Security is owning . . . but not in a bubble.

Written by admin on June 30, 2012 – 4:53 pm

Ask any real estate agent and they will tell you security is owning your own home!!.

Ask America’s Generation X and they are likely to tell you something very different.

The U.S. Federal Reserve Board’s Survey of Consumer Finances (SCF) for 2010 has reported what could be unprecedented levels of wealth destruction in the three short years between 2007 and 2010.

Median Family net worth across all age groups has fallen from $126,400 in 2007 to $77,300 USD in 2010, a fall of 38.8 per cent.

But it was families headed up by a person between the age of 35-44 that suffered the most destruction in household wealth. This group has seen median family net worth fall 54.4 per cent from $92,400 to $42,100 USD.

What did this cohort do so wrong?

As they started families, Generation X leveraged up into the housing market, towards or at the top of the bubble. When the bubble burst, they were left with mortgages on homes worth more than they paid for them.

Food for thought.

» Federal Reserve Bulletin, Changes in U.S. Family Finances from 2007 to 2010: Evidence from the Survey of Consumer Finances – U.S. Federal Reserve, June 2012.


Posted in US economy | 30 Comments »

30 Comments to “Security is owning . . . but not in a bubble.”

  1. BotRot Says:

    Meanwhile back at the ranch (here in the Land of Oz), there are many a similar story. I have a brother that was earning just a little over $107K pa. His whole section/department was flicked, the ones that did find jobs again, are now on between $46-48K, for similar jobs/hours. In relative terms, they’re working 5 long days while being paid for 2. Lucky for him and his work-mates, they’re of the age were they bought their houses in the early 80′s and had them paid off by the late 90′s. Picked up and paid off an investment unit or two on the way.

    In this past 10-15 years, imagine the younger people that were also (some, not all) receiving a salary of 85-120K, purchases a house from 450-650+K, taking a pay cut, not even near the vicinity mentioned above, now faced with this “”"asset”"” declining in value, and other credit card and finance debts. Other debts to fill the new house. As an aside, I can remember by brother (mentioned above) and his mates buying new houses 30 years ago. First thet bought the house, 3 years later they fixed/replaced doors and windows and bought new curtain. 7 years later new furniture, TV, kitchen and dishwaher. 10 years later new carpet, then two new cars, …etc.

    Its’ not just the U.S, in Japan the average wage now is around $30K. Here, despite what every media outlet and source across this land screams at us, I am noticing everywhere, less money and activity, hence less wealth around.

    Also its’ not just GenX jumping out of the frying pan, credit card usage from senior citizens that aren’t able to pay back their transacations is on the up, they’re also jumping into the fire.

    But, there are a few that handed their Mercedes in for an Aston Martin. Just ask them, what recession, things are great and the way they should be.

  2. Michael Francis Says:

    Bot Rot

    I bet if you removed the Clive Palmers and the Gina Rhineharts from the income equation you will find that most Australians earn under $40,000 a year.
    Those who wish to earn about $60,000 a year need to rack up a $30,000 HEC’s debt to do so. That’s a pretty poor return on investment, assuming you find a job that continues paying that much.

  3. AverageBloke Says:

    ^ Or be an apprentice on crap money for the first 3 years.

  4. Tom Says:

    What demographic do you think will be hit the hardest here? The RBA keep telling us not to worry as the mountain of household debt is with the people who can afford it – i.e. almost 50% of our debt is(was) with the 5th income quintile. But a lot of this analysis is pre FHOB. The government encouraged 200,000 first home buyers in at the top of the market. Is there any up to date information of household debt distribution by age group?

  5. Matty Says:

    @Micheal Francis, I agree. the media feed us junk about average incomes.

    A few years back (think 2006/07) South Australia’s MEDIAN income (where 50% of the population earn more and 50% earn less) was $38,000 PA. I would bet a counter meal that this figure is still accurate post GFC.

    Average house in Adelaide at peak was $405k….Thats over 10X annual income. These loans will never, never be paid in full. It’s mathematically impossible. Chuck in 3+ years of massive utiliy price increases, every form of government revenue being exploited, etc.

    It WILL collapse. It is collapsing.

    And I think that if they were to stimulate the market, they have left it too long, and there aren’t enough idiots left wanting to get on the ride at these prices.

