Generation Gap

“Today’s adults in their mid-30s or younger—the prime time for career and family formation—benefited little from the doubling of the economy since the early 1980s and have accumulated no more  wealth than their counterparts 25 years ago.”

“Lost Generations? Wealth Building Among Young Americans”

 

The Great Recession hasn’t really been kind to any particular age cohort, but it’s highlighted how severely Generation X and Y have been left in the dust by the Baby Boomers. The Urban Institute recently released some research detailing the specifics:

Despite the recent recession, our economy in 2010 was about twice as rich both in terms of average incomes and net worth as it was 27 years earlier in 1983. But not everyone shared equally in that growth.

Younger generations have been particularly left behind. Roughly speaking, those under age 46 today, generally the Gen X and Gen Y cohorts, hadn’t accumulated any more wealth by the time they reached their 30s and 40s than their parents did over a quarter-century ago. By way of contrast, baby boomers and other older generations, or those over age 46, shared in the rising economy—they approximately doubled their net worth.

The younger cohort also faces severe disadvantages in comparison to the Boomers – severe inflation of college tuition, often leading to  high level of student loan debt and the increased cost of home ownership.  There’s an understandable wish for people to believe the economy is ‘getting better’, and it’s true that it’s not quite as awful as it was a few years ago. However, this is a far cry from the economy actually being good.  As Brad DeLong notes about the recent unemployment figures, the employment report was fairly decent but the labor market itself is a nightmare.

“the employment-to-population ratio today is exactly where it was three-and-a-half years ago, at the recession trough…There has been no closing of the output gap and no decline in the unemployment rate from putting a greater share of the adult population to work. All of the decline in the output gap and all of the decline in the unemployment rate is from the collapse in labor force participation. {…} one-tenth of our labor market shift relative to 2007 can be attributable to demography; nine-tenths are the result of the Lesser Depression.

The parry I get from the people in Washington is: “Britain, Japan, and Europe are doing much worse!” True. So?

I’m not entirely sure how a generation that has less wealth, more debt, and a highly unfavorable labor market that threatens to last a decade are supposed to surpass the Baby Boomers in attaining a higher standard of living. As most people have intuitively known for a while, they’re not.  The question that remains is – what are we going to do about that?

Things Are Different

There’s been some mainstream commentary suggesting that the housing market is close to a recovery and that household formation is set to surge. Derek Thompson at The Atlantic:

“Household formation is miserable now, but it’s projected to pick up for a simple reason: an improving economy is bound to encourage young people to get out, buy apartments, and get married, eventually. How fast they start gobbling up apartments and houses is unclear.”

Neil Irwin at the Washington Post:

“In the first six months of 2012, the growth rate of the economy, excluding gains in housing, was about 1.35 percent. If everything else — consumer spending, business investment, exports and government spending — continued growing at the same pace it has in 2012, the gain in housing then would put overall growth in the coming year at about 3.25 percent.

{…}

That would mean an additional $262 billion in economic activity, which, if recent relationships between dollars of residential investment and housing starts hold up, would translate into an additional 517,000 homes being built every year — meaning that the 872,000 annual rate of housing starts that the Census reported Wednesday would rise by a cumulative 59 percent in the coming 12 months.

While all this may seem like an naively sunny scenario — and it would be great news for the economy if it materializes — keep in mind that it is hardly presenting an outlandish sort of boom for housing.

Rather, this is what would happen if housing returns to its average role in the economy of the pre-bubble 1990s and did so in the coming 12 months.

The dark clouds are these: We don’t know for sure whether the gains in September housing activity are a short-term blip, one of the kinds of ups and downs we have seen too often in this recovery, or something more. And this scenario assumes that the other sectors of the economy keep holding up their current growth rates.”

They both include some obvious qualifiers, but it seems to be an instance of hope rather than certainty. I hope the recovery plays out like they predict, but there’s plenty of worrying signs that remain. Underemployment and stagnant wages remain a very real problem.

Generation Y professionals entering the workforce are finding careers that once were gateways to high pay and upwardly mobile lives turning into detours and dead ends. Average incomes for individuals ages 25 to 34 have fallen 8 percent, double the adult population’s total drop, since the recession began in December 2007. Their unemployment rate remains stuck one-half to 1 percentage point above the national figure.

