APRIL 1, 2016

GREAT U.S. HEIST


Those over sixty-five who were raised in middle class homes in the United States may still remember years when a fourth or less of one’s income paid the mortgage or rent for a place to live. My parents’ California home in Marin County had a monthly mortgage payment of $95.48 when they bought it in 1958. The California minimum wage in that year was $1.00 per hour. According to a 1960 US Census report the average family annual income in 1958 was $5,100 or $425 each month. A $95.48 mortgage payment equals 22.5% of that $425 monthly income.

In 2015 a house sold for $750,000 a few doors away from the house my parents bought in 1958 for $20,000. That is an appreciation in price of 3,650% over a period of fifty-seven years, or an average annual return of 64.04%. For the person who may have kept such a home that meant an average increase in wealth over fifty-seven years of $12,807 per year or more than twice each year of what the buyer’s annual salary was when the house was purchased in 1958. If we assume that the buyer paid twenty percent down or $4,000, then the return on that original investment of the downpayment was actually a fantastic 18,650% over a period of fifty-seven years, or an average annual return of 327.19%.

So what does that mean now for the young average worker starting out today in comparison to the worker who bought a home in 1958?

The price now for a house like my parents owned in 1958 in Marin County is $750,000 and a twenty percent down payment equals $150,000. The monthly payment on a $600,000 mortgage at a 4.5% interest rate is a monthly payment of $3,040.11. In 1958 my parents paid 22.5% of monthly income as their mortgage payment. Today $3,040.11 is 22.5% of $13.511. That is what a household monthly income must be now to buy the same type of house and to be in the same financial position as my parents were in 1958 when the average annual household income was $5,100.

In 1958 my father worked as an accountant at a mid-sized corporation in San Francisco. My mother worked as a part-time bookkeeper at a small insurance agency with fewer than ten workers including the owner of the business.

In 2016 a full-time accountant in San Francisco might earn $79,000; a full-time bookkeeper might earn $47,000. Since my mother only worked three-quarter time in 1958 a comparable 2016 wage as a bookkeeper would be $35,250. So a married couple holding these positions in 2016 would have a household income of $114,250 annually or $9,520 monthly.

But the 2016 monthly mortgage on that $600,000 loan is $3,040.11. That means that a 2016 household must spend 31.94% of monthly income on a mortgage — not the 22.5% of income that my parents paid in 1958. That is a difference of 9.44% or about $899 each month, or $10,785 annually.

But there are other cost differences that place the 2016 family further behind my parents' position in 1958:

At 1% property taxes on my parents $20,000 home were $200 annually.
At 1% property taxes on that $700,000 house purchased in 2015 are $7,000 annually.

In comparison to 1958 the 2016 household in effect has $17,585 less in disposable household income only on account of the higher percentage of income that they must pay on their mortgage and property taxes. Their comparable budgets then look like this:

My parents’ household in 1958:

5,100 income
1,146 annual mortgage payments (22.5% of income)
3,954 amount left
200 annual property tax (3.9% of income)
3,754 amount left (73.6% of income)

Our imagined 2016 household:

114,250 income
36,481 annual mortgage payments (31.93% of income)
77,769 amount left
7,000 annual property tax (6.13% of income)
70,769 amount left (61.94% of income)

Buying a newly built house in 1958 left the purchaser with 73.6% of their income after paying their annual mortgage payment and property taxes.

Buying a fifty-seven year old house in 2015 left the purchaser with 61.94% of their income after paying their annual mortgage payment and property taxes.

In 1958 a three year old Chevrolet cost $800 (15.69% of $5,100).

In 2016 a three year old Chevrolet cost $22,000 (19.26% of $114,250).

In 1958 Annual fees at UC Berkeley were $84 (1.65% of $5,100).

In 2016 Annual fees at UC Berkeley were $13,518 (11.83% of $114,250).

Does something seem wrong with this picture?

