Baby Boomers Going Bust

Highlights include Starwood Hotels & Resorts Worldwide, Inc. (HOT - Analyst Report), Marriott International, Inc. (MAR - Analyst Report), Winnebago Industries, Inc. (WGO - Snapshot Report), The Procter & Gamble Company (PG - Analyst Report) and Del Monte Foods Co. (DLM).

One of the most disturbing things about the housing bubble and its subsequent bursting -- and the resulting financial crisis -- has been the effect it has had on the wealth of the middle class, particularly those who are approaching retirement.

Rising asset values, both in equities and real estate, lead people to save less than they might ordinarily have in the absence of a bubble. While this "extra" disposable income was certainly a boost to the economy on the way up, it is going to have devastating long-term consequences.

Quite simply, most of the largest generation of Americans ever will not be able to retire. The only assets that are not considered are the value of defined benefit pension plans, which in any case have become quite rare in recent years. While I have been writing about this in general terms for a while now, a recent paper available here: http://www.cepr.net/documents/publications/baby-boomer-wealth-2009-02.pdf puts some actual numbers on the problem.

The graph below shows the net worth of people aged 45 to 54 versus where they were in 2004 (when they were aged 40 to 50). It projects their net worth at the end of the year under 3 different scenarios for housing prices, and assumes that the S&P 500 stages a very nice rebound from where it is today (but flat from when they were writing the paper) by the end of the year, finishing at 823. Frankly, I find the "worst case scenario" to be a bit on the optimistic side on housing prices, but well within the realm of reason. The other 2 scenarios are really not worth considering too seriously, so look at the purple bars and ignore the yellow and green ones.

The study finds that people in the lowest 20% actually owe more than they own today. In effect, they are underwater on their homes, have nothing in the bank, no 401(k) and no IRA, and are carrying a credit card balance. These people are, in a word, "screwed."

However, even the people in the middle are in very bad shape. The median net worth of households headed by someone in this age cohort is just $94,200 vs. $172,400 5 years ago. So during 5 years of what should be the prime wealth-accumulation time of life, their wealth has plunged by 46%, and that is under the most optimistic of the 3 scenarios.

Well, at least these folks have between 10 and 20 years to rebuild their savings before reaching normal retirement age. For the older baby boomers, time is running out. Under the optimistic scenario, their median net worth is down to $159,800 from $315,400 in 2004. That is not going to last very long in anything like a comfortable retirement.

The report also shows the very large concentration of wealth, with the top quintile simply towering over all the rest. However, while all wealth levels have been affected, the top is clearly the largest in absolute dollar terms, but on a percentage basis much less. This is because the lower quintiles tend to hold a greater percentage of their wealth in the form of housing equity, and that tends to be highly leveraged.

Housing prices still have room to fall, and they are not going to be coming back anytime soon in real terms. Many of the boomers are going to be stuck in their houses, unable to bring cash to the closing that would be required. Unless they simply walk away, or are foreclosed upon, this may slow down the elderly migration to places like Florida.

This points to very serious long-term problems for the economy and should cause any recovery to be extremely anemic. The Baby Boomers are going to have to dramatically raise their savings rates. The older boomers -- those on the verge of retirement -- are not going to be doing the things that we currently associate with retirees. They are not going to be traveling as much, which will hurt the long-term prospects of the hotel companies like Starwood (HOT - Analyst Report) and Marriott (MAR - Analyst Report). They will not be buying RV’s from Winnebago (WGO - Snapshot Report).

This might, on the other hand, be good for pet food companies, because it looks like they are going to be booming (but not for feeding Fido). Unfortunately, there are no good pure-play pet food companies out there; most of the major brands are part of much larger firms like Procter & Gamble (PG - Analyst Report). Del Monte (DLM) is probably about as close to a pure play on the pet food market that is available.

I would strongly suggest that people follow the link and read this paper.

Read the full analyst report on PG

Read the full analyst report on MAR

Read the full analyst report on HOT

Read the full analyst report on DLM