith.
In all seriousness, it was weird that Wells required we draft and sign letters on Word docs explaining the one credit inquiry we had in the last two years. The inquiry identified the Irvine Co and the apartment complex, but apparently that wasn’t sufficiently obvious as to the purpose of the inquiry.
It can’t be that bad for a 26 year old. They probably have few assets or credit to report. When we bought a couple years ago we had to produce over 75 different documents, including: paystubs, two months of bank statements for every account, w2’s, 4506Ts, retirement accounts, all the documents for two investment properties (mortgage balance, taxes, associated bank accounts, homeowners insurance), letters of explanation of our non-financial interest in places we rented, letter of explanation for wife’s lost income from family leave, etc., etc., etc. It was all done Columbo style: always one more question… All this with two 800+ credit scores, and 20+% down. I think we bought when the credit pendulum was at its zenith.
We are currently refinancing to shave a half-point off the loan. Hoping it’s less arduous, but prepared for the worst.
I’ve never had to submit more than an e-mail reply and a one sentence explanation of my hard pulls. Wells considers themselves to be the gold standard of mortgage lending, so they are probably a little worse than most other lenders.
Whenever I read these stories complaining how difficult he process is, I wonder what they expect. The paperwork doesn’t seem like a particularly onerous burden considering the borrower is asking to borrow several hundred thousand dollars. And realistically, the reason lenders ask these questions is because someone in the past defaulted on a loan because they failed to meet one or more of the qualifying standards they enforce today.
Sustainable Homeownership is the Key to Wealth-Building, Middle Class
The ususal suspects lobby for lowered lending standards and unsustainaable homeownership
Sustainable homeownership is the “gateway to the middle class” for many Americans and is the primary source of wealth creation for many, which is why increasing the homeownership rate is so critical to a healthy economy, according to a panel at a housing forum in Washington, D.C. on Tuesday.
In the “Achieving the American Dream” housing forum, hosted by First American Financial Corporation, three members of Congress addressed the audience while a panel of experts discussed primarily how to increase the homeownership rate among Latinos and African Americans.
Panelist Gary Acosta, Co-Founder and CEO, National Association of Hispanic Real Estate Agents, declared to the agreement of the panel that the gateway to the middle class in America is sustainable homeownership—and that lenders do not need to lower the bar, but instead need to open the credit window.
“What that essentially means is we’re not trying to qualify people who probably shouldn’t qualify for a mortgage,” Acosta said, “but we want to widen the criteria that we use and the metrics that we use to identify successful homeowners of the future.”
One way to open the credit window without lowering the bar, which will in turn increase the country’s homeownership rate, is to find new and inventive ways to determine creditworthiness and subsequently lend to the group that is “credit invisible,” or have no credit history. The Consumer Financial Protection Bureau issued a report in May stating that 26 million American adults had no credit history, and that Black and Hispanic consumers were more likely to be credit invisible than white consumers (15 percent compared to 9 percent).
“We need to find ways to credit score these types of individuals by using things like rental payment histories, utility history, and cell phone payment histories,” First American Chief Economist Mark Fleming said. “If they’ve established a creditworthiness through making monthly rental payment and timely payments on their cell phone bills, then you know there’s a good chance that they’ll also be capable of making a mortgage payment on time.”
Whether They Want to Rent or Buy a Home, Millennials Are Basically Out of Luck
It’s hard out there for a millennial navigating the housing market.
If you’re an American man or woman under the age of 35, there’s a historically large chance that you’re living with your parents. And if not, you’re very likely to be renting, and paying too much for the privilege. Only 34.8 percent of young adult households actually own their home, the smallest fraction since at least 1994, and among those who are forking over cash to a landlord, nearly half are considered “rent burdened”—meaning housing eats up around a third or more of their income.
And what about those who’d at least like to buy? Well, there’s a pretty good probability they’re getting boxed out of the market. On top of the challenges posed by tough post-crash mortgage standards, Bloomberg reports Thursday that prices for typical starter homes have been on a tear due to a lack of supply, and are now actually above their past bubbly heights:
Prices for the least expensive previously owned homes—properties at 75 percent or less of the median—were up 10.7 percent in August from a year earlier and now represent the only one of four price tiers to surpass the peak reached during the housing bubble, according to a housing index from CoreLogic Inc. The August pace was 5.9 percent above its pre-recession high in October 2006.
