Can't Save? Here's Why

Ego · Post by **Ego** » Wed Jan 16, 2013 3:47 am

C40, that is f#%$ing brilliant!
It is hard to get a feel for just how much expectation-inflation we've experienced in such a short period of time. When I see your spreadsheet showing the average square-foot of housing space per person has more than tripled since 1950... that is amazing!
Nice work. Thanks.

Spartan_Warrior · Post by **Spartan_Warrior** » Wed Jan 16, 2013 3:48 am

@C40: I'd be more interested to see the cost of a 1,000 sq ft house in 1950 vs the cost of that same 1,000 sq ft house today. If you don't think it's vastly outpaced income growth, well, you're in for a surprise.
The more I think about it the more I realize my interest in this problem has to do with what secretwealth said about "less economic maneuverability".
Let's say everyone gets a certain amount of drinking water. The amount varies per person but it's more than what's needed for survival by an arbitrary amount. Some people are going to take that extra and make a swimming pool for frivolous splashing about. Some people are even going to dip into what they actually need to survive so they can make an even bigger swimming pool, even if they have to go thirsty sometimes as a result. And some people are going to save some of the excess water in case they come upon a drought.
Now, suppose that next year, everyone across the board gets ten gallons less of drinking water. They still get more than what's needed for survival. But the people that want to fill swimming pools now have less to use without dipping even deeper into the amount of drinking water they actually need for drinking. Likewise, the people that want to save water also have less to save without dipping deeper into their necessary drinking reservoirs.
Suppose that reduction in supplied drinking water keeps happening year after year, again, across the board (so you can go look for another water supplier that supplies X gallons instead of Y gallons--so as to avoid any allusion to fatalism--but each year that amount will still be X - 10). We keep telling ourselves, hey, at least it's still more than what's needed for survival (for now). But we're still getting less water, whether our goals are swimming pools or saving. Oh yeah, and it's getting hotter and hotter every year, so the amount of water you need for drinking keeps increasing.
(Or something like that.)
Point is, yes, some people save and some people spend. But as the necessary costs increase and income stagnates or decreases, the disposable income available for EITHER choice dwindles, thereby reducing "economic maneuverability". I really don't care that the majority of people would rather spend than save (in fact I think that's necessary for us savers).
You say your grandparents could save easier because they lived in a small house and played card games. I contend that if I lived the same lifestyle today (which, ahem, I do) it would still be far more difficult for me to save at the same rate they could have. If I'm making the same personal choices, how can those choices be to blame for my lower savings rate? Answer: they aren't.

RealPerson · Post by **RealPerson** » Wed Jan 16, 2013 3:51 am

@secretwealth - you are right that it is called "security", reminiscent of an insurance policy. Finances still work out the same. If an insurance company pays out more and more, they will need to raise premiums or reduce payouts. For SS, the raising of premiums happened January 1. The reduction of payouts has not happened yet. Too many members of congress scared of losing their jobs.
I guess my wishful thinking is that SS would be an individual account where your own contributions are accumulating and produce investment income. Hence the Ponzi scheme comment. SS would be a lot more comfortable if I could accumulate and invest my own SS account funded with my own contributions.

C40 · Post by **C40** » Wed Jan 16, 2013 4:13 am

SW - I know very little about home construction costs. A quick google search produced this:
http://www.thepeoplehistory.com/50s-homes.html
Which makes it look like a 2 bedroom house would've cost around $10-15k.
Putting $12.5k in this inflation calculator (http://www.westegg.com/inflation/) spits out $115k today.
Looks pretty close to me.

Spartan_Warrior · Post by **Spartan_Warrior** » Wed Jan 16, 2013 4:16 am

Housing costs have far outpaced CPI-reported inflation. But sure, let's go with those numbers.
Per your chart, income in 1950: 25,000. House cost: 15,000. 60% of 1 year's income.
Income in 2000s: 50,000. Housing cost: 115,000. 230% of 1 year's income.

