Give Me the Outlook for the Future Generation

Really Lost One · Sep 27, 2008

So how's the future looking for the future generation? For the posters here still in high school? Just wondering because the future looks very very bleak. Especially with the recent economic plunge, I'm hearing about this 700 billion dollar bailout or something for the banks? Everything seems to be losing its value in the US. The currency is down, people are losing their homes. Gas prices keep soaring and I doubt they'll come back, my history teacher said it should reach $5 within the next year. The job market is horrible, you have guys graduating from Stanford and UCLA not being able to find jobs (I know a few). I've been hearing the US will no longer be the "best" country in the world very soon, although I'm not surprised. The Iraq war, or whatever war we are in doesn't look like it's going to end anytime soon. The housing market is down right now, but I've heard people say that the prices will go up and rise tremendously, and those who are not able to purchase a house now will be kinda screwed in the future. All together, is there anything to look forward to in the future? Especially with the US probably now in a trillion dollar debt or something, how are we gonna pay all that off? Higher taxes for the next generation? So someone explain to me what to look forward to in the future, and if things will settle down in this country, or if we are really just screwed beyond repair.

Kid Chocolate · Sep 27, 2008

of course the job market sucks, i'm looking for a job.

pegs · Sep 27, 2008

I don't think the US has been the best country for a while now.

huevonkiller · Sep 27, 2008

Whatever, just worry about your own future Lost One, no use in troubling yourself over things you can't control.

For what it is worth, I found an interesting article about the housing market and you should consider renting.

Renting Makes More Financial Sense Than Homeownership

By Jack Hough

Sep 26th, 2008

I have something un-American to confess: I rent an apartment, despite having enough money to buy a house. I plan to keep renting for as long as I can. I'm not just holding out for better prices. Renting will make me richer.

I normally write about stocks for SmartMoney.com, but the boss asked me to explain to readers my reason for renting. Here goes: Businesses are great investments while houses are poor ones, so I'd rather rent the latter and own the former.
Stocks vs. Houses: Returns

Shares of businesses return 7% a year over long time periods. I'm subtracting for inflation, gradual price increases for everything from a can of beer to an ear exam. (After-inflation or "real" returns are the only ones that matter. The point of increasing wealth is to increase buying power, not numbers on an account statement.) Shares have been remarkably consistent over the past two centuries in their 7% real returns. In Jeremy Siegel's book, "Stocks for the Long Term," he finds that real returns averaged 7.0% over nearly seven decades ending 1870, then 6.6% through 1925 and then 6.9% through 2004.

The average real return for houses over long time periods might surprise you. It's zero.
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Shares return 7% a year after inflation because that's how fast companies tend to increase their profits. Houses have their own version of profits: rents. Tenant-occupied houses generate actual rents while owner-occupied houses generate ones that are implied but no less real: the rents their owners don't have to pay each year. House prices and rents have been closely linked throughout history, with both increasing at the rate of inflation, or about 3% a year since 1900. A house, after all, is an ordinary good. It can't think up ways to drive profits like a company's managers can. Absent artificial boosts to demand, house prices will increase at the rate of inflation over long time periods for a real return of zero.

Robert Shiller, a Yale economist and author of "Irrational Exuberance," which predicted the stock price collapse in 2000, has recently turned his eye to house prices. Between 1890 and 2004 he finds that real house returns would've been zero if not for two brief periods: one immediately following World War II and another since about 2000. (More on them in a moment.) Even if we include these periods houses returned just 0.4% a year, he says.

The average pundit, planner, lender or broker making the case for ownership doesn't look at returns since 1890. Sometimes they reduce the matter to maxims about "building equity" and "paying yourself" instead of "throwing money down the drain." If they do look at returns they focus on recent ones. Those tell a different story.

Between World War II and 2000 house prices beat inflation by about two percentage points a year. (Stocks during that time beat inflation by their usual seven percentage points a year.) Since 2000 houses have outpaced inflation by six percentage points a year. (Stocks have merely matched inflation.)
Stocks vs. Houses: Valuations

But while stock returns have come from increased earnings, house returns have come from ballooning valuations, not increased rents. The ratio of share prices to company earnings (the price/earnings ratio) has remained relatively steady. It's about 16 today, close to both its 1940 value of 17 and to its 130-year average of about 15. Not so, the ratio of house prices to rents. In 1940 the median single-family house price was $2,938, according to the U.S. Census, while the median rent was $27 a month, including utilities. That means the ratio of prices to annual rents was 9. By 2000 the ratio had swelled to 17. In 2005 it hit 20. We can adjust for the size of dwellings, but it doesn't make much difference. The ratio of single-family house prices to three-bedroom apartments is 19. In SmartMoney.com's home town of Manhattan, where more detailed data is available, the ratio of condo prices per square foot to apartment rents per square foot is 22.