Why are cheap houses getting so expensive? Because nobody’s building them, for starters. In the years immediately following the recession, there was a sense among many urban planners and others in the real estate industry that developers would have to shelve their McMansion blueprints and start marketing smaller, more affordable new homes—possibly in slightly urban or at least walkable settings—in order to adjust to millennial tastes and finances. But that hasn’t really happened, even as more young adults have hit home-buying age. Instead, builders, convinced that all the market really craves is size, seem to have gone back to erecting large houses in far-out subdivisions. The median new home hit a record square footage in the first quarter of 2015, and shrank only slightly in the spring.
Developers might start turning their attention to first-time buyers soon. The Wall Street Journal has certainly suggested so much recently. (Then again, it made a similar prediction about a year ago). But for now at least, the market seems to be geared toward the more affluent, older customers. And so the least expensive older homes are getting costlier. “You’ve got the front end of a big wave of first-time homebuyers but the supply of affordable housing is not there to meet that wave,” Sam Khater, CoreLogic’s deputy chief economist, told Bloomberg. “What you’re seeing in the housing market is a reflection of the polarization of income. The builders are looking at it from that perspective: ‘If I have a choice of going up- and down-market, I’ve got to go up-market.’ ”
And up-market means out of reach for most millennials.
Millennials: Forever Renters?
One of the most frustrating truths about the current housing market is that, month to month, it’s still significantly cheaper to own a house than it is to rent, and that’ll remain the case as mortgage rates stay low and rental prices climb ever higher. Yet despite this fact, the rate of homeownership remains below what it was a decade ago. And the rate of young people buying their first home is in an even bigger slump. Why aren’t more people flocking to an ostensibly cheaper housing option?
The answer is more complex than simple calculations comparing owning and renting let on. The real-estate analysis firm Trulia—which, as a company that makes its money from people buying houses, might have an interest in promoting homeownership—recently released a report that found that for young adults ages 25 to 34 buying was nearly 25 percent cheaper than sending in a monthly rent check. Trulia made a number of assumptions to figure out what this choice looks like for young adults, who tend to have less income and less wealth to throw at a home purchase. Trulia assumed a 10 percent down payment (instead of a more traditional 20 percent figure), that new owners would move every five years (more frequently than older Americans), that buyers were in the 25-percent tax bracket, and that their interest rate on a 30-year mortgage would be around 3.85 percent. After plugging in all that data, Trulia found that buying was still cheaper than renting in 98 out of 100 of the largest metro areas in the U.S.
That might be true, but that argument overlooks one of the biggest reasons young people aren’t buying houses: Most of them simply don’t have enough money saved to clear the hurdle of a down payment. A mortgage might well be cheaper overall, but the one-time cost of becoming a homeowner is simply too high for most of them. While the job market is slowly getting better, Millennial wage growth remains pretty slow and student-debt loads continue to rise. On top of that, they’re expected to save up the little they can spare as they continue paying rent that’s only getting more expensive.
Millennials’ top competition for condos might be their parents
Millennials have tough new competition for the condominiums and apartments heating up the nation’s housing market: Mom and Dad.
Roughly 10,000 baby boomers are retiring each day, and recent data shows that half of those who plan to move will downsize when they do. Many are seeking the type of urban living that typically has been associated with young college graduates — so much so that boomers are renting apartments and buying condos at more than twice the rate of their millennial children.
“There’s not one thing I miss about my house,” said Abby Imus, 57, who recently moved with her husband into a condo in downtown Bethesda, Md., three miles and a lifetime away from the house they lived in for more than two decades. “I was so ready to leave.”
This new generation of empty nester is reshaping the recovery in real estate after the industry suffered its worst setback in half a century during the Great Recession. Boomer demand has helped fuel a surge in high-end housing that features two-bedroom units and large kitchens reminiscent of boomers’ suburban homes. That could have big implications for cash-strapped millennials, who had hoped to snag affordable studios in buildings developed to house 20-somethings.
The data suggests that boomers who are downsizing are relatively well-off. Harvard University’s Joint Center for Housing Studies found that those ages 55 and older accounted for 42 percent of the growth in renters over the past decade. In addition, the wealthiest tier of American households made up about one-third of new renters between 2011 and 2014.
