Tuesday, March 29, 2011

Economics Issue

So I was listening to MPR this morning when they came on with their Marketplace Report thing. The big news was that house prices continue to decline. Home sales are down, which means home prices are down, which means 1 in 5 mortgages is underwater, which means those homeowners can't afford to sell/move, which means sales are down... etc. What to do about this?" they asked. The answer from their financial expert was that banks had 2 choices. 1. Bulldoze the homes and consider the assets lost or 2. Rent the homes, because there's a big rental market.

So here's my problem with this... our financial experts can't figure out that neither of those options is a solution to the economy-wide problems. Our financial experts are focused on what the banks can do to increase their profits (with the assumption that better-off banks will necessarily trickle down into a solution for our economy's woes).

I think there's a more direct solution. How to get all of these homes off the market? How to increase sales, and thus price? You need to increase first-time home buyers. Obviously existing home-owners can't afford to move because of the low market prices. Therefore, the only solution is more first-time home buyers. So, who are first-time home buyers? Young people. So, why aren't young people buying homes? Honestly, for a lot of people, it's because they've got too-little income. It's my experience that, right now, there are a lot of people 30-and-under who have enough income to survive in a rental market, but not enough to be able to purchase a home.

It's also my experience that there are a lot of baby boomers and >50 year-olds who make a crap ton more than the <30 crowd. That is, our economy right now rewards longevity in our pay scales. Not a completely unreasonable proposition. But it turns out, that has an effect on the ability of our economy to, say, recover from a giant housing bubble. Since real-wages have stagnated over the past 30 years (or however long), while prices have continued to rise, the buying power of the new workforce isn't comparable to what it was 20 or 30 years ago. Therefore, people at the bottom of the work totem-pole, the people we need buying houses to help pull our economy out of this funk, aren't able to buy houses and provide the economy-wide boost that we're looking for.

So what's the solution? Maybe we need to get companies looking at the way they pay their employees. Maybe we need a more equitable distribution of wages across generations. Maybe we need to shift some of our assets from senior employees towards younger employees. Maybe that sounds crazy.

But maybe it's time to try something new. From a big-picture perspective, this would help create more first-time home buyers, which will help stabilize and grow the housing market, which will help everyone, including those senior employees who already own their homes, because their assets will continue to grow in value. Let's call it a trickle-up theory. Crazy, right?

(P.S. Please try to keep any comments non-political.)

Well I'm a steamroller baby

1 comment:

aaron said...

Matt,
I like the idea and thoughts laid out here. It is a good discussion and thought provoker. As I think about it, I keep coming back to the same answer....INVESTMENT.

Our parents and their parents thought of a home as a long term investment. A place to shelter their family and money for the long term....20+ years. As I see it know, young people today see homes as money makers. They are not looking to stay in one home a long time, only until they can move up to a bigger better home.

I think part of the answer is to change the way these people think. Get them to see that a house is a long time investment and in the long term will provide financial security in there future.

Unlike cells, clothes, cars, and other "toys" which lose value the moment you take possession, homes most often can value throughout the years. They can also be updated to fit your current need while increasing the value of them.

That's all I got for now.