Three and a half years after the worst recession since the Great Depression, the earnings and employment gap between those in the under-35 population and their parents and grandparents threatens to unravel the American dream of each generation doing better than the last. The nation’s younger workers have benefited least from an economic recovery that has been the most uneven in recent history.

“This generation will be permanently depressed and will be on a lower path of income for probably all of their life — and at least the next 10 years,” says Rutgers professor Cliff Zukin, a senior research fellow at the university’s John J. Heldrich Center for Workforce Development. Professionals who start out in jobs other than their first choice tend to stay on the alternative path, earning less than they would have otherwise while becoming less likely to start over again later in preferred fields, Zukin says.

{…}

About 61 million people, one-fifth of the U.S. population, work at jobs where median earnings declined since 2007 even as the 1.2 million households whose incomes put them in the top 1 percent saw their pay rise 5.5 percent last year. Younger workers are experiencing the worst of the disparity in part because they’re being displaced by older workers. The number of employees ages 55 to 64 is expected to surpass the under-24 working population by 2020 for the first time since at least World War II, according to the BLS.”

Typically, household formation is primarily driven by young adults striking out on their own. They begin earning more money and eventually save enough for a down payment. Their careers are stable enough where a mortgage payment becomes a manageable responsibility. That’s how it’s supposed to happen. Does that sound like today’s situation? What else is different from the typical story?

Oh. That’s going to put a crimp in saving for a down payment. Stories about an imminent housing recovery will eventually have to incorporate student loan debt into their narrative. Loan underwriters certainly will.

Apartments and austerity

Multi-unit construction is one of the few healthy aspects in the real estate sector lately. Which is some ways is positive in the sense that economic activity in general is positive. However, it’s also  a reflection of people’s inability to afford single-family homes. Yet people need to live somewhere and apartments are picking up the slack formerly occupied by detached housing.

“As residential building recovers from a near standstill after the housing crisis, much of the momentum is coming not from subdivisions with green lawns and two-car garages but from rental apartments. Multifamily construction nationwide is two-thirds of the way back to its prerecession peak, while single-family home construction is still only about a third of the way back to its peak, said David Crowe, the chief economist of the National Association of Home Builders.

m{…}

Still, vacancies remain extremely low and the pace of building in recent years has not been quick enough to replace obsolete, decrepit or demolished units, said Mr. Crowe of the homebuilders group. He projected that it would be several years before supply was back to normal.”

Rents rose between 4.2 percent in 2011 and 3.6 percent this year. The median income has fallen from $72,956 to $69,487 between 2000 to the present.  Apartments have their advantages (flexibility, no maintenance, etc) but oftentimes, they’re not particularly cheap. Eventually, American cities will have to more fully come to terms with Accessory Dwelling Units and loosen some of the regulatory barriers that prevent their construction. ADUs are a sweet spot between multi-unit apartments and single family housing – they’re also going to be a major policy tool that helps keep downwardly mobile Americans out of severe poverty.

 

 

 

Housing Prices: An impediment to income mobility?

 

Binyamin Appelbaum at the the New York Time’s Economix blog highlights some research indicating that the high prices in many major metro areas are a significant impediment for low-wage/low-skill worker who might otherwise be inclined to locate there for economic opportunities.

““The best places for low- and high-skilled workers used to be the same places: California, Maryland, New York,” said Peter Ganong, a doctoral student in economics, who wrote the paper with Daniel Shoag, a professor of public policy. “Now low-skilled workers can no longer afford to move to the high-wage places.”

In this account, people aren’t moving to the Sun Belt because they want to live there. They are moving because they can’t afford to live in Boston. And the result isn’t just second-best for them; it also slows the pace of economic growth.”

On one hand this is fairly obvious to anyone who has considered moving to somewhere like New York City or San Francisco – “it’s so expensive!” It’s a serious career obstacle for many low and medium skilled wage earners – there are clearly more lucrative opportunities in larger cities, but it’s not always clear that the extra compensation would make up for the astounding difference in housing costs. A service worker earning $12/hr would clearly have more disposable income living in Hartford or Waterbury than New York City. This would probably even apply to an average white collar middle skilled worker – it’s not particularly clear that earning 50k in Boston is a step up from earning 42k in say, Greensboro.