Home Prices Soaring Out of Reach of Millennials
David M. Blitzer, managing director and chairman of the Index Committee Spins the Data
Home prices continued to rise across the country in August 2015 as the economy improves and housing demand outweighs supply.
The S&P Dow Jones Indices released its results of for the S&P/Case-Shiller U.S. National Home Price Index (HPI) Tuesday, showing that home prices experienced year-over-year gains of 4.7 percent in August compared to a 4.6 percent increase in July.
According to the index, which covers all nine U.S. census divisions, the 10-City Composite rose 4.7 percent in the year to August compared to 4.5 percent in July, and the 20-City Composite’s year-over-year gain was 5.1 percent, up from 4.9 percent in July.
Among the cities with the highest year-over-year increases were San Francisco, California and Denver, Colorado with home prices gains of 10.7 percent and Portland, Oregon with a gain of 9.4 percent. The HPI report also found that fifteen cities had greater year-over-year price increase in August 2015 compared to July 2015.
On a month-over-month basis, the index rose 0.3 percent in August prior to seasonal adjustment. The 10-City Composite and 20-City Composite increased 0.3 percent and 0.4 percent month-over-month, respectively. After seasonal adjustment, the index rose 0.4 percent from the previous month, while the 10-City and 20-City Composites both increased 0.1 percent.
“Home prices continue to climb at a 4 percent to 5 percent annual rate across the country,” said David M. Blitzer, managing director and chairman of the Index Committee for S&P Dow Jones Indices.
Blitzer also noted that other housing indicators have shown strength recently:
*Housing starts topped an annual rate of 1.2 million units in the latest report with continuing strength in both single family homes and apartments.
*The National Association of Home Builders sentiment survey, reflecting current strength, reached the highest level since 2005, before the housing collapse.
*Sales of existing homes are running about 5.5 million units annually with inventories of about five months of sales.
*September new home sales took an unexpected and sharp drop as low inventories were cited as a possible cause.”
“A notable part of today’s economy is the continuing low inflation rate; in the year to September, consumer prices were unchanged,” Blitzer concluded. “Even excluding food and energy, the core inflation was 1.9 percent. One result is that a 5 percent price increase in the value of a house means more today than it did in 2005-2006, the peak of the housing boom when the inflation rate was higher. The rebound from the recent lows was faster than the 1997-2005 housing boom, and also much less driven by inflation.”
Fed Holds Off on Raising Interest Rates, Citing Insufficient Economic Improvement
Is anyone surprised by this?
As the Federal Open Market Committee (FOMC) reconvened Wednesday, results from their October 27th and 28th meeting placed yet another hold on the rate hike, leaving the federal funds rate at the current 0 to 1/4 percent target range.
The question on everyone’s mind in the mortgage industry remains: When will the Federal Reserve raise rates?
With just one more meeting left this year in December, the Fed has just one last opportunity to raise rates, but many are wary that it will may not occur this year.
A statement from the FOMC showed that household spending and business fixed investment rose at solid rates in recent months, while the housing market continued to improve.
On the downside, government officials saw net exports fall soft, job gains slow, and the unemployment rate held steady. In addition, inflation remains under the Committee’s objective of 2 percent, reflecting falling energy prices and prices of non-energy imports.
With all of this taken into account, the Committee decided to hold off on the rate increase until maximum employment, price stability, and inflation goals are reached.
“To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate,” the statement said. “In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress—both realized and expected—toward its objectives of maximum employment and 2 percent inflation.”
The National Association of Federal Credit Unions’ (NAFCU) Chief Economist Curt Long predicted that the rate increase would not occur prior to the official FOMC statement.
“December is a possibility, but one has to ask if the situation has really improved since September,” Long stated. “At this point, the answer would seem to be no, as the risks to inflation continue to be stacked to the downside. Early 2016 seems far more likely.”
Hillary Clinton says she’d let big banks fail
Does anyone, anywhere believe she means this?
Over the last few months, Democratic presidential frontrunner Hillary Clinton has gone out of her way to position herself as a non-supporter of the country’s biggest banks, perhaps as part of a plan to woo those on the left who would rather see Senator Elizabeth Warren running in Clinton’s place.
Clinton continued her push against the big banks on Tuesday night when she was a guest on “The Late Show with Stephen Colbert.”
