Outside Economics

11 Million Wave, Landlords Watchout

Posted by Wendell Brock, MBA, ChFC on Fri, Jul 29, 2016

Market forces in the economy help determine the rental rates in every community. Each landlord worries whether the ad they ran to attract a renter, will actually bring one in who will not only pay the rent on time, but take care of the property. And hopefully not burn the place down as one of my tenants did 20 years ago! In any event, I certainly understand the other side too - people want to live the American Dream and own their own property/house/castle! It is hard to make the leap and buy a home, when we are surrounded with economic turbulence and uncertainty. Home ownership requires a higher level of economic stability.for_rent.jpg

As banks and financial institutions have been mandated to increase their loan qualifications for home mortgages due to government regulations, more and more families are being forced to rent rather than own. As the demand for rentals has been increasing, the level of home ownership has been falling. Some attribute this dynamic to a low inventory of homes on the market, while others blame excessive government requirements imposed on mortgage lenders.

A lack of available rentals along with the increased demand for rentals has propelled rental costs upward. The number of individuals dedicating at least half of their income towards rent hit a record high of 11 million people in 2014, according to the annual State of the Nation’s Housing Report from the Joint Center for Housing Studies.

As rental prices have been rising faster than wages, losing such a large portion of a paycheck to cover housing, means cutting back on essentials such as food, clothing, and health care. This can be draining on young families trying to save for a down payment on a home and then not knowing if they would be able to get approved or not.

Last year saw the biggest surge in new renters in history, according to the report on Housing Studies, bringing the number of people living in rental units to around 110 million people, accounting for about 36% of households. Middle-aged renters made up a substantial portion of the new demand with 40% of renters aged 30-49.

More affluent renters are staying in the rental market longer and driving up the demand for housing.  Traditionally, the wealthy move on to become homeowners, but tight inventory in the housing market is keeping them in rentals longer.

The median rent on a new apartment was $1,381 in 2015, according to the report, which means that a renter would have to make at least $55,000 a year before taxes in order to be able to afford the rent.

It is important to remember also that many people rent for various reasons, they are in work transition, divorce, personal choice, students, newly immigrated. The fact that so many poeple rent is not such an issue as the percent of their income going to pay for rent - that is where the government gets all bent out of shape. According to their model, housing should not cost more than 30% of household income.

When 11 million people pay upwards of 50% of their income for rent, this is going to add fuel to the fire for raising the minimum wage or some sort of rent controls. Either way there will be those in government that think they need to "solve this problem". Landlords: Watch Out!

Owning a home or renting requires effort to budget your income properly. Any time housing costs reaches close to 50% of income things get really tight. As one of my old financial planning professors use to say, “There are only two things you can do, help people cut expenses or help increase cash flow.” In life there are only so many expenses you can cut, and for many people you can only pound so many nails in a day. But generally increasing income provides the greatest opportunity. It is wonderful to see people transition from barely making ends meet to an abundance!  

Sources: Joint Center For Housing Studies

 

Remember:

At the beginning of the day its all about possibilities. At the end of the day, it’s all about results.  - Bob Proson

Topics: Economy, Landlords, Rentals, Rental Property

How Interest Rates Feed the Pig

Posted by Wendell Brock, MBA, ChFC on Fri, Jul 22, 2016

Interest rates are the economic rain to the world economy. Like rain, when there is too much, it causes flooding and will swamp growth; not enough and a drought ensues then economies don’t thrive. The Fed controls the spicket. Current rates are hurting savers and the retired. While at the same time allowing the government to borrow trillions to grow at dirt cheap rates.

This causes a dilemma: the government needs the cheap interest rates; the retires and savers need higher rates to maintain a shrinking standard of living. This conflict is a problem the world over: what to do about low stagnant interest rates?  

The events in Europe along with the International Monetary Fund (IMF) report released in June indicating that U.S. economic growth would fall short of expectations. This is one reason that prompted the Federal Reserve to subdue its pursuit of any additional rate increases this summer.

Britain’s vote on the EU exit sent U.S. government bond yields to new multi-year lows as well as dimmed trade growth prospects between Europe and the U.S. The dollar’s recent rise is also a headwind for the U.S. since a rise in the dollar’s value drags on U.S. exports; putting downward pressure on U.S. inflation, which is well below the Fed’s 2% target for inflation.united-states-interest-rate.png

The problem here is, as other countries have economic “occurrences” they send money to the U.S. to buy our treasuries, which are perceived to be a safe haven for storing cash. When a flood of money comes in, it lowers the interest rates people are willing to take just to park money. After all, getting something is far better than getting nothing or losing money all together. 

