An Economy without Nest Eggs?

That’s the image created by two recent articles.  American households are going to have to adjust to dramatic decreases in two sources of “rainy day” wealth:  housing values and retirement pensions.

In the New York Times, David Streitfeld reports that many economists believe that home prices are unlikely to ever see the type of appreciation they experienced in the last two decades.

“There is no iron law that real estate must appreciate,” said Stan Humphries, chief economist for the real estate site Zillow. “All those theories advanced during the boom about why housing is special — that more people are choosing to spend more on housing, that more people are moving to the coasts, that we were running out of usable land — didn’t hold up.”

Instead, Mr. Humphries and other economists say, housing values will only keep up with inflation. A home will return the money an owner puts in each month, but will not multiply the investment.

To be fair, some economists still believe that residential real estate could see substantial annual appreciation in some markets within a few years.  In others,  it might take 15 to 20 years to get there.  But generally it looks like consumers will no longer be able to treat their houses as piggy banks.

This is coupled with more potential bad news.  Over at the Atlantic, Megan McArdle writes that changes in the stock market suggest that, not only will mutual funds and 401K plans suffer, traditional “defined benefit” pensions are in real trouble:

Allison Schrager, an economist who designs investment strategies for retirement accounts, recently wrote on The Economist’s Web site that for private pension funds, the equity premium “is often assumed to be between 5 percent to 8 percent. In my experience, risk managers go silent when asked where exactly this number comes from.” If the future equity premium turns out to be much lower than these fund managers are projecting, the funding gap may be too large for companies to make up—particularly since the gap tends to be largest in recessions, when companies are least able to find the money for extra contributions. And yet the private plans are in good shape compared with state and local pension funds.

All of which suggests there may be big changes in store for the way Americans spend and save in the next generation.  All of which holds  substantial implications for a future with any economic prosperity.  Stay tuned.