Murray's Weblog

The Vanishing Middle Class

I was just having some Dim Sum with my friend Matt at an upscale London restaurant and we were talking about politics, finances, the extinction of the Middle Class. I articulated something I hadn't really said out loud before—although I've been thinking it a bit—we've hit the point where if you're a young adult (25-35) and haven't bought a home yet, you may have lost the window of opportunity.

I hate to be pessimistic, but many of my generation in the United States are screwed. Due to a fair amount of pressure from my Mom, I bought an apartment (a "co-op") in New York back in 1999. I didn't want such a responsibility as a mortgage on my shoulders because I'd really just started making a real living, but once I calculated that mortgage payments would be significantly lower than rent (it was a fluke of market variables at the time) it just didn't make sense NOT to buy something.

Well, I was able to buy a rock-bottom place in Manhattan for $95K. When I sold it about 2 or 3 years later, it had doubled in value. I bought a place in Los Angeles (fortunately while interest rates were rock-bottom) and in the last 2-3 years it has again doubled.

I don't expect housing prices to go up much more, but I don't really expect them to drop either. At least not in places like New York or L.A. where you just can't really build any more. Yeah, you can move to the fringe suburbs of L.A., but then you have horrendous commutes to work, and gas prices are on the rise. The point is that demand for a limited resource is going to stay pretty high.

So here's what's depressing: buying a home in L.A. or New York starts at $400K and realistically may be as high as $500K. If you wanted to get a loan at 5% down at let's say (with interests rates rising) 7% fixed, you would have to come up with $50,000 cash up front and then your mortgage payments on the remaining $450,000 (not considering insurance and property tax) would be almost exactly $3,000 per month. That's $36,000 annually. Given that a pretty decent professional salary for a young person these days is $50-60K, this isn't going to happen.

I'm worried that very soon a far greater proportion of Americans is going to be spending their lives renting. The family house has traditionally been the single best way for a generation to pass some wealth down to succeeding generations. In bad times it has been sold and converted into retirement living. (An elderly person can sell a house and convert it into an annuity that will keep him or her in a stable income for the rest of his or her life—at the unfortunate cost of not having anything to pass along to children.)

What does this mean if you are 25-35 right now, not making 6-figure income, and you're reading this blog entry? Please take a piece of advise: write down on a piece of paper "I WILL OWN MY HOME" and tack it up in your bedroom somewhere where it is certain to permeate into your subconscious. Within the next 6 months go to a financial planner and say "somehow I want to own my home" and find out what concessions, hard work, and planning it's going to take. (This may very well be something you can't do without 5 years of savings and planning. If so, aren't you glad you started today?)

Be realistic! Don't jump at the first "interest only" loan that jumps out at you. You're likely to lose everything if times get tough. Set goals. Read books on personal finance. Understand what different loans are like and don't get suckered into a bad one. Set savings goals for your down payment. Figure out what government programs might assist you in buying your first house or condo. (There are some of them out there, although I'm not very familiar with them.)

What's at stake if you don't heed this advise? Experts talk about the vanishing Middle Class. This means that soon there will be people with a fair amount of wealth, doing nice things like flying to Hawaii for the family vacation, etc. Then there will be those people for whom going to the movie theater is something they might not be able to do more than once a month. I'm seeing a lot more of that over here in Europe. Americans have grown accustomed to a pretty sizable disposable income and that might not last forever.

Posted by Murray Todd Williams at August 13, 2005 12:09 PM