A 2016 household may have gross income of $114,250 — over twenty-two times more than the $5,100 of gross income that a similar household had in 1958. But on a percent basis the 1958 household had more money left after expenses than the 2016 household has that pays cash and incurs debt in 2016 prices to buy that same 1958 lifestyle.

It is called the great inflation and debt extension spoof.

In fact, it is impossible for the average US household to have a 1958 life style without a great increase in debt taking on new and higher levels of debt.

Asset prices have inflated over the decades. So have wages but not by as much or enough to provide the same purchasing power as in the middle of the last century. What allowed the difference and continued inflation was debt extension. But debt requires future income to pay back the loan and the interest due. If future income is needed to pay back debt and interest, how does the consumption party continue to grow the US economy without wages also rising dramatically?

One way was to move factories where goods were produced from areas with high costs of living and high wages to areas where wages and the cost of living were lower. From the northern states to the southern states; from this country to other countries. This stabilized or even lowered prices so that consumers could buy more at lower costs. Another way was to give everybody a credit card and to emphasize low monthly payments rather than the actual total cost for higher priced items. The most important way was to loosen credit standards for obtaining home mortgage debt.

In the 1980s and 1990s as debt payment loads increased reducing the amount of household income available for consumption a new form of debt was made available to homeowners — the home equity line of credit. This allowed homeowners to draw money from their home equity to pay off their credit card balances.

Between 1997 and 2007 in San Francisco the selling price of seventy year old homes near City College rose from $250,000 to $800,000 — an average increase in value of $55,000 per year. Then came the crash and the long, slow, economic recovery ever since. As always after an initial drop, real estate prices in San Francisco have recovered, even increased in value. In many other places in America the recovery has often been far less than wonderful.

A house is "worth" a downpayment plus whatever a bank is willing to lend on it. Higher home prices mean that creditors and bankers are able to take more for themselves from the future income of home buyers. After paying back over thirty years a $600,000 mortgage at a 4.5% interest rate the home buyer pays the bank a total of $1,094,439.60 — that is $36,481.32 each year from future earnings for thirty years. When one considers the additional debt and interest that is likely to be paid over thirty years for the costs of education, medical and dental care, and car purchases, the transfer of wealth from buyers to creditors is indeed staggering to behold.

In our lifetimes stockholders, high level business executives, creditors, bankers and politicians have apparently done quite well. Those over sixty-five who have owned real estate since the early years of the great real estate boom before the mid-1970s have also prospered.

Those now living in the ten or fifteen percent of households with the highest incomes and asset wealth may not feel pinched by current economic conditions in the United States.

For the rest of the households in America times have changed. The percentage breakdown of budgets for households with workers who must commute to work are likely tight:

50% to 40% Rent or Mortgage, utilities, and telephone service
19% to 16% Property, income, and sales taxes
10% to 19% Automobile and transportation
11% to 19% Food and household supplies

For higher to lower paid households occupied by only one individual or one family the cost of essentials may range from 90% to 94% of total household income.

Where is the income to save for retirement?

Where is the income to save for the higher education of children?

Where is the income to pay for medical and dental care and insurance premiums?

Where is the income for holidays, gifts, vacations, and occasional entertainment?

Where is the income for clothing and the replacement of durable household appliances?

Do you think these percentage costs are unrealistically inflated?

Consider the dollar amounts that those percentage breakdowns allow:

For a household with $12,000 of monthly income:

$6,000 to $4,800 … Rent or Mortgage, utilities, and telephone service
$2,280 to $1,920 … Property, income, and sales taxes
$1,200 to $2.280 … Automobile and transportation
$1,320 to $2,280 … Food and household supplies

For a household with $6,000 of monthly income:

$3,000 to $2,400 … Rent or Mortgage, utilities, and telephone service
$1,140 to $960 … Property, income, and sales taxes
$600 to $1,140 … Automobile and transportation
$660 to $1,140 … Food and household supplies

Some folks are being overcharged in America.

Others are getting very rich.

Can you guess who does the heisting and who gets heisted?