  6. Michael Francis Says:

    Tom

    When our housing ponzi implodes the question is what demographic will suffer the least. Retirees will see their super funds vanish. High income earners like those mentioned by BotRot will be unable to service their debts when redundancies turn from a trickle to a flood, even if they find new jobs that pay a fraction of what they are used to.
    The biggest employers are construction and retail and each week we are reading about such companies going to the wall and laying off their workforces.
    Government is now talking of massive lay offs.
    The only workers who are safe are either in the police or army.
    Even unborn babies will suffer because as soon as they are born they owe $65k.

  7. HousingTroll Says:

    I’m beginning to believe the simple answer lies in inflation, or to be correct bi-flation.
    GovCo and the RBA speak out of both sides of their collective mouth.
    Look around and tell me if you see the signs of rising prices? Does this not mean that the RBA is failing to meet its mandate?

    They will run inflation hard enough to *motivate* us to park what little savings we have in housing and take out a whopper of a loan. They may even incentivise the sheeple with bigger grants and more liquidity in the banks to lend. I call it “Bail Out Our Boomers Scheme”.

    Its one of a few rabbits in the hat left to be pulled out.

  8. Sceptic Says:

    Housing Troll

    Inflation of every day goods and services will mean that people will have less to spend on housing.

  9. Yoda Says:

    About the only ‘security’ in owning a home is the banks security that they have secured another debt slave.

    Most Aussies will suffer in silence, run up debts on credit cards before announcing they are hungry.

    Sucks to own, with ownership costs escalating. Will be fun when the UN Carbon Tax gets its teeth in the average Aussie expenses.

    Enjoy your government as they are working for us. Aren’t they?

  10. HousingTroll Says:

    @ Sceptic

    Its the fear factor. They’ll run the line: Everything is inflating. Better buy now or be priced out forever!

    And GovCo will provide the liquidity to the banks to lend cheaply. Effectively bailing out anyone underwater by creating false equity via inflation.

    Consequences be damned – they will inflate and inflate and the problem of wages catching up will be left to Fair Work Australia presiding over the biggest industrial battles this country will have seen in a very long time.

    For those that might still have a job anyway.

  11. Matty Says:

    Inflation wont be an issue.

    Inflation is caused by a combination of political consequences and credit creation.

    As bad as our government is, we do not have a Zimbabwe style government.

    And credit creation is negative, hence the price deflation the retailers are moaning about.

    The USA are 6 years into housing deflation, with the Reserve bank openly admitting they are trying to create inflation, but the public wont borrow, hence deflation. If the public went mad and borrowed, with a huge lift in credit creation, then yes inflation will occur, but the public in the USA are scared of debt, and borrowing is a dirty word.

    The government (effectively the RBA) can provide as much liquidity as they like, but unless the public borrow it, inflation just wont occur. The USA is proof of this. The banks have massive amounts of money, but no one is borrowing. So what are the USA banks doing with this spare liquidity? They are trading the stock market.

    The Dow Jones is damn near it’s record high, yet Price/Earning ratios are terrible. All pumped up by funny money from the trading banks. It’s a time bomb. The market knows this, the commentators know this…..Almost everyone with any common sense knows…..

    They just all hold on for dear life that Europe wont pop today.

  12. HousingTroll Says:

    You see above where I said “bi-flation”.
    Yeah, thought you might have missed it.

    Don’t disagree with much of your asessment. but what of the stupidity of our countrymen when it comes to appetite for debt? Remember in Oz, debt=wealth as far as many are concerned.

    Until the wipe out establishes a reset point in psychology there will be plenty of suckers to take a gamble with whatever free money comes their way in the form of grants, incentives, boosts, NRAS, defence housing, PPP’s and the one I fear the most – some form of GovCo backed mortgage insurer.

  13. Romsey Says:

    If you have not read this article, I suggest you take a look.

    I drive through Epping on my way to work each day and can vouch that sections are like a ghost town – very quiet.

    http://www.theage.com.au/victoria/housing-glut-hits-suburbs-20120707-21o6k.html

    The following passage taken from the end of the article :

    “But claims of a housing glut were rejected by development industry groups, the UDIA and the HIA.
    ”There’s no reason for concern. The stock on the market tells you nothing about the fundamentals. It’s underlying demand that matters. Melbourne’s new homes market is in good shape,” said HIA economist Andrew Harvey.”

    Gives me an insight into what was being discussed in a bunker under Berlin in 1945.

