Straight Dope 2/3/2023: Followup - Did baby boomers wreck the planet?

Cecil's Columns/Staff Reports
41

I’ll give you a specific example. Our first home cost $163,000 in 1990. Mortgage rates at the time were 13.5%. After 25% down, the mortgage was 122.250 (actually more, because of fees, closing costs, etc. That gave us a mortgage payment of $1375/mo. The inflation calculator tells me that this is equivalent to a mortgage payment of $2539 today.

There is an identical model of our home for sale down the street from our original, for $378,000. With 25% down, a mortgage for that home at today’s rates is $1669.

Both are 25 year amortizations with a 5 year term. So in 2022 dollars, it cost us $870/mo more to pay our mortgage as an equivalent couple would pay today.

And the house we are talking about is fairly nice - a 2,000 sq ft modern 4 level split with attached double garage. A perfectly nice starter home can be had here for $250,000. At today’s mortgage rates, that’s an $1100 mortgage.

The places where it’s gotten crazy expensive are much worse (that house we owned would be probably 1.5 million in Vancouver). But there’s an obvious fix for that - move to a place where real estate is affordable. That’s what my generation and my parent’s generation did. You don’t have to move to a backwater - just a place where real estate hasn’t run outnof control for 20 years.

As for cars, the 2023 Chevrolet Spark is a nice car and can be had for $14,595. The inflation calculator tells me that this is equivalent to $7902.84 in 1990. That’s roughly the same price as a base 1990 Chevy Cavalier, but that car had manual windows, manual steering, manual brakes, no airbags, no cameras, Am/Fm crap radio, no AC, etc.

Then there’s interest rates. A car could haveva rate of 12-15% depending on crefit. At 15%, $8,000 cost $190/mo, or $365/mo today. The Spark at 4.9% costs $275/mo. Bith calculated with 60 month terms.

So, in real terms the house I bought in 1990 sould be $870 LESS per month today, and an inexpensive car today would cost about $90/mo less than an inexpensive car in 1990, and be much better in quality.

I can do the same for food, appliances, entertainment, electronics, etc. The best TV you could get in 1970 was a 26" Sony Trinitron. It cost the equivlent of $2200 today.

Remember ll those baby boomer vacations? They would almost certainly have been driving vacations to the lake or visits to relatives, as flying was too expensive for the average middle class family all the way up to the late 1970’s when Carter de-regulated airlines.

42

Thank you for the legwork. The low interest rates drove up home prices, interest rates are a variable. Not a goal in and of itself.

43

And take a 50% pay cut…

What an absurdly reductive scenario. Your 1990 house was $163k. The median US salary was $50k. Today this house is $378k. The median US salary today is $53k. I know interest rates are a right-wing boogeyman, but come on.

44

You keep hammering on a 15% interest rate like it was the Great Depression, but that was a temporary phenomenon from about 1978-1986. And it only affected the subset of the economy who wanted to take out a new loan for a house in that time, and first-time homeowners of that generation went on to accumulate more wealth in real estate than any generation before or after.

In other words, high interest rates weren’t exactly a Vietnam War or Great Depression type generational burden. It was just a financial complication for a subset of the population, a campaign talking point that folks were happy to bludgeon Jimmy Carter with, and then forget about when Reagan was elected, even though rates remained over 10% for most of that decade. It’s a cherry-picked, politically convenient talking point more than anything.

45

I do?

46

High interest rates affect everything. They make it harder for businesses to raise capital. They increase the cost of real estate holding, which drives up rent. They raise the cost of inventory and capital investment, which causes businesses to fail. Hiring slows down. That’s the whole point of high interest rates - to choke off demand and cool off the economy. It hits everyone.

And interest rates were high for a lot longer than you suggest. The fed funds rate was close to 10% in 1969. It went down for a couple years, then rose to over 10% by 1973 and stayed over 10% for two years. It came down to a low of just under 5% by 1977, but then started rapidly climbing to 15% by 1979, and then it went crazy high, all the way to over 20% by 1981. The funds rate didn’t go below 8% again until 1986. Then it started going up again, and was back to 10% by 1989. Most of the 90’s were spent with the federal funds rate between 4% and 6%. The funds rate today that has the markets in a tizzy is 4.68%.

This is the environment the late boomers and Gen-X grew up in. In 1969 I was 6 years old. By the time interest rates got low and relatively stable I was close to 30. Those high interest eates affected everything I did from moving away to school to buying a car and eventually a house. Interest made everything much more expensive.

Shall we talk about unemployment? Our ‘wrecked’ economy currently has the lowest measured unemployment in history. When I became old enough to work, unemployment was over 8%. When I turned 18 the unemployment rate in Canada was over 13%. It took a decade to slowly drop to 8%, then went back up to 12%. That was the situation from the time I turned 18 until I was 30. Today in Canada it’s 5%, and lower in the US.