During her appearance, Colbert asked Clinton what she would do as president if there were another financial crisis, and she used the opportunity to plant her flag on the issue of the big banks.
According to a Reuters report, Clinton said she would not bail out the banks again.
From Reuters:
“If you’re president and the banks are failing, do we let them fail?” asked Colbert.
“Yes, yes, yes, yes… ” Clinton said.
She added that she would not hesitate to break apart banks that were “too big to fail.”
Earlier this month, in an article written by Clinton on Bloomberg View, the former Secretary of State said that she is also in favor of having more accountability for those on Wall Street.
“People who commit serious financial crimes should face serious consequences, including big fines, disbarment from working in the industry and the prospect of imprisonment,” Clinton wrote.
“As president, I will seek to extend the statute of limitations for major financial crimes, enhance whistle-blower rewards, and increase resources for the Department of Justice and the Securities and Exchange Commission to investigate and prosecute individuals,” Clinton continued. “We should also hold financial executives accountable for egregious misconduct by their subordinates. They need to lose their bonuses and, in some cases, their jobs.”
And yet they are her biggest contributors…
Which is exactly why I don’t believe a word of what she says.
It doesn’t matter so much where rates are right now relative to where they were 30 yrs ago; but, rather, where rates are going and how soon they get there. The past is past, and may or may not have any bearing on the future.
First of all, rates were too high 30 yrs ago. Supra-10% rates are as atypical as sub-4% rates. Comparing current rates to the inflated rates in the 80s makes about as much sense as comparing current housing prices to those at the peak of the bubble.
Second, households that bought in the 70s before rates spiked did just fine financially. If you believe that cash flow is more important than asset value, then having a fixed shelter cost is more important than high asset values. Since no one will be refinancing as rates rise, LTV becomes irrelevant. Cash-out refinancing and HELOCs will also fade. Households will have less ability to overextend themselves, thus creating a more stable economy.
Third, and perhaps most important, rates rise or fall for a reason. Rates tend to rise as a brake on an overheated economy, and tend to fall when the economy is struggling.
Lastly, rising housing valuations are “good” for owners in only a couple of situations: 1) when the owner wants to withdraw some of the free equity; 2) when the owner sells. In the first case, the free equity isn’t free since the owner has to pay interest on the loan AND pay back the equity. In the second case, the owner has to pay a higher commission when they sell, and then turn around and either buy or rent shelter at the higher prices. Rising equity does give owner’s financial flexibility – at a cost. Property taxes and insurance also rise with higher prices.
Housing prices have risen as rates have fallen. This is roughly balanced by falling monthly interest payments and rising amortization. There’s no free lunch. Either you can pay through the nose on price, or on rates.
“Comparing current rates to the inflated rates in the 80s makes about as much sense as comparing current housing prices to those at the peak of the bubble.”
Yes, but, if we’re trying to identify a group (Boomers) that were very lucky in terms of timing for a house purchase, this is valuable to identify. If you talk to a Boomer, they’ll remind you how much they paid for their house in 1979, they won’t adjust the figure for inflation, and they’ll attribute the home’s increased value to their skilled investing acumen, rather than the dramatic drop in rates over three decades.
Boomers made far more from real estate in the 70’s while rates were spiking than they did in the decades that followed when rates began steadily declining.
Boomers bought in the 80s for the same reasons that Millenials are buying today: 1) it was the right time for them, and 2) they could afford the payments. Everything else is just revisionary not visionary. Most boomers don’t understand how to adjust for inflation. The ones who do, ignore it since it makes them look foolish to take on a 10+% loan.
Boomers also benefitted from the drop in marginal tax rates in the 80s. The combination of lower taxes and falling rates drove up consumer spending, wages, and housing prices in SoCal during the 80s bubble.
The key difference between the response to the double recession in 80/81 and the recession in 08/09 was that marginal rates were lowered and brackets were tightened in the 80s. In the 00s response to the recession, marginal rates were raised both at the state and federal level. Sales taxes were also raised. The ACA brought a whole new tax at a time when the economy could least afford it.
Dropping rates to zero destroyed interest income for seniors, which is basically just an intergenerational wealth transfer from the Boomers to Millenials who are buying cars and homes at rates well below market. No one wants to talk about that though. The banks were also had extra money available to pay their settlements since they had a federal license to shaft depositors.