Two main events have caused house valuations to inflate since World War II. First, the government subsidized housing by relaxing borrowing standards. Prior to the creation of the Federal Housing Authority in 1934 house buyers who borrowed typically put up 40% of the purchase price in cash for a five- to 15-year loan. By insuring mortgages, the FHA permitted terms of up to 20 years and down payments of just 20%. It later expanded the repayment periods to 30 years and reduced down payments to 5%. Today down payments for FHA loans are as low as 3%. Aggressive lenders offer loans with no down payments or even negative ones so that house buyers can borrow the full purchase price plus closing costs. Some require little documentation of income, assets or ability to pay.

That means more Americans can win loans for homes, and they can win them for far more expensive (larger) homes than their incomes previously allowed. Two-thirds of American households own homes today, up from 44% in 1940, even though the percentage of Americans living alone has tripled during that time. The ratio of house values to incomes has risen 260% in just under four decades.

A second event helped boost house demand in recent years. Share prices plunged in 2000. The Federal Reserve, fearing that the decline in stock wealth would cause consumers to stop spending, reduced the federal-funds rate, the core interest rate that determines the cost of everything from credit cards to mortgages, to 1% by the summer of 2003 from 6.5% at the start of 2001. Since most of the cost of financing a house over 30 years is interest, monthly house payments shrank and demand for houses soared. In some markets a string of big yearly increases in house prices led to panic buying.
Stocks vs. Houses: Conclusion

For house returns over the next 20 years to match those over the past 20, the government and private lenders would have to "up the ante" by relaxing borrowing standards further. Given the recent attention paid to swelling foreclosures, that seems unlikely. I suspect real returns will turn negative over most of the next two decades, but that house prices won't necessarily dip. Since 1963 they've done so in only two years, vs. 18 for stocks. That's because homeowners mostly just stick it out rather than sell during soft markets. But if house prices remain flat, they produce negative real returns due to the creep of inflation. According to calculations made by The Economist in the summer of 2005, house prices would have to stay flat for 12 years with annual inflation at 2.5% for the ratio of prices to rents to fall from its 2005 perch to merely its 1975 to 2000 average.

So to sum up why I rent: Shares right now cost 16 times earnings and over long time periods return 7% a year after inflation. Houses right now cost 19 times their "earnings" and over long time periods return zero after inflation. And they look likely to return less than that for a while.

On the following page I've tried to anticipate and address questions and objections.

Questions/Objections
"You can't live in your stocks" or "Renters throw money down the drain."

Rent is the cost of owning shares with money you would otherwise spend on a house. Houses have ownership costs, too: taxes, insurance and maintenance. Rent costs about 5% of house prices each year if we apply the price/rent ratio of 19. House incidentals often cost around 2%. If you have $300,000 and a choice between spending it on a house or shares, you'll pay $6,000 a year in incidentals if you buy the house or about $15,000 a year ($1,250 a month) in rent if you buy the shares. But the shares will return $21,000 a year after inflation while the house will return zero. (My numbers work out even better than these. I pay a smidgen less than $1,250 a month for rent, while house prices in my neighborhood are far higher than $300,000.)

Note that houses and shares have transaction costs, too. Home buyers pay around 1% in closing costs when they buy and 6% in broker commissions when they sell. Share buyers pay $10 trading commissions, which are negligible for buy-and-hold investors.
"House buyers get tax breaks."

So do share buyers, but both are a bad deal. The interest on loans for houses (mortgages) and shares (margin balances) is tax-deductible. But the rates are almost always too high. A big house loan presently costs 6.1% interest while a big stock loan costs about 9%. For the returns, we can forget about inflation because it helps debtors while hurting investors, making it a wash for those who borrow to invest. Still, nominal returns of 3% for houses and 10% for stocks aren't high enough to justify those rates. The tax breaks aren't really breaks at all. Moreover, a majority of homeowners don't claim them. Their incomes are low enough to make the standard deduction a better deal.
"What about the pride of home ownership?"

It's not for me. I define ownership as no longer having to pay for something and being able to do as I please with it. I own my coffee maker. House owners must pay taxes each year even when their mortgage payments are done. In certain markets they can't even make changes to the houses they've paid for without seeking the approval of others. Personally, I feel the pride of ownership for shares of businesses, and I'm proud to occupy a nice place while leaving the burden of poor returns and maintenance to someone else.
"You seem to knock government housing subsidies, but they've helped many Americans afford homes."

My inner socialist agrees. My other inner socialist worries that the government has effectively raised prices to the point where the middle class can't afford houses, or buries itself in debt to own them. My inner capitalist is too busy watching shares to care about house prices. My inner conspiracy theorist notes that while politicians tout the social benefits of homeownership none mentions its tax benefits to the government. I pay no taxes on the overall value of my stock portfolio, just on my cashed-in gains and collected dividends. But Americans pay taxes on the full $11 trillion worth of housing they own plus the $10 trillion worth of it they're still paying off.
"Houses are bigger than apartments."