As more flows in - it strengthens the dollar, which also makes it harder for us to export our goods and services to other countries. It does make it cheaper for us to buy stuff from other countries and to travel, but that may not be the current objective.

Concurrently, the IMF report released in June suggested that the U.S. faces economic “headwinds” and “pernicious” trends including a shrinking middle class that could slow growth in the long term. 

Labor’s share of U.S. income is about 5% lower today than it was 15 years ago, while the middle class has shrunk to its smallest size in the past 30 years. Demographic changes are slowing potential growth and that in turn, is affecting business investment and leading to a less dynamic labor force. The IMF is estimating that U.S. GDP will grow 2.2% this year, which is down from 2.4% in 2015. This may seem like a small percent, but it works out to be $36.0 billion out of an $18 trillion economy. This much money could employ 720,000 people at $50,000 per year. That is a lot of money and a lot of middle class jobs!

Economists believe that both of these occurrences will foster an elongated low interest rate environment throughout the domestic and international fixed income markets. When factoring in the need for the federal government to keep borrowing such large amounts of money for both the annual deficit, and the rolling over of previous year’s debt obligations low interest rates help “feed the pig” so to say, causing income pain to the retirees and savers!

So how does this affect you and your investment or retirement portfolio? Low rates are generally good for the stock market, companies are able to borrow more to expand and grow. Now would be a good time to refinance any debt that may have higher rates or better yet, get it paid off. When debt is paid off early it is like earning that same interest rate. So for example you pay off a credit card that charges 18 percent then you have just earned that 18 percent on the balance by removing that future interest payment obligation. This is not to say go borrow a bunch of money at a high rate and then work to pay it off.

Rearranging your portfolio to a more balanced strategy may help with market upsets and continued low rates. Participating in several asset classes will properly diversify your portfolio. For more information click here.  

Tot the extent you can get your own house in order you will be greatly strengthened when the headwinds really hit hard. As the old saying goes, it is nice to “sleep when the wind blows”.

Sources: IMF, Bloomberg, Federal Reserve

 

Remember:

 Those who don't understand interest, pay it; those who do, earn it. - Anonymous

Topics: Interest Rates, Fed, Federal Government, IMF

Where Did The Economy Go 2nd Quarter?

Posted by Wendell Brock, MBA, ChFC on Fri, Jul 15, 2016

The economy this past quarter has been a great improvement over the first quarter. I am expecting some market stability as we head into the convention season and through this years election cycle. Who is elected will determine much of what happens next. We are however due for a recession soon, depending on which economist you follow. I fully expect we will see something in the next 12 to 24 months. 

Macro Overview 

The British vote to exit the EU (Brexit) was essentially a validation that a disintegration process of the EU is possibly underway, causing destabilization for countries throughout the EU. Britain’s vote may lead to other similar referendums, particularly with the Netherlands and France where populist sentiment is growing.

economy-flag-2_2042549b.jpg

The British pound fell to a 30-year low versus the U.S. dollar following the outcome of the referendum. Conversely, the fall in value for the British pound can be beneficial for the country as Britain’s exports become cheaper worldwide and tourism increases as stronger foreign currencies come into the country.

The unraveling of Britain from the EU is not expected to be automatic or immediate and may take years for it to finalize. Britain would need to execute a divorce clause titled Article 50 of the EU agreement in order to move forward with the separation from the EU. Several member EU countries, including the IMF, are eager to have Britain expedite the exit in order to minimize uncertainty.

In the wake of the referendum’s outcome, international equity markets tumbled as uncertainty led the course. U.S. financial markets were incredibly resilient following the days after the British EU vote, with U.S. equity and bond prices all propelling to higher levels. 

The Fed’s plan to further increase rates this year took a different course as the repercussions from Britain’s EU vote are expected to lead to slowing economic growth and a sustained low interest rate environment. Some Fed watchers believe that the Fed may ramp up its stimulus efforts again with lowering rates should the EU and Europe’s economy falter.

Overshadowed by the Brexit news, the U.S. Census Bureau reported data that may help solidify the Fed’s wait to raise rates. Durable goods orders fell 2.2% in May, worse than anticipated. Such data is an indicator of whether inflationary pressures are present and if inconsistent expansion exists in the economy due to less capital spending.