C40 · Post by **C40** » Wed Jan 16, 2013 4:28 am

That $25,000 was in 2,004 dollars.
Back in 1950 it was more like $3,000.
http://en.wikipedia.org/wiki/Personal_i ... ted_States
http://www.stanford.edu/class/polisci12 ... Income.pdf

Spartan_Warrior · Post by **Spartan_Warrior** » Wed Jan 16, 2013 4:35 am

Oh, haha, touche. Didn't catch that. So the idea is that housing costs have decreased overall since the 50s? I still find that hard to believe.

C40 · Post by **C40** » Wed Jan 16, 2013 4:38 am

That $25,000 was in 2,004 dollars. Back in 1950 it was more like $3,000.
http://en.wikipedia.org/wiki/Personal_i ... ted_States
http://www.stanford.edu/class/polisci12 ... Income.pdf
I think the median income where you can build a house for $115k is less than $50k though.

C40 · Post by **C40** » Wed Jan 16, 2013 4:39 am

Well I think the median income where you can build a house for $115k is less than 50k. But you can't build a 1,000 square foot house in most cities now anyways. Who would've imagined in the 50's that it would be ILLEGAL!!
Edit -- Maybe comparing the 70s and now would tell a different story, since it appears the income increase happened between the 50s and 70s. Also, who knows how accurate that website I posed with prices is, or even how accurate that inflation calculator is.

RealPerson · Post by **RealPerson** » Wed Jan 16, 2013 4:41 am

Housing costs have gone up a lot on a per square foot basis, but there have been some nice improvements: indoor plumbing, central heating, warm water on demand, much better home insulation, just to name a few that I can think of. My grandparents lived in an old house. I really would miss an indoor toilet and I would not like to order a coal delivery for the stove that was heating the one room in the house that was heated during the winter. As a kid I was not terribly fond of their outhouse. One especially cold winter I was afraid my behind would freeze to the seat. When water was needed in the kitchen, it was manually pumped up from a well. Living in a small house is very doable, but it sure is nice not to live in a 1930s home (that is when theirs was built).

secretwealth · Post by **secretwealth** » Wed Jan 16, 2013 4:47 am

.......
Note from C40:

Oh crap -- sorry Secret wealth - I was trying to quote from the post here and I accidentally edited your post instead of posting a new one. Not sure if there's a way to get it back. Maybe Jacob knows how.
(It was your post mentioning the 100 million dollar home sale in NYC, and it had the example of a London professor who relayed that a new starting professor in the same university wouldn't be able to buy a house there now)
Sorry again. I need to slow down on this thread!

Christopherjart · Post by **Christopherjart** » Wed Jan 16, 2013 4:58 am

can you actually buy 1,000 square foot homes new in the USA now? They are common here, but they are in bad areas and have no yards at all.

Ego · Post by **Ego** » Wed Jan 16, 2013 5:06 am

1360 square foot home, 1962, $16,500
I don't know their income at the time.
Today the same homes sell for $170,000.

$16,500 is worth $125,700 in 2012 dollars according to the CPI calculator
http://data.bls.gov/cgi-bin/cpicalc.pl

C40 · Post by **C40** » Wed Jan 16, 2013 5:15 am

Let's take a look at whether there is less money or not:
http://upload.wikimedia.org/wikipedia/c ... istory.jpg
http://knowledgecenter.csg.org/drupal/s ... me_NYT.PNG
http://online.wsj.com/media/info-povert ... old-MD.gif
http://www.tradingonlinemarkets.com/Art ... income.gif
http://www.zerohedge.com/sites/default/ ... ollars.jpg
I'm assuming these use the CPI (?)

C40 · Post by **C40** » Wed Jan 16, 2013 5:17 am

Christopher - only if you buy an older home. Most cities have ordinances requiring minimum square footage of new homes be over a certain amount. 1,500 is about the lowest.
It's ridiculous. What the hell am I going to do with 1,500 square feet?

