Eq: Total Market
Something both predictable and perplexing has developed in the US economy—renting is on the rise. One would have expected renting to become a more popular option following the fallout of the Financial Crisis, but interestingly, the trend is continuing strongly for a complex mix of reasons. The homeownership rate (the percentage of homes that are owned by the occupant) recently dropped to its lowest level in 20 years and is falling fast, with the rate now at 64% versus 69% before the Crisis. People initially shifted to renting because of losing their homes, and used rented housing while they tried to buildup large down payments for a future home purchase. However, people seem to have grown so used to the insecurity of wages and jobs that they fear to buy a house, and thus lose the flexibility of renting. Renting allows people to be more flexible, as they can often move on a moment’s notice. Alongside the rise in renting, construction of new apartments is surging, while single family home starts and sales lagging.
FINSUM: This is a sea change in American homeownership and investors need to take note. The large scale shift towards apartments seems likely to have a bearish effect on traditional single family American home values, the effects of which will seep into all manner of individual financial behaviour.
Two things are glaringly obvious in world demographics and consumer markets—the richest segment of the population is getting older, and the marketing world has completely failed to reach them. The Financial Times has run an in-depth piece examining the marketing and advertising world’s inability to sell products to baby boomers and anyone over 55. The piece focuses on how the world of advertising has become obsessed with youth, both as a target market and in terms of employment. The average age of employees in the sector has dropped to just 34 years old. Yet, despite this obsession with youth, the richest and most powerful consumer segment is baby boomers. The over-55 category controls $15-$20 tn of spending power, yet the industry is stuck in old stereotypes of how to market products. Many advertising agencies have failed to realize that older people are not stuck in their ways, but are actually quite adaptive, such as not only responding to print adverts. The article makes the argument that one large part of the disconnect is that with employees being so young, and never having lived through the fifties and beyond, it is impossible for them to relate.
FINSUM: This is an interesting article that gives good insights for any financial professional. Attracting clients in the older demographic is increasingly important, and this piece might spark some ideas.
In response to falling global oil prices, Mexico has had to redraft its annual budget, revising its 2015 budget to plan for oil prices of just $79/barrel, instead of the $82/barrel it had assumed previously. World oil prices have fallen sharply in recent months due to a glut of supply and slowing global demand. Oil exports account for one third of Mexican GDP, and the country is in the midst of a broad “opening” of its industry, in which foreign oil companies will be allowed to operate in Mexico for the first time in over 60 years. A senior Mexican congressional source commented on oil that “the oil price at $81 is unsustainable”, potentially spelling trouble for the country’s budget. For every $1 drop in the oil price, Mexico loses $300m of revenue. As of yesterday, Mexico’s main crude stream, Maya, was selling for $75.12 per barrel.
FINSUM: This story just goes to show how the falling price of oil will heavily impact government budgets across the globe, with many winners and losers. How the commodities decline will affect specific markets may be a big determinant of stock performance in 2015, so this is a major theme to keep in mind.
America has seen a rising trend over the few years that is raising the eyebrows of economists and investment advisors alike. Despite heavy penalties and the imposition of income taxes, many US residents are using their retirement 401(k) accounts more like checking accounts and withdrawing cash routinely. According to Fidelity, 35% of all Americans, and 41% of those aged under 39, took out part or all of the money in their retirement accounts when changing jobs in 2013. There is little data on the phenomenon, but it is known that withdrawals face a 10% fee and have income taxes charged on them. As yet, most of those withdrawing money say it is to cover large piles of debt they have incurred over the last few years, as many say it is hard to envision paying off loans for decades when they have large piles of cash just sitting in 401(k) accounts. Another aspect to the phenomenon is that many employers are forcing those who move jobs to withdraw all their money as they do not want the difficulty of tracking down people once they have moved on.
FINSUM: This is a fascinating article which communicates a disturbing trend. This shows how difficult a time many American families are having to make ends meet, and bodes poorly for the health of retirement accounts moving forward.
For six years American companies have fearfully hoarded cash on their balance sheets. Trillions of dollars in cash became locked away, taken out of the economy as companies became fearful to invest in new business lines. Many have seen this as a major reason that the US economy has largely remained in the doldrums since the Financial Crisis. However, just this quarter, new data has emerged which shows that there has been a net outflow of cash from corporate balance sheets, and a survey of corporate treasurers shows that this is likely to keep falling. This may be a good sign that corporations are more comfortable spending money, but according to industry experts, nearly all of it is being spent on acquisitions and share buybacks, both of which funnel money back into shareholders’ bank accounts and do little to improve employment or investment.
FINSUM: So companies are finally beginning to spend, but unlike when they invest in factories, machines, and employment, these expenditures will likely bring no benefits to the wider economy, only to their share prices. Hopefully, this sign is indicative of things to come.
In what seems a reaction to the Financial Crisis, young adults, between 20-35 are increasingly living in apartments and rented housing instead of buying their own homes. The trend is much more complicated than simply young people not being economically well-off enough to buy a home, it is highly driven by both extremely tight credit conditions, and very importantly, their feelings towards buying a home. Many say they have chosen to not buy a home because of the fear a mortgage puts on them. The idea of being stuck in a loan from which they cannot immediately escape feels very threatening to young US adults, as the economic instability brought on by the Financial Crisis makes a generation who came of age during recession wary of long-term commitments. Developers and private equity firms are responding by building large apartment blocks instead of single family homes, and some say this is one of the greatest changes to hit the American housing market for decades, as stand-alone home shave long dominated the American housing landscape. The new blocks are highly luxurious, with built-in speak services, and pre-installed building apps to track deliveries and repair requests.
FINSUM: This has very interesting implications for the US housing market as it could signal that condominiums and apartments will see price gains and more development while stand-alone housing, especially at the middle and lower ends, falls back.