You could go on looking at almost every economic indicator from that era, and it’s better today. One big exception is government debt, which is much higher now, and the cost of education in top schools. Both of those are the fault of bad government policy. Anyone who supports high government deficits is complicit in that, and that’s not a generational thing.

47

Where did you get your numbers from? Because I’m looking at them, and in 2021 dollars, the median US household income was $30,636. By 2021 it had risen to $70,784.

Would you? Let’s do the numbers. Let’s say you make $100,000.

So, we will compare a $400,000 house at 15% with a $750,000 house at 5%.

A $400,000 house at 15% will cost $4984 per month over 25 years.
A $750,000 house at 5% will cost $4362 per month

You are much better off with the 7.5X at 5%. Not only is it $600/mo cheaper, when it’s paid off you have a more valuable asset. The reason, obviously, is that in the first case you pay a huge amount of interest which more than makes up for the difference in price.

Any examination of home costs that doesn’t include the interest rates is meaningless.

48

Let’s say we stick with 4x median income, so that house is 280k, not 400k.

49

It doesn’t make any difference. The same math applies.

$280K at 15% interest is $3489/mo, and over 25 years you will pay $766,762 in interest. Total cost: $1,046,000.

A $525,000 house (7.5x) at 5% will cost you $3053.43 per month. You’ll pay $391,000 in interest over 25 years. Total cost: $916,027.

The more expensive house is cheaper in the long run, has lower monthly payments and leaves you with a larger asset at the end.

Any talk of housing affordability has to include interest rates.

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51

Solid post, even if people dont care to pay attention. There is mass media trying to convince parents to blame their children and vice versa for their economic situations. It is systemic, and we are currently creating the wealthiest people in history.

52

Now that’s a huge generalization. I, a late boomer, put myself through college by working two jobs, and the longest I ever worked at a single company was as a part-time cashier. I have no retirement savings, although not for lack of trying. I can’t claim anything about kids myself, but all my boomer lady friends held jobs. Where do you get these standards?

53

True. But, mortgages can be re-negotiated. I did this with my home, originally going with a balloon mortgage and then switching to a fixed amount at a lower interest rate when the rate dropped.

54

Your historical site is ten years old. I posted the 3021 numbers. You can see it here:

Since your chart ended, median household income has jumped from $51,939 to $70,784. Also not shown is government benefits and taxes.

Taxes have been declining for the poorest quartile since 1990. Then the income tax rate for the lowest quartile was 13.7%. By 2018, that rate had fallen to 6.7%. The second quartile saw tax rates drop from 16.2% to 10.3% The middle quartile dropped from 18.6% to 13.3%. So after tax income went up even faster.

As for affordable houses, the big difference is that people want bigger houses now, despite having smaller families. That’s yet another sign of wealth.

In 1950, the average home size was just under 1,000 square feet. Today it’s almost 2,500.

In my city, you can get a mid-century 1,000 sq ft bungalow for $250,000 in a decent neighborhood. With a down payment that’s a mortgage of $1139.

If you want to live like a boomer from the 60’s, you can. Buy a 1,000 sq ft house in a small/medium city. Buy a $5,000 used car, which will still be better than a new car in 1960. Vacations are packing the kids into the car and camping at the lake, because only rhe rich could afford to fly. Scrap the cell phone, you can have one TV. Go out for supper rarely. Most of the time, you will cook from scratch ingredients.

The fact is, we don’t live like that any more because we are much wealthier. Rich, poor, doesn’t matter. At the median, everyone is doing better in almost every way. We live longer, travel more, eat out more, drive nicer vehicles and surround ourselves with tech that would have been a luxury for the very rich 50 years ago.

55

Not until they re-install all the pay phones.

56

Why did you ignore the BLS link?

57

Ooooh, speaking of which!

A bud took her kids to Kauai for a week, and she posted a few pictures every day on Facebook. One picture was of her teenage daughter on a payphone. I immediately posted and asked, “Is that a real, working payphone, or just a prop somewhere?” She said it was real and had a dial tone!

It was along a roadside and also looked like this one!

Who knows, maybe this was actually the one! So, if you really are pining to bring 'em back, take a trip to Kauai. LOL

58

Do downpayments come out of thin air in your world?

59

Use whatever down payment you like - the math doesn’t change. Is saving for a down payment hard? You bet. It took us years.

In the meantime, here’s an apartment in Edmonton near West Edmonton Mall, for $120,000. $30,000 down, $95,000 mortgage. Payments: $552/mo. That’s more affordable than anything from when we got started. That’s cheaper in constant dollars than rent I paid 35 years ago. There are many larger apartments, condos and townhomes under $200,000.

There are deals like this across North America. Just not in San Francisco, Toronto, Vancouver or Seattle. We have a bifurcated real estate market: a few crazy-high priced cities, and lots of reasonable real estate elsewhere.

60

The BLS cite didn’t seem relevant. It’s just another way of looking at current wages, has no historical information, and doesn’t contradict anything I said. What did you want me to get from it?