Spartan_Warrior · Post by **Spartan_Warrior** » Wed Jan 16, 2013 5:33 am

@secretwealth: Once again, same page. Those are my thoughts exactly.
EDIT: Except that those thoughts are now gone. O____O
@C40: Here are two charts I find slightly more telling:
http://en.wikipedia.org/wiki/File:Produ ... 7-2009.png
http://blogs-images.forbes.com/shenegot ... ttom99.jpg
As to housing costs, my house in a suburb 12 miles from a major city was $220,000, for 1230 sq ft, in 2010. Per wikipedia, "Maryland is the richest state in the United States of America, with a median household income of $69,272 according to the 2010 census.[1]" So about 314% of 1 yr's salary.
I'll have to ask around about housing costs in the past. Off the top of my head I feel like my parent's first house in the 80s was something like 25k while their income was 10-12k.
And let's not discount the fact that "household income" in the past consisted of one earner whereas nowadays two-earner households are the norm.

BennKar · Post by **BennKar** » Wed Jan 16, 2013 5:39 am

I will go along with C40's analysis of homes being cheaper today, especially if you include all the improvments of today's homes, and median size inflation, over the years. As a child of the 70's, I soooo don't romanticize about how easy it was then.
If you do true apples to apples comparisons, most things are cheaper today (with some exceptions - college definitely one of them). Think of autos - what was an average car back in the day? Poor mileage, AM/FM radio only, maybe AC, nothing power - 'cept maybe steering, much less safe than today, and would last at most 125,000 miles. To find a car like that today you would look for a late model car with perhaps 75,000 miles on it, and it would still get better mileage, better radio/CD/AC/GPS, safer, pollute less. Today's car would be much less, when you consider inflation, than the early 70's model.
If you have a steady job (and that's a big IF), today is no harder than when I grew up. There *are* some things I romanticize about the 70's, but finances and the ability to save then sure isn't one of them.
P.S.: You could fire back and say pensions were better and more plentiful then. True, to a point, but as has been shown, many of those pensions weren't worth the paper they were written on. Today's retirement plans may not be your cup of tea, but at least they're your money.
P.P.S.: For you finance wonks out there, one reason home prices were relatively "cheaper" years ago is that mortgage interest rates were higher back then compared to today. If the government wouldn't meddle with mortgage rates (via the Fed.), housing prices would drop at least another 20% country-wide. Without comparing retail interest rates, you don't get a true comparison, even when you take inflation into account.

C40 · Post by **C40** » Wed Jan 16, 2013 5:39 am

SW -- Yeah I saw that chart also while looking. I'm guessing it has a lot to do with computers and automation.
Edit -- So it looks like the 2nd chart shows that the extra money is going to the big whigs, rather than to lower prices.
Where I work, our production lines run WAAYYYY faster than they did 30 years ago, and it takes fewer people to run them. The jobs are in some ways more skilled than before as they have transitioned from a lot of manual labor to line monitoring and quality checks. (Well they aren't really much more skilled, but they are more critical and their mistakes are now much more expensive)

Spartan_Warrior · Post by **Spartan_Warrior** » Wed Jan 16, 2013 5:45 am

Well, combine it with the second chart and I'd attribute it to having more to do with the top echelon earners (the "water distributors" in secret_wealth's ex-post) taking a ridiculous share of the total income growth.
EDIT: Too many edits.

My_Brain_Gets_Itchy · Post by **My_Brain_Gets_Itchy** » Wed Jan 16, 2013 5:45 am

RE: Water Analogy
The fault I see in the water analogy is the water cannot create more of itself.
In ERE and investment of our savings, we are building systems of generating more wealth, increasing our 'resevoir of water' not by hoarding, but my making it grow, ie reproduce.
IF we are given 10 Gallons of water year one, and have consumed 3 gallons, and then in year two we are give 8 gallons and again have consumed 3 gallons:
Year 1: 10 given -3 consumed = 7 saved

year 2: 8 given -3 consumed = 5 saved

Total Amount after 2 years = 12 gallons
The analogy you are using says we would only be left with 12 gallons.
ERE teaches that if we use our 12 gallons properly, we can actually have 15 or more gallons, that is, an amount more than we were 'given' or allotted. Eventually we won't need to be dependent on our our allotment of water because we are self sustaining and we have enough of it. We do this by having a SWR that is lower than our rate of return on our investment.
Even if the allotments continue to dwindle, we continue to grow our reservoir, and the allotment process is of less concern to us.