Intergenerational Transfer of Wealth

If you are old, particularly if you are a homeowner, then you likely saw a good chunk of your wealth deteriorate due to the collapse of housing prices directly or due to the MBS fiasco indirectly. Regardless, you now have less wealth. It's kind of like an accounting error...you wake up one morning and realize you had been consuming and planning as if that 2 was really a 5. Opps.

If you are young, particularly if you do not own a home, then your consumption is derived from income and you aren't much impacted by the current crisis. Moreover the housing bubble just made a very important source of investment and forced savings much more affordable for you. This is windfall. It's like walking into the grocery store and discovering everything is now 1/2 price...time to stock up. True, we now know that real estate is not a risk free investment and prices can fall and fall big. But that certainly doesn't mean housing is a bad opportunity for a patient investor. Nor does is it a especially risky investment with the right collateral. People with 20% down are not (yet) sitting on negative equity.

So we are experiencing a transfer of wealth across generations. Lets look at how this could play out for three specific groups:

(1) Many homeowners have children and many homeowners plan to bequest some wealth to their children. But now their kids can benefit from the housing slump. So if you own a home and are planning to leave something for your kids, then fret not. You can reduce the amount you were planning to pass down without guilt. Your balance of wealth is basically a wash.

(2) On the other hand, if you are young and are planning to get a shout out from the old folks, then situation will be a wash for you too. Better start looking for a house to buy if you don't want to take a hit on the inheritance.

(3) Now, if you are like me, then you are in the best position to take advantage of the opportunity the housing slump presents. I can benefit from the affordability of housing AND I don't lose anything because my parents weren't going to give me anything in their will anyway! Woohoo.