 

On the other hand, it’s useful to have solid empirical evidence suggesting that housing prices have a clear impact on the economic opportunities facing non-superstar workers. It’s another example of how you can’t entirely separate affordable housing policy decisions from large economic trends – they’re closely related. Creating more affordable housing in the cities with the best economic opportunities is one small way to help alleviate unemployment.

Housing the Downwardly Mobile

A recurrent theme of this blog is how the recession and current environment of austerity impacts nearly everyone regardless of age, education, work experience, and social class (for the bottom 90% of us at least).  The current living arrangement in too many American regions doesn’t really allow for quick adaptation to reduced financial circumstances. The New York Time recently had an article detailing the difficulties faced by older experienced workers after experiencing layoffs and long term unemployment:

“Most have been unemployed for months or years. Time spent with them at several gatherings over many months reveals a postrecession landscape where grim frustration battles with the simple desire to find a way out.

They were once advertising executives, engineers, social workers, teachers and purchasing managers. Now they come week after week, dressed for the office, carrying binders full of résumés and leads for potential jobs. They refine what they call their “60-second commercial” — a way to pitch themselves to nearly anyone they meet. When the three-hour meetings end, they mosey over, some reluctantly, to a table packed with day-old bread donated by a supermarket.

{…}

Finding a job is particularly difficult for people like those who gather here each week. These are not unskilled workers looking for entry-level jobs. They are men and women in their 40s and 50s who were midlevel managers with salaries that made them comfortable enough to buy homes and take vacations. Nearly all have college diplomas, and some have advanced degrees.”

As noted in the article nearly 45 percent of California’s unemployed are out of work for over 27 weeks, with the auto-dependent Inland Empire region averaging 55 weeks. Most of these people will eventually be forced to take lower paying jobs well below their skill level. In many cases, they won’t make enough to cover their previous expenses. Some argue that no one is necessarily entitled to live a certain lifestyle and to a degree that’s correct. What’s troubling is that people looking to downsize their lifestyle to adjust to their new financial realities have anchors like car or home ownership weighing them down. Since cars can be useful and homes are both a place to live and a vehicle to build equity, the answer isn’t to eliminate ownership of either but rather start rethinking our consumption preferences for these products.

Single generations living in large houses far from employment center is going to be an option for the affluent. Fifty-somethings facing downward mobility will need other housing options and cities with foresight will  provide them.

Moving Backwards

Spending patterns by income bracket. Housing and transportation are the largest expenses in every category.

Two recent stories highlight some of reasoning behind the austere city thesis. Via Planet Money, the above graphic shows spending patterns by income bracket. Housing and transportation costs are highlighted. Housing accounts for at least a quarter of spending for all groups, while transportation costs range from about 15 percent for the affluent upper-middle class and around 21 percent for middle-class households making less than 70k. Regardless of income, housing and transportation costs are major expenditures.

The second story is a recent study from the Center for Economic and Policy Research that offers further evidence that solidly middle-class employment opportunities are becoming much more rare –  they find that the share of “good jobs”, (defined by the study as one that pays at least $37,000 per year, has employer-provided health insurance, and an employer-sponsored retirement plan) fell from 27.4 percent in 1979 to 24.6 percent in 2010.

“The U.S. workforce is substantially older and better educated than it was at the end of the 1970s.Given that older and better-educated workers generally receive higher pay and better benefits, we would have expected the share of good jobs to have increased in line with improvements in quality of the workforce. Instead, the share of good jobs in the U.S. economy has actually fallen. Our estimates suggest that, relative to 1979, the economy has lost about one-third (28 to 38 percent) of its capacity to generate good jobs.”

The gender gap explains a large part of the wage story – the average man makes less than his 1979 counterpart, while the average woman makes far more. In terms of the other two “good job” components, the percentage of employer-sponsored health care and retirement plans has markedly declined over the past thirty years. The study notes that despite substantial increases in the education level and quality of the workforce and a 63 percent increase in GDP per person that the share of good jobs in the economy still fell 2.8 percentage points.