    “It’s underlying demand that matters” ————— Yup that’s right…… too bad there is none.

  14. AverageBloke Says:

    Well again it all comes down to price. Sure there is a glut of unaffordable ‘Luxury’ units and McMansions. There is also a shortage of affordable housing and units.

  15. Romsey Says:

    After a bit of a search I’ve located the original article on the subject of these new outer suburbs in Melbourne becoming slums which was written Neil Jennman nearly 2 years ago…… seems he was spot on.

    http://www.jenman.com.au/news_alert.php?id=108

    With the reality of property now well and truly heading south in these suburbs, a lot of first time investors and stuck with real lemons.

  16. Romsey Says:

    Seems the roller-coaster is continuing to gather momentum…… the implosion just gets worse and worse!

    http://theage.domain.com.au/real-estate-news/home-owners-facing-loan-repayment-disaster-20120708-21pkl.html

    Houses bought back in 2008 passing in at auction without a single bid for about 50% of their purchase price?

    Melbourne is so finished…….

  17. Jimmy Says:

    The parallels between the US tech boom of 2000 and the current mining boom are undeniable. Massive investment built on credit using overstated assumptions. The boom is already coming off the boil. When Chinese demand declines coupled with other mining countries increasing capacity, we are going to see sudden and large drops in demand and prices for Australian commodities (esp. coal & iron ore). This will crash the WA economy and drag the rest of Australia down with it.

    Back to house prices, we will see 2% drops (4-5% in real terms) year-on-year for at least a decade and when the mining boom collapses, the dollar will crater, unemployment will skyrocket, people will go into housing arrears and foreclosures, banks will wear huge mortgage losses (which will strangle credit) and the economy will go into a deep recession. Australia doesn’t have the capacity, economic diversity, or clout that the US and EU do to avert an economic disaster once the mining boom collapses and housing market implodes. We could even see a depression. The global economy – which is laregely funding Australia’s housing bubble – will NOT tolerate Australia engaging in “quantitative easing”. Aussie bonds will be dumped like hot rocks and the dollar may even dip to 30 US cents at its worst.

    I see it all happening between 2015 and 2020. Get out now!

  18. Matty Says:

    Jimmy,
    depression is already upon us. Speak to those in retail or construction, the economy is worse than both 87 and 92 recessions.

    In SA we are seeing several multigenerational business liquidate, go into receivership.

  19. Skichaser Says:

    Very true Matty, I am also in SA, and sell medical devices to retail health specialists, and they are doing it tough. I also cover WA, supposedly the economic powerhouse of AUS, and I can tell you alot of people over there, do not ‘feel wealthy’ at all, and are in ‘save mode’. In brief, I think that has alot to do with unsustainable home prices.

  20. Jimmy Says:

    @Matty – Well, if Australia is already in a deep recession then the mining boom is doing a good job of masking it…so far. I’m telling ya, I see nothing but bad juju coming from the mining sector over the next few years. The bigger the boom, the bigger the bust. And the bust is going to be BIG.

    If the economy does go into depression, Australia will become a global economic pariah. No Germany or USA to provide a bailout. Just wholesale dumping of Aussie bonds and a slammed door on external credit. When the RBA tries to turn on the printing presses (like the US Fed) that will devalue the currency further. And since Australia pretty much imports everything, that will cause huge spikes in inflation. RBA will lower interest rates, devaluing the currency further. Lather, rinse, repeat.

    2020 = The Great Housing Correction “we had to have”.

  21. BotRot Says:

    @Jimmy,

    I don’t think this minimg boom is what we’re lead to believe it is. Yes I can buy into things been worse without it, OK fine. But to what extent are all people of Australia the beneficiaries of this boom? Currently W.A mining is pulling in ~$47 Billion, QLD is said to be a small fraction of that in comparision. How much of it goes off to forgein consortiums, private investors here, Government coffers, bank accounts here, etc, before people in general are better off because of it.

    Since 2008 (when I believe Australia went down with the rest of the world), credit and debt issuance have been on the up and up. Also borrowed money for our stimulus (go-broke-ulus) packages. That is what predominately gave Australia the we’re not in deep recession mask.

    I get the impression that mining boom isn’t yours (me too included in ‘yours’), that this mining boom is mostly an investment boom, that is, are you an investor or owner in mining? Yes? Well then, you have a mining boom. Less than 2% of the Aust. labour force is employed by mining (and good on them too), that’s not enough for a noticable spill over effect into the general economy, mining towns yes, but not a winner for the whole economy.

