It appears to this observer that one of the best indicators as to where the economy may be headed is to pay close attention to the buying habits of ordinary people doing very predictable things based on age. Thanks to Harry Dent and the US Census Bureau, for example, the majority of Americans eat the most potato chips in life at age 14, we enter the work force at 20, we move for job opportunity when 25, get married in our late 20’s to early 30’s, and buy the most potato chips in life for our 14 year old children. As we have shown here, for the average American, peak earning and spending occurs at age 45 and the largest number of 45 year-olds peaked in 2007. Then there was 2008. The highly compensated peak in earning and spending too on a lag, because you entered the work force, got married, and had children after graduation from college. The highly compensated American peaks in earning and spending at age 54, and the largest number of 54 year olds peaked in 2015. Here we are mid- 2016. Notice the current discouraging data on retail sales and jobs.
As CNBC reported on May 24, 2016, “New home sales hit 619,000 in April, versus 520,000 estimate.” Instead of reading the headlines, feeling satisfied, and moving on, let’s dig deeper. You see, many of us focus on sales activity, we then draw plot lines that suggest this good news will continue forever and we will all go to financial heaven. Now this good news from the Commerce Department is that new homes in April increased 16.6%, the highest level since January 2008 and the percent increase was the largest since January 1992. Notice how we focus on the sales activity and immediately conclude the economy is firming.
Don’t count on it
As Harry Dent pointed out on May 31, 2016, “Home sales like jobs, is a lagging indicator, not a leading one. It’s a sign of where we’ve been, not where we’re going.” Could it be that just as money is exiting, new money is pouring in real estate? You can remember in the early 80’s, despite double digit rates on loans, buying a home for Baby Boomers was like a rite of passage. If you had a job and didn’t own a home you were considered a loser. Today home loans are at the lowest rate you have seen in your lifetime, but where in the country are people standing in line waiting for a new home development to open? Unlike their parents, Millennials have held back on buying homes for a variety of economic reasons over the past 8 years. First, they are saddled with school loan debt, there are tighter lending standards, the concern that home prices could fall again, their love for mobility, on top of falling real wages, and higher unemployment. While more Millennials cross that 28 to 33 age line when they would usually buy a home, many have opted out, choosing to stay at home with their parents or rent.
As you can see in this chart, new home sales aren’t anywhere close to where they were back in 2005 when a million or more homes were selling every month.
Think of this way. Over the past 60 years real estate was needed for the parents and families of 76 million Baby Boomers, born between 1946 and 1964, according to the US Census Bureau. As I have shown before, thanks to Dent Research, from 1980 to 2000, 40% of all of the homes purchased in this country were on lot sizes of ½ acre to 10 acres in size. If we all bought the Mc Mansions during the same 20 year time frame, what’s next? With Boomers ranging in age from 52 to 70 this year it is conceivable that we will all be selling at the same time for individual reasons. “It’s not just the skittishness of these fragile new buyers. Their demand will simply not be enough to offset the retiring Baby Boomers who eventually die and become sellers by default,” says Harry Dent. So don’t be surprised if net housing demand begins to fall, even turning negative in the future, as sellers move to expensive assisted living facilities. My family, for example, moved my Mom into such a home one year ago, where at age 90 her housing costs tripled. Thank you Mom for your continued practice, even well into retirement, of saving money. It was a good thing Mom had three pensions and some money so she could continue to enjoy her independent lifestyle. You see, it may soon be that the number of people dying may more than offset people buying homes.
What’s your exit strategy?
Here are the five questions you need to answer about the rental(s):
- When did you buy it?
- It was purchased to serve what purpose?
- How much money have you made from it over the years in rent & appreciation?
- When do you plan to sell?
- Has the purpose been served?
Remember, the economy doesn’t care when you think it’s convenient to take action. If the purpose has been served or your value is back to another high point or you might need the money to make work optional, now may be the best time to avoid regret by putting paint on that real estate pig and selling it.
We are on a mission to save your assets.
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