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2009-05-19 17:32:24

Generational Patterns Hit the Financial Markets


When we wrote Generational Housing: Myth or Mastery*, we described how the distinct generational personalities in America affect real estate and the financial markets. We also discussed the very persuasive thesis of William Strauss and Neil Howe that generations in America repeat in a four-generation cycle, or about once every 80 years. If this thesis is valid, we should expect to see some similarities between the American experience of the present day and of 80 years ago, though we acknowledge that there are other factors that influence economic consequences.
Going back 80 years would put us in the late 1920s, a time that we have come to know as the “Roaring 20s.” What was that time like? It was an age that became known for amusement, fun, and breaking free of the constraints of tradition; life was good for most Americans. Social mores were changing, though with an attendant backlash among religious conservatives. Wealth was increasing rapidly, as American manufacturing efficiency became the envy of the world. But the increase in wealth was very uneven, with a sharply growing disparity between the top and bottom tiers of American life. The dramatic reduction of income and inheritance taxes brought about by the Revenue Act of 1926 disproportionately benefited the wealthy and contributed to the wealth disparity. (Henry Ford reported a personal income of $14 million in 1929, a full 20,000 times the $750 national average).
Interest rates were low in the 1920s, and money was readily available. Installment credit more than doubled between 1925 and 1929, supporting a surge in consumption that buoyed the national economy. In addition, Americans were speculating in both real estate (e.g., the Florida land bubble of 1925) and the stock market, anxious not to miss out on seemingly inexhaustible opportunities. Investments were highly leveraged, with margin requirements on stock purchases as low as 10%. But…
The end of the decade was to bring about an economic collapse that was the largest in American history, a collapse that was accompanied by a rash of bank failures (over 9000 in the 1930s). With a lack of government programs to soften the fall, we entered the Great Depression, which was to last for the next decade.
The similarity of events in the 1920s and most of our decade is striking. Through much of this decade we too have enjoyed the good life, driven by low-cost consumer goods and technological marvels. Ours has also been a time of changing social mores and a loosening of traditions, with an attendant religious backlash. Prosperity has increased for the average American, but it has been accompanied by a growing wealth disparity—per capita income was over $36,000 in 2006, but the decade has seen reports of executive compensation of over $500 million (e.g., Eisner, Ellison) again reaching 20,000 times the per capita average. The combined tax cuts of this decade (on income, capital gains, dividends, and inheritance) have been the largest in the post World War II period, with the greatest benefits going to the top 1% of wage earners.
This decade saw an explosive growth of borrowing at low interest rates (consumer debt has grown from $8 trillion to $14 trillion since 1990). The rapid appreciation of real estate drove a speculative fever, with purchases leveraged by no down payment loans and risks assumed by interest-only or negative-amortization mortgages. Home refinancing to fund consumer purchases became a significant contribution to the consumer spending that supported the national economy.
But as in the 1920s, the bubble of the decade did not last, but culminated in economic collapse, proximately triggered by the real estate market rather than the stock market. Mark Zandi, chief economist for Moody’s says that the “current housing downturn is the worst in the U.S. since the Great Depression.” And the failure, or threat to solvency, of major financial institutions and mortgage lenders (e.g., Bear Stearns, IndyMac, Fanny Mae, Freddie Mac, Lehman Brothers, Goldman Sachs, and Countrywide) has been all too reminiscent of the 1930s.
There are many similarities in the effect of the economic turmoil, including a loss of jobs, decline in consumer confidence, and a steep reduction in equity in housing and other investments. There are also many differences in the economic landscape of these two eras. Ours is a more international financial world, with global institutions struggling to respond to changing economic conditions. While we are not predicting another Great Depression, the current decline may well be the deepest and longest lasting of any since that time. But whatever the outcome, there are clear behavioral similarities in these two eras reflecting a similar mix of generational personalities, and of how those personalities affect our national life. Generational shifts are evident from our national politics to the approach to housing trends and investment solutions. Understanding how the generations will make decisions and make use of negotiating and technology skills is a subject to be mastered by all real estate professionals seeking to be proficient in the changing real estate industry.
Carmen and Lloyd Multhauf are the founding developers of the Generational Housing Specialist™Council, a national real estate designation that focuses on the unique impacts made by different generations in establishing housing trends, financial products, negotiating skills and reaching a successful closing. You can read more at

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