In addition to this already sobering data, Richard Kirsch of the Roosevelt Institutes offers another bleak reminder:

“I want to throw one more scary statistic into this brew before drawing the implications for building an economy that will work for everyone: most of the jobs that will be created in the next decade don’t require much of an education. Of the 10 occupations expected to create the most jobs, eight of them require a high school degree or less. There will be almost four million job openings for retail clerks, home health aides, and the like compared with one million for nurses and college professors, the only two jobs in the 10 that require more than a high school degree.

These numbers foretell an economy where even workers with a good education are barely making it and most Americans don’t have a prayer of living the American Dream.”

People are earning less despite higher levels of experience and education and the bulk of the anticipated job growth will be in occupations that no one even bothers to pretend offer a route to the middle-class. As the above infographic details, housing and transportation account for nearly half of a middle-class household’s (increasingly stagnant) income, while health insurance costs rise and secure retirement options dwindle. The austere city thesis is a simple acknowledgment of these realities – the built environment must adapt to an era where prosperity is increasingly elusive. Decreasing the housing and transportation cost burdens will have to be a major priority as we re-imagine our cities.

A Different Housing Market

Streetcar Suburbs, Somerville Alex MacLean. Somerville, MA, ca. 1910

Yale economist and housing market guru Robert Shiller is sounding gloomy about current state of the market , recently claiming in an interview that “Dispersed suburban housing may not do well in decades to come. It could be we will never in our lifetime see a rebound in home prices in the suburbs.” Other analysts are making a similar argument:

“For some analysts, the scariest outcome of the collapsed home-price bubble is that it could turn an entire generation of would-be homeowners into perma-renters. {…}

Other economists and real estate experts say young would-be home buyers haven’t given up on real estate as an investment. It’s just that stifling student loan debt and the unstable job market have made it all but impossible—and it may be years before that changes. A study by the John Burns Real Estate Consulting firm predicts the homeownership rate for 25- to 34-year-olds will continue falling through 2015. It says the number of first-time home buyers has dropped 20 percent since 2009.”

The reasons are fairly obvious for those inclined to look. Student loan debt, underemployment and stagnant wages are going to be a drag on the housing market for the foreseeable future. I’d also argue that there has been a change in the psychology of would-be home buyers since the onset of the Great Recession – it’s painfully obvious that home price can in fact decline and that employment is far more precarious that we like to admit. People are reluctant to potentially anchor themselves to an underwater asset when the reality of the labor market might involve moving across the country.

People are still going to want to buy homes, but in my view the demand for certain suburban typologies are going to severely decline. A recent report from the Demand Institute makes a similar point:

“Downsizing, Polarization, and Accessibility
Although demand for new and existing homes will rise, consumer demographics as well as altered preferences will change the nature of that demand. Consumers will reduce their expectations and houses will be smaller, neighborhoods will be increasingly segregated economically, resulting in polarization, and demand will be high in areas well served with amenities that are within walking distance and that have a sense of community. Sprawling, featureless suburbs will be less attractive.

Downsizing
Demand for smaller homes will be driven partly by the many baby boomers who delayed retirement because of financial concerns during the recession.  When they do eventually retire, many will not move. But those who do are likely to downsize.”

These points seem obviously true. The desire for a home is highly ingrained in American culture, and it’s merely going to be modified, not abandoned. Smaller homes on small lots close to walkable urban areas and various amenities were the norm before World War II, so it’s not as if that urban typology is utterly alien to consumers. There’s a reason why home values in historic districts are generally so robust – people like those neighborhoods. We should build more of them.

A Satellite’s View of Inequality

Tim DeChant’s PerSquareMile blog has an striking post illustrating how neighborhoods tree canopy is often indicative of it’s wealth. Namely, wealthier areas have more trees. His post uses Google Earth satellite imagery of well-known and very different neighborhoods. Here’s an example from Chicago:

Woodlawn neighborhood

Hyde Park neighborhood

One neighborhood is a well known urban success story. The other still has a long road ahead. You can probably guess which ones are which.

(Link via Grist.org)