House Price Drop: Good News for Young

Posted by: Michael Mandel on July 29

I’m on ‘vacation’ right now…actually, I’m on the Jersey shore finishing up my textbook. But I had to comment on today’s home price drop. The previous increase in home prices was effectively a wealth transfer from home buyers to home sellers. That is to say, you were a big winner if you were 65 and sold your big home to go live in Florida. You were a big loser if you were 30 and buying a home for the first time. And you were a small loser if you owned a small home and were trading up to a larger home as your family expanded.

The drop in home prices basically reverses all this. The worst hit are those people who were about to cash out of the housing market, or downsize. The big beneficiaries are the young. And for middle-aged homeowners who have been in the same house for ten years, what’s disappearing is wealth they never had, anyhow.

If I was 25 or 30 years old today (!), I would be applauding this news.

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Reader Comments

Justin Coffey

July 29, 2008 12:34 PM

I'm not so certain your age based division of winners and losers holds true under scrutiny. There /are/ only two significant groups of people who are in a bind from this crisis, however they are not necessarily divided by age. They are those who either bought around the peak for their metro area or those who took out home equity loans.

Unfortunately, many of those who bought around the peak /are/ young homeowners who rushed into a home because they were afraid the market would leave them behind for good (note to self: never purchase the most expensive thing in your life out of fear). Now they'll either struggle through or walk away from their homes and deal with renting for the next decade while their credit recovers. I might add, this is not the worst thing that will ever happen to them, though we are expected to believe it as such.

The other group of "winners" who don't fit into your thesis are those who are about to retire, have owned their home for a long time (perhaps paid off) and have not taken out a HELOC. With home prices declining most rapidly along the coasts, or if you prefer, "the desirable parts of the country," this brings with it the renewed possibility of a retirement in the sun, either via renting or purchasing a small condo out of the proceeds of the sale of their large home.

Sincerely,
Justin

Brandon W

July 29, 2008 02:10 PM

Except that the biggest bunch of new, young prospective home-buyers are those that have left college sometime in the past 8 years or so, and their wages are dropping in real terms.

Mike Reardon

July 29, 2008 03:25 PM

The down draft in housing prices and the extra churn of those defaulted houses will also remove income from state treasury’s through smaller state property tax. Schools will take one more hit in balancing the state budget. Though young parents may be able to afford privet school with the tax break.

Kartik

July 29, 2008 05:15 PM

The best thing America could do right now is issue 1 million greencards to anyone in the world who is a trained engineer, doctor, or scientist. Applicants should be screened with scrutiny.

That will boost GDP, create new homebuyers, generate more taxes, and restore US primacy in the sciences, keep Social Security solvent, raise the average education level of American society, etc.

Wasn't it Mike Mandel who said a BS-degree Engineer who comes to the US after being educated at the expense of another country is essentially bringing the $200,000 it took to educate him for 16 years into the US?

So we could immediately import $200B of knowledge by issuing 1 million greencards to highly qualified people.

Keith G

July 30, 2008 02:04 PM

The good news here seems to be for anyone who was bearish for the last five years. For example, someone who is looking to move-up in housing because they saved some money when everyone else was buying-big will find beautiful houses at a significant discount.

Viking

July 30, 2008 06:42 PM

So,Mike Mandel,you seem to suggest that young people will benefit from the current correction in real estate,yet you also support the bailing out of Fannie and Freddie,which will have the effect of putting an artificially high floor under the market.The way I see it it is not between old and young,but rather between those who used too much leverage and those who lived prudently within their means.Instead of rewarding the prudent folks,they are being punished by all the bail-outs and the inflation policy currently pursued by the FED,which erodes the value of their savings.Even worse these same people will be asked to pay for the bail-outs with their taxes!!So the very behavior we need more of is being punished,while the behavior we need less of is being rewarded!!Good luck America!!

Mike Mandel

July 31, 2008 09:39 AM

Hi Viking,

There's a big difference between a correction and an uncontrolled plunge. Everyone is hurt if the financial system comes unravelled. But lower prices? A good thing for the young.

Exotic Electrons

July 31, 2008 06:24 PM

You sound like one of my asshole clients on Long Beach Island. What about the 25-30 yr olds that just bought property with good credit and not one of the, "loser loans" - Yeah - fuck them, they should have waited. So what if they are now paying a loan amount that can not be matched in real dollars for another ten years. You make it seem like musical chairs and the losers get to hold the bag, with "wealth they never had, anyhow."

Joe Cushing

August 3, 2008 11:49 PM

Its not just an issue of age, it's an issue of not already being long in real estate. Even if you want to upgrade, to take advantage of lower prices; you may not be able to if you can't get out from under your current home.

Isabel Gardyner

August 18, 2008 08:06 AM

I'd even go as far as saying: IT'S ABOUT F**KING TIME!

Thank you for your interest. This blog is no longer active.

 

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Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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