    Back to debt/credit issuance, mortgage debt in Australia is just about (almost there) 100% of GDP, there’s a correction waiting to happen, personal household debt is about $1.4 Trillion, that exceeds GDP. Credit card debt is running at $51 Billion of which, $38 Billion is accruing interest. There are other debts to, government being one of them, that fall on the shoulders of the people.

    I don’t think (that’s me though) mining boom is the mask, its’ the debt issuance. Look what is happening now that there is a decline in credit issuance. Also I don’t believe Australia is the land where people can manage high levels of debt (Mr. Glen Stevens). I agree with you too that mining is a “bad juju”, now that UrbanDictionary.com states what that means.

  22. Jimmy Says:

    @BotRot,

    I agree – we are in the middle of an unprecedented investment boom. Propped up by massive speculation built on the flawed assumption Chindia will continue with its massive public works programs for the next 20-30 years. Where is the money to pay for all this coming from? And people deride the USA for “printing” money. That’s ALL the Chinese government is doing! Let’s get this straight: China and the US are not even close to being in the same league. The American economy is built on creative destruction and innovation. The Chinese economy is built on the theft of intellectual property and cheap labour. China’s GDP may equal that of the US in 15 years but it will never match US innovation…unless the US suddenly disappears. But I digress.

    Back to topic: The Australian economy is currently being propped up by massive speculation about the Chindianese economies. When the rort is laid bare, there will be nothing left to support the Australian economy. Manufacturing is disappearing at an alarming rate thanks to an overvalued dollar (and obscenely expensive labour). Retail is suffering the same fate. Services are doing OK in comparison but are restructuring to service the mining sector. In effect, the mining sector is turning the Australian economy into a banana republic. If the investment boom does indeed go on for another 20 years there will be two sectors: the mining sector and everything else servicing mining.

    Anyway, this lack of diversity is going to ruin the Australian economy with the ensuing property bust destroying the wealth of an entire nation. I’m so glad I’m out of it now.

  23. Romsey Says:

    I suspect the figures are probably worse than this…..

    http://www.theage.com.au/victoria/mortgage-stress-strikes-a-third-of-all-home-loans-20120714-2236l.html

    As we wouldn’t want a panic would we?

  24. Craig Says:

    The lower the prices of houses the wealthier we will all be – more time with family, more money on holidays, healthy food etc.

  25. AverageBloke Says:

    We can’t have that Craig … it would make too much sense.

  26. Matty Says:

    Poor MR. HIA was on the radio this morning telling all that construction has been in recession for two years (that doesn’t line up with their underlying demand argument) and that many “skilled” tradesman have left the industry for the mines.

    ….and in 18 months when consumer confidence is back, we will need to expect higher house prices as there will be fewer tradesman to build the new homes. We still have huge underlying demand wanting homes…….

    What planet are these fools from? He’s bleating on that the government need to give their industry tax cuts, but the has the cheek to say that in two years time there will be sooooooo much work that prices will rise through the roof.

    It’s the debt stupid. Consumer confidence is shattered, yes, but the real drama is the debt levels.

    It is sweet seeing cashed up bogans hurting, both construction workers and property investors.

    Oh, on a side note, if in a married couple, one has a good income, and the other has an unprofitable business, then thats a great investment strategy because of negative gearing. Right?????? No different to negatively gearing an investment property. Cos the business rises in value “equity mate”. LOL.

    I still to this day cannot believe people believe they can get rich off negative gearing…WTF?

  27. BotRot Says:

    @admin,

    For all the articles you’ve presented to us here, allow me to give one to you courtesy of MacroBusiness;

    Tax man increases high-end property squeeze
    http://www.macrobusiness.com.au/2012/07/tax-man-increases-high-end-property-squeeze/

  28. Gavaroo Says:

    Hey Admin…. Ive learnt a lot, laughed a lot and wondered WTF from other peoples comments. What about adding a thumbs up/ thumbs down for the comments? This would make it more interactive for the ones like me on the sidelines.

  29. HousingTroll Says:

    must be about time for the annual update to the Real House Price index?

  30. admin Says:

    The ABS will release an update to their house price index next Wednesday. Stay tuned for a update to the real house price index then.