Landmark Links February 10th – Surprise?

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Lead Story…. The cost of housing – both renting and buying – has been on a steep upward trajectory in recent years as more and more young people gravitate towards cities.  At the same time, members of the Millennial generation are saddled with ever-larger student debt loads and are making substantially less money than their parents did at the same age. Given the above, one might wonder how young people could possible afford to live in cities in significant numbers.  Actually, it’s simple: Baby Boomers – the wealthiest generation in history – are subsidizing their children whether they live at home or not.  And they are doing it in shockingly large numbers.  As Quoctrung Bui of the NY Times reported this week:

Almost half of people in their early 20s have a secret, one they don’t usually share even with friends: Their parents help them pay the rent.

Moving into adulthood has never been easy, but America’s rapidly changing labor market is making it harder to find economic security at a young age. Skilled work is increasingly concentrated in high-rent metropolitan areas, so more young people are tapping into their parents’ bank accounts.

According to surveys that track young people through their first decade of adulthood, about 40 percent of 22-, 23- and 24-year-olds receive some financial assistance from their parents for living expenses. Among those who get help, the average amount is about $3,000 a year.

It’s a stark reminder that social and economic mobility continues past grade school, high school and even college. Economic advantages continue well into the opening chapters of adulthood, a time when young people are making big personal investments that typically lead to higher incomes but can be hard to pay for.

Remember this the next time someone tries to tell you that the highly restrictive zoning in major US cities doesn’t have a profoundly negative impact on income inequality.  Increasingly, employment opportunities that offer better economic mobility are clustered around major cities.  When the cost of living in those cities increases due to a deficit of housing starts, it acts as a barrier to entry to young people and those with lower incomes.  That is, unless there is a subsidy available in the form of the Bank of Mom and Dad.  Parents who that can afford to subsidize their kids are doing so until they can make enough money to be self sufficient.  20-somethings with parents that can’t afford the subsidy either need to make substantially more money or find an area where they can afford to live – one which most likely won’t have the same economic opportunities down the road.  This is only getting worse.  Again, from the NYT (emphasis mine):

There are also significant differences for young people who live in bigger cities. Young people in metro areas with a million or more people are 30 percent more likely to receive rent money from their parents than those in smaller cities. After controlling for other factors, the big-city residents receive twice as much support.

This helps explain the country’s decline in internal mobility over the past few decades. In the 1980s, 5.1 percent of those 18 to 24 moved across state lines. By the 2000s, that figure had fallen to 3 percent. When the barriers to moving to metro areas with high-paying jobs are too high, it undermines the long-held belief that people can simply uproot themselves for better job opportunities. That may have been true in the past, when low-skilled work paid better and rents were lower, but the survey data suggests that it’s harder to do without a little help.

Financial dependence among 20-somethings has steadily grown in the past few decades. In the 1980s, Paul Wightman (an assistant professor at the University of Arizona who helped the NYT analyze data) found, fewer than half of this age group received any parental support. But by 2010 nearly 70 percent of them did.

Living expenses account for only 20 percent of the help that parents give their children. According to the survey, the bulk of the support comes in the form of lump-sum gifts for things like a down payment on a house or capital to start a business.

There is a massive and growing demand for entry level housing – both for sale and for rent – that is not being met in our most productive regions, resulting in housing costs that are outpacing inflation.  The increasingly large number of 20-somethings receiving assistance from parents in order to live in places with dynamic economies that offer potential for growth is a symptom of this.  One’s economic future in the US should not be dictated by one’s parent’s ability to subsidize their cost of living in their early employment years. This is not going to get better until we recognize the real culprit and start building more housing where it is needed most.

Economy

Disconnect: From weak regional economies, to a lack of in-demand skill, disability, criminal records and debt,  the problems that keep today’s jobless stuck on the sideline are a complex web of interrelated issues.

To Go or Not to Go: Bloomberg columnists and economic professors Noah Smith and Tyler Cowan  debate the future of Dodd-Frank.  See Also: When is a repeal not really a repeal?

Skeleton Staff: Amazon’s robotic grocery store of the future will only require 3 human employees.  Stay in school, kids.

Residential

Broken Record: Data suggests there is a significant and growing shortage of lower-priced homes and a glut of high-end ones.  This problem is not going away until we start building more entry level homes.  See Also: Houses are the least affordable they’ve been in seven years – here’s why.

The Elephant in the Room: The Federal Reserve still holds $1.75 trillion of mortgage back securities from quantitative easing programs and recent comments from officials suggest that they could start to reduce those holdings later this year.  Unwinding a portfolio of that size could have serious negative consequences for mortgage rates.

Heading South: Back in August, I wrote about the impending housing debacle in Vancouver when City officials decided to impose a 15% tax on real estate purchases by foreigners.  The Vancouver market is tanking as expected.  Seattle appears to be the early beneficiary of Vancouver’s self-imposed crash as many wealthy Chinese buyers turn their gaze to the other side of the American/Canadian border.

Profiles

Second Act: How Hall of Fame QB Steve Young beat the odds – 78% of former NFL players go bankrupt or come under financial stress just two years after they retire, according to a 2009 report in Sports Illustrated – and became a successful private equity investor.

Shooting the Messenger: Greece is responding to it’s now-resurgent debt crisis by prosecuting the statistician whom the government hired in 2010 to fix data fraud.

Make it a Double: The strong dollar is doing wonders for foreign booze sales.

Death Watch: The cost of insuring Sears’ bonds has reached a new high.  There’s a good chance that this thing isn’t going to be around much longer.

Graphic of the Day

Who did this?

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WTF

A Fool and His Money…Some fool with more money than brains purchased a Cheeto shaped like Harambe on eBay for $100,000.

At Least He was Having a Good Time: Meet the Italian priest who is facing defrocking for organizing orgies on church property.

Rekt: Patriots fans held nothing back when it came to making signs to troll NFL Commissioner Roger Goodell at their Super Bowl victory parade.

Please Make it Stop: KFC is now selling a pizza with crust made out of fried chicken called a Chizza.  The fast food race to the bottom continues, unabated.

Landmark Links – A candid look at the economy, real estate, and other things sometimes related.

Visit us at Landmarkcapitaladvisors.com

Landmark Links February 10th – Surprise?

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