True, and both can be rented. A third of renters live in single-family houses. I prefer an apartment for now. I like not having to fill it with stuff. I like using a fifth of the energy of the average American. I like being 20 minutes from work and (this is unique to New Yorkers) not having owned a car in 10 years. I like not stressing over whether to get the marble countertops or the imported tiles or the 52-inch flat screen. I'm not especially frugal; I spend a teacher's salary each year on restaurants and travel. But I guess I'm too busy or lazy right now to bother with a big house and its innards.
"Are you saying I should sell my big house and rent an apartment instead?"

No, unless you have more space than you need and moving wouldn't be disruptive to your family, and you want to cash in on recent housing gains, make more money over the next couple of decades, use less energy while simplifying your life, and you don't mind seeming odd to friends. In which case, yes. But really, I'm not trying to win anyone over. Strong demand for houses keeps my rent cheap.
"Renting is for poor people."

True. But it's for rich people, too. The average renter makes about $34,000 a year, but while the percentage of renters declines after incomes exceed $20,000 and rents exceed $600 a month, it jumps again once incomes top $150,000 and rents top $1,200 a month. In other words, poor people rent modest apartments for lack of choice. Middle-income people buy houses. High-income people, presumably with a dose of financial savvy, often rent nice apartments instead of buying.
"You say houses return zero. But I've made a fortune on my house in recent years."

I'm referring to inflation-adjusted returns over long time periods, absent external boosts to demand. You're referring to gross returns over a short time period that combined lax borrowing standards and ultra-low interest rates. Over the next 20 years I believe houses will return zero or slightly less after inflation and that stocks will return 7%.
"So you're never going to buy a house? What about raising a family?"

I might buy one eventually, but the longer I can put it off the more I'll get out of the shares I'll have to sell to afford it. I'm 34 now with a fiancée and a fish. I'm going to try to rent for at least 10 more years. If I have kids I'll probably move into a big apartment or a house once they reach running-around age. I'll rent, most likely.

Copyrighted, SmartMoney.com. All Rights Reserved.
Click to expand...

Yahoo! Real Estate

Really Lost One · Sep 27, 2008

Yeah well I'm hoping things will cool down in the next 6-8 years when I finish college (hopefully).

Mamba · Sep 28, 2008

Uh paragraphs should be in your future...

I'm living well right now and will continue that way. My job outlook is also high, because there will always be a need for law enforcement. : ] Take that you USC and Stanford hacks with your Masters in god knows what!

NJNetz · Sep 28, 2008

because there will always be a need for law enforcement. : ]
Click to expand...

You're going to be a cop? Interesting, because I've been looking at that field of work, myself.

Colonel Ronan · Sep 28, 2008

The previous generations (AKA Denny's LOL) have fucked everything up for us!

JE · Sep 28, 2008

I've been thinking about this extensively myself. I guess I'll just hole up in college for as long as possible . I'm already planning to go for 6 years so that works out.

GodlessCommie · Sep 28, 2008

EDIT: Very, very creepy post.

If things get bad enough, I'll just open an ice cream shop. There is nothing that can go wrong when you're in an ice cream shop.

Claud · Sep 28, 2008

After college, I'm going back to Europe.

Kid Chocolate · Sep 28, 2008

Claud said: ↑

After college, I'm going back to Europe.
Click to expand...

God bless America.

JE · Sep 28, 2008

GodlessCommie said: ↑

EDIT: Very, very creepy post.

If things get bad enough, I'll just open an ice cream shop. There is nothing that can go wrong when you're in an ice cream shop.
Click to expand...

Денг Гордон · Sep 28, 2008

I think I'll be fine. Sucks for you though.

God bless scholarships and grants!

Really Lost One · Sep 28, 2008

^that's just for college

What happens when you get out?

Денг Гордон · Sep 28, 2008

Get a job, make money.

Really Lost One · Sep 28, 2008

You now the job market is shit right?

Master Shake · Sep 28, 2008

BG7 Lavigne said: ↑

Get a job, make money.
Click to expand...

Your logic is fucked.

Денг Гордон · Sep 28, 2008

I'm sure I could get a job in my uncle's business if I had to.

I'm not worried. If you're good at what you do, you will probably find a job.

You make it sound like there are absolutely no jobs out there. That is not the case. There are plenty of jobs out there.

Really Lost One · Sep 28, 2008

Of course there are opportunities, but it's a lot difficult now then before, and I sure as hell don't expect it to get any better in the near future. How do you explain UCLA and Stanford graduates sitting at home all day without a job offer? In the past, the job market would welcome them with open arms.

My counselor says that now, the degree you graduate with may be more important than the college you go to.

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