What I find remarkable is that new home buyers a being given a gift of low interest rates the likes of which we haven’t ever seen, and yet they complain that rates are too low because the make house prices too high. Okay. Maybe so. What will these same buyers be saying 5 years from now when rates are in the mid-5s, and yet housing prices haven’t fallen? They will complain that rates are too high, and therefore unsustainable – and wait as rates march ever higher.
When rates rises we could have some inflations and inflations is good for housing and stocks. Than rent will rise even higher since almost no one can afford to buy and landlords has to raise prices to catch up with inflation and getting adequate returns on assets. The only thing that could be negative for housing is higher property taxes if the govt needed more money.
This is an excellent point that I hadn’t given much thought to. I know many seniors are being screwed by zero percent savings rates. And it stands to reason that anyone borrowing money is the beneficiary of this injustice. Unfortunately, in the real world, the beneficiaries don’t really get that much benefit because the prices of durable goods become inflated due to the cheap debt. Houses are a prime example. So what we end up with is a lose for seniors, a wash for Millennials, and a win for the banks — at least a win on the recovery of their bad bubble-era home loans.
HELOC’s will become more popular as rates increase because nobody will want to refi out of their low fixed rates. HELOC’s will still be the cheapest form of consumer debt when rates rise, due to the collateral backing, so they will be the lending product of choice for those that qualify.
The cheapest kind of consumer debt is no debt. The second cheapest is HELOC debt, unless you can take advantage of 0% auto financing specials, or 1 yr same-as-cash financing of furniture, appliances, or other durable goods.
Yeah, we can split hairs but my point is that HELOC’s will become more popular than ever in a high interest rate environment.
An excellent point. I had not thought of HELOCs from this perspective.
Yes, to the degree people will be willing to finance consumer goods in a higher interest rate environment, HELOCs will be the financing mechanism of choice because the interest rates and payments will be lower. Nobody will refinance the full amount of their purchase-money mortgage at higher rates.
There is no point to selling your home if you are a boomer and do not intend to move to a region with lower home prices which allows you to lock in your equity.
Home appreciation in the bay area has been quite aggressive. Interest rates remain near zero in the bank. Due to house price inflation if a boomer wants to trade down the math does not make any sense.
Boomers are going to ride the bubble regardless of what millenials want.
My Boomer parents retired and bought a small house in Florida for cash from their equity from their wage-earning house.
A Fed Rate Hike Can Spur the U.S. Economy
Defying convention, a JPMorgan strategist argues a 1% increase can boost confidence—and stock prices.
http://www.barrons.com/articles/a-fed-rate-hike-can-spur-the-u-s-economy-1446054350
“Perhaps I have grown cynical in my old age, but I have come to the view that most great economic policy campaigns are much like most great military campaigns — a great waste of human resources expended on battles not worth the fighting, wars not worth the winning, and waged with tactics that are largely counterproductive.
Such certainly seems to be the case with the Federal Reserve’s campaign against deflation. The truth is, with or without further monetary “stimulus,” there is little danger of the U.S. being engulfed in deflation. In addition, to the extent that the deflation threat manifests itself in lower commodity prices, it seems to be a positive rather than a negative for the U.S. economy. Finally, as we argue in a just-released paper, the first few interest rate hikes would actually stimulate, rather than suppress, aggregate demand in the U.S. economy and thus reduce any small risk of deflation.
…
Finally, and most frustratingly, we believe that the maintenance of a zero interest rate policy is actually currently suppressing aggregate demand. If the Fed were to increase short-term interest rates by just 1% from current levels, we estimate that it would boost personal interest income less personal interest expenses by over $60 billion, would tend to boost confidence and the stock market, would cause borrowers to accelerate loan applications ahead of further rate increases and would have negligible negative price effects.
In short, deflation fears are a no good excuse for the Fed to postpone rate hikes any further. However, we may still need to wait for firmer evidence of firming inflation before the Fed’s most dovish members are tempted to act.”
LOL!! FAIL!
If a rate hike could actually spur the US economy, the fed would have raised rates in conjunction with the “green shoots” era media-blitz that commenced back in 09.
Right. Because the Fed is never wrong… and 2015 is the same as 2009.
higher rates will purge the malinvestment while increasing legitimate savings.
This will sustainably spur the economy in the long run, but we must first endure the purging process.
