Jan182017

Yesterday’s Baby Boomers were better off than today’s Millennials

Millennials are worse off than Baby Boomers were at this stage in their life cycle.

Growing up in the Midwest, I remember the relative prosperity of ordinary families in the 1960s and 1970s. Working-class families supported themselves on union labor contracts granting them a high quality of life. A sole breadwinner without a college education could make enough money to buy a house, two cars, recreational vehicles, and family vacations. Today, working-class families with two breadwinners can’t afford any of those items today, and even those with higher educations struggle to make ends meet.

I remember the arguments against unions in the 1980s. Their power was excessive in the 1970s, they held back business expansion due to the high labor costs, and US products weren’t competitive overseas. At the time, perhaps the pendulum swung too far in favor of labor, but perhaps now, the pendulum has swung too far the other way.

Donald Trump’s popularity with working-class voters emanates from their belief that he will undo the damage caused by the collapse of organized labor, unrestricted immigration, and a political culture that favors the wealthy over the working class. His supporters are likely to be disappointed by the flow of bills from a Republican Congress that will exacerbate each of those problems, but perhaps Trump will fulfill his campaign promises and do something for the working class. We will know soon enough.

The problems with the deterioration of working-class opportunity is apparent when looking at the problems Millennials endure, particularly when compared to the Baby Boom generation.

Millennials earn 20% less than Boomers did at same stage of life

Collin Brennan, Jan. 13, 2017

SOUTH MILWAUKEE, Wisconsin (AP) — Baby Boomers: your millennial children are worse off than you.

With a median household income of $40,581, millennials earn 20 percent less than boomers did at the same stage of life, despite being better educated….

The analysis being released Friday gives concrete details about a troubling generational divide that helps to explain much of the anxiety that defined the 2016 election. Millennials have half the net worth of boomers. Their home ownership rate is lower, while their student debt is drastically higher.

The generational gap is a central dilemma for the incoming presidency of Donald Trump, who essentially pledged a return to the prosperity of post-World War II America. …

What can Trump really do about the problems of the working class? So far, the only thing his colleagues in the Congress are excited about is cutting off the health care to the working class, arguably a step in the wrong direction.

Andrea Ledesma, 28, says her parents owned a house and were raising kids by her age.

Not so for her. Ledesma graduated from college four years ago. After moving through a series of jobs, she now earns $18,000 making pizza at Classic Slice in Milwaukee, shares a two-bedroom apartment with her boyfriend and has $33,000 in student debt.

Apparently, her college degree was not worth $33,000.

“That’s not at all how life is now, that’s not something that people strive for and it’s not something that is even attainable, and I thought it would be at this point,” Ledesma said.

Her mother Cheryl Romanowski, 55, was making about $10,000 a year at her age working at a bank without a college education. In today’s dollars, that income would be equal to roughly $19,500.

Romanowski said she envies the choices that her daughter has in life, but she acknowledged that her daughter has it harder than her.

“I think the opportunities have just been fading away,” she said. …

Yet compared to white baby boomers, some white millennials … median income tumble[d] more than 21 percent to $47,688. …

The declining fortunes of millennials could impact boomers who are retired or on the cusp of retirement. Payroll taxes from millennials helps to finance the Social Security and Medicare benefits that many boomers receive — programs that Trump has said won’t be subject to spending cuts. And those same boomers will need younger generations to buy their homes and invest in the financial markets to protect their own savings.

(See: What happens if nobody buys the Baby Boomers’ houses?)

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Even before the housing bubble created a great deal of false wealth, baby boomers received an artificial boost in home prices due to 25 years of falling mortgage interest rates. At least 40% of the value of their homes was spawned by increased borrowing power of subsequent buyers.

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.

OCHN_OC_Housing_Market_Report_2015-2

 

So who is the beneficiary of this artificial 40% boost in home prices? Baby Boomers.

Who is the loser who pays the price for the benefit enjoyed by Baby Boomers? Everyone who wants to buy a house over the next 20-30 years, mostly Millenials.

Today’s 4% mortgage rates represent an artificial transfer of wealth from Generation X, Generation Y, and Millennials to Baby Boomers. Since these mortgage rates represent the bottom of the interest rate cycle, it’s also 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.

Unfortunately for the Baby Boomers, the next generation isn’t excited about overpaying for real estate, so sales volumes are off, particularly among first-time homebuyers. 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.

Further, since Baby Boomers were the first generation to fully embrace the dual-income household, one of the many reasons Millennials have not become a major force in the housing market is because they are delaying marriage, and many fear they may never embrace home ownership.

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Though the transfer of wealth between generations is the primary plan to provide Baby Boomers with a comfortable retirement, so far the subsequent generations aren’t playing along.


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