In the midst of the Brexit turmoil, the Federal Reserve announced that 33 selected U.S. banks passed an imposed stress test to see how well they would perform under severe circumstances, such as high unemployment, recession, and falling asset prices. The stress test revealed that the 33 banks tested had nearly twice the amount of required capital needed, up significantly from the last stress test conducted.

Equity Update – Domestic & Global Stock Markets

U.S. stocks fared better than international stocks following Britain’s announcement on leaving the EU. U.S. equity markets were resilient once the surprise of Brexit unfolded, with the S&P 500 Index and the Dow Jones Industrial Index both positive for the year.

Domestic equities are more insulated from global developments and any other major equity markets since American companies generate 70% of the revenues from the United States. Japanese companies generate 50% from within their economy only and European companies generating a mere 49% from Europe only.

U.S. equities are considered attractive relative to negative yielding government bonds in Asia and parts of Europe, even as the U.S. 10-year note finished below 1.5% in June. The S&P 500 index currently carries 60% of its stocks with a dividend yield higher than the 10-year treasury bond yield.

The primary British equity index, the FTSE 100, tumbled in June following the Brexit vote. Companies within the index generate about 75% of their revenues outside the U.K., with many maintaining contracts and arrangements with other companies based in other EU countries. Since the actual extraction of Britain from the EU may take years, decisions for capital spending and expansion by European companies may be hindered.

Certain equity sectors are becoming increasingly sensitive to what the presidential candidates are proposing.  Concerns lie with those sectors where newly enacted regulatory policy can inhibit growth and profits. Other sectors are being adversely affected by low rates, such as banks whose earnings are hindered by low rates, which limits the amount of profits they can earn as deposits fall and loan rates drop.

Precious Metals, Oil & Gas, and Wages

Precious metals have increased dramatically this past quarter. Economist, Mark Skousen, said, “I think they (Federal Reserve officials) are working overtime to bring inflation back. Gold, which is finally moving, is the best indicator of future inflation. So we may see a return of inflation here if the gold market continues to rise. So that's what I'm looking at more than the bond market.”

Silver has rallied this year increasing nearly about $6.30 per ounce over the $13.83 at the start of the year. That is a 45.55 percent increase in price. For the past several days it has reacted independently of gold as gold prices have come down a bit; Silver has continued to go up. It seems there may be some hedging going on due to Silver’s expanded use in industrial applications. These are the highest prices for silver since the summer of 2014.  

Oil and Natural Gas are also on the rise. According to Dan Steffens, President of Energy Prospectus Group, (EPG) of Houston, TX, “The combination of rising demand and falling production has pushed the natural gas prices up from $1.70/mmbtu in February to near $3.00 at the end of June. My prediction is now we will see gas trading for more than $4.00/mmbtu by December.” If that is the case, lets hope all the global warming kicks in so we have a mild winter or we will be paying more than double for heat.  

With U.S. oil production down from last year, we are back to importing about 50% of our oil. Other countries are having production issues too, which may cause an increase up to about $70/bbl by the end of the year. Third quarter typically sees an increase in oil demand due to summer travel, which could easily eat up the surplus that has been keeping oil prices low. Some analyst think that oil will remain fairly steady around $50/bbl for the near future.

The Department of Labor reported that average hourly earnings grew by 2.5% over the past year, thus placing pressure on corporate earnings as wages move up. Many analysts believe that wages will continue to increase as unemployment rates remain below 5%, enticing companies to keep performing workers and paying them more.

After a market run up as we have seen this past quarter, I would not be surprised to see some profit taking in the next couple months, particularly if this earnings season does not produce any great results. If inflation takes off  then expect oil, precious metals, wages and other commodities to increase, which will certainly put pressure on corporate profits, and will also stress the markets. Now is a good time to continue to get out of debt and put a little extra away for a rainy day. 

Kind Regards,

Your Arm-Chair Economist

 

Sources: Eurostat, Department of Labor, S&P, Bloomberg, Federal Reserve, U.S. Census Bureau, EPG

 
Remember: 
"Education is what remains after one has forgotten what one has learned in school."  - Albert Einstein
 

Topics: Economy, Oil, Precious Metals, Interest Rates, Stock Market, Brexit

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Wendell W. Brock, MBA, ChFC

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