Yes. The idea that raising rates will spur the economy completely ignores the short-term consequences. Plus, it will flatten housing, which will not make the banks very happy.
A few points:
1. Most of the country isn’t in a “real estate” bubble like LA/SF. As pointed out it is in a “low interest rate” peak with current values robbing future appreciation. Buying isn’t to bad an option if you don’t count on your home appreciating.
2. LA/SF is in a “housing” and “low interest rate” bubble. Good luck finding good value with a historically likely 25% correction AND no future appreciation as rates go up.
3. LA rents are also in a mini bubble. Of the three options, buying, renting, or living with mom and dad; option 3 is the best in LA! Millenials are making the right choice.
4. It pisses me off to no end our stupid policies that “punish” right sizing of properties. Why does a widower need a 5 bedroom house? Why would they not right size their place and take the significant bag of cash that goes with it? Why do we create an artificial scarcity of homes for families? Because of the stupidity of artificially low property taxes for those that create this need to be in a house forever and their “fear” of loosing their stupid tax break that can be passed down and inherited like some sort of royal title.
5. Now, with the economy recovered is the time to rip off the bandaid and start making sound policies that promote habitability and don’t simply subsidize home values. Stop proping up mortgage rates, stop withholding inventory, get rid of ridiculous tax breaks that just push housing prices higher. Incentivize median income building units in areas with inadequate housing supply. Enough is enough!
economy recovered. rip off bandaid. ROFL.
Good comment.
I agree with Mellow Ruse, very good comment. Thanks for sharing.
The United States will be much better off after every “Baby Boomer” is dead. When is Brokaw writing a followup book entitled, “The Worst Generation.”
Yesterday I read an article where seniors were whining about no social security inflation adjustment while insisting that their expenses inflated a lot.
My reaction to all that is: Quit whining after being an entitled generation with good economy, jobs, low housing costs and prices. All while they barely paid into social security and are getting much more out of it.
When I retire, social security will be bankrupt.
The problem is Millenials are like Boomers on crack.
+1. So much finger pointing…
Don’t forget us Gen X homeowners, Larry!
Being a Gen Xer, it’s hard for me to forget them. We are the forgotten generation. We don’t have the size of either the Baby Boomers or Millennials. I’m counting on the Baby Boomers to rig the system so I can enjoy a good retirement riding on their coattails.
Millenials are in the prime demographic that marketers are targeting, ages 18-35. I think that’s the reason you see so many click bait articles telling us all about Millenials these days. They love reading about themselves and either agreeing or disagreeing with these articles. In the process, it generates page clicks which translates into marketing revenue.
Don’t forget us Gen X homeowners, Larry!
Don’t forget us Gen X homeowners, Larry!
Spot-on post IR!
A lot of Boomers are in trouble financially simply because they did not understand that the ability to service debt plus interest declines steadily over time and leads to cash flow problems.
Also, the MSM sell-side narrative…”Millennials are willing/ready/able to take the hand-off” is a myth.
39% of L.A. millennials ‘chronically stressed’ about money, survey finds
Their top financial priorities
70% said being debt-free was a top priority
63% said having an emergency savings fund was a top priority
62% said spending less than they earn was a top priority
http://www.latimes.com/business/la-fi-millennials-money-20151022-htmlstory.html
depressions create savers. always a silver lining.
I hope 70% of them can achieve that debt-free status. For most, that’s an impossible dream.
My concerns now with real estate is the availability of the 30 year mortgage. I know that that there are plans to wind down Fannie Mae and Freddie Mac which guarantees/backstop most of the 30 year since the private banks typically do not want to loan money for 30 years at this current dirt cheap rates. However, I can still see foreign investors coming in to fill the void if the government is moving away from this business especially if we have more sovereign defaults elsewhere and holding the mortgage loan could perceived to be the wiser alternative. This threat and the rising in taxation among others will probably keep housing in check (without rapid appreciation at the mid and low end) in the long run.
[…] The Millennials currently cope with excessive student loan debt, which is also preventing them from buying houses. Millenials are delaying marriage, and they are not forming new households at the same rate as previous generations. Most housing market analysts blithely assume Millennials will follow the same path as preceding generations once they have opportunity, but what if Millennials decide not to buy homes? Baby Boomers don’t want to think about that possibility. […]