“The U.S. central bank forecast one or two more hikes for 2018.
Assuming no additional stimulus in 2020, the fading of the U.S. fiscal sugar-rush after 2018-2019 could lead to withdrawal symptoms that could exacerbate a cyclical slowdown.
The U.S. could target an additional $200 billion in Chinese goods, followed by another $300 billion – bringing duties on a total of $550 billion Chinese products, which is more than the $506 billion the U.S. imported from China in 2017
In the US, headline inflation is projected by the IMF to increase to 2.5% from 2.1%.
The IEA predicts the U.S. will add 1.7 million barrels per day in 2018, followed by another 1.2 mb/d in 2019.
Being well overdue for a recession in the US, the unbridled optimism of global investors will eventually end, once they consider the plethora of rising risks.
Achieving policy objectives will become more challenging from 2020 amid a technical recession in the US and a faster deceleration in Chinese economic growth rates.
In the next three years, a rising amount of bonds maturing within one year entails rollover risk if financial conditions tighten abruptly.
A recession in the US will cause economic growth in Canada to slow to a little above 1% in 2020.
The risk of a recession really picks up after a year, or sometime in 2020 because that is when you start to see the fiscal stimulus start to fade.
One change from recent years is that corporate car rental prices in North America are expected to rise by as much as 5 percent in 2018 due to operator issues.
The US stock market is on the brink of an imminent crash that could trigger another global recession.
Borrowing costs climb to a four-year high just as investors begin to anticipate a downturn in the global economy.
US rate hikes risk triggering a recession in 2019 or 2020 by putting the brakes on growth.
With unemployment at 4.1%, inflation fears are rising: Typically, the Federal Reserve starts to increase interest rates to slow the economy and push inflation back into its lair – but in doing so, the Fed raises the risk of recession and pushing down already lofty stock markets.”
6) Anticipate changing circumstances and economic cycles.
7) Persist and pivot to navigate external threats and opportunities.
17) Sketch out your trajectory in 5-year timeframes.Will we fall into another recession?Absolutely.Will you be ready this time with future-proofed strategies?
“Why swim upstream, if the current is moving everything in the opposite direction, right?”
Using economic cycles and bubbles, demographic shifts and a way of sizing up quality-of-life communities to live and invest in.
An excerpt from Book Two in “The Knowledge Path Series” dedicated to helping you make more money from a lifestyle businesses you’re truly passionate about.
Peak around the corner.
About the time of my own mid-life crisis I discovered the author Harry Dent.
He introduced me to economic cycles and bubbles, demographic shifts and a way of sizing up quality-of-life communities to live and invest in.
Amy Poehler’s fictitious Pawnee, Indiana didn’t grow on me until season five when neighboring Eagleton, an ultra-affluent town, was written into the script.
In the sixth season the town of Eagleton, involved in a longstanding rivalry with Pawnee, goes into bankruptcy and is absorbed by Pawnee.
An effort spearheaded by Leslie after she sees no other way to save the town.
Having lived in a small Indiana college town on a bluff overlooking the Ohio River for four years and, then in another rural college town for my masters degree, I sought higher quality-of-life choices in a region that wasn’t so topographically flat.
And what if I discover after I move that I don’t like it?
What do I need to know ahead of time?
What if I chose a new Eagleton somewhere else and it files bankruptcy?
That can’t be good – except for Amy Poehler, right?
Nearly anybody can forecast the future.
How do you know which ones will come true?
I set up “The Journal of 2020 Foresight” after researching the top 100 trends and predictions from a variety of technical, economic, social and political sources.
And, knowledge labs to monitor key indicators in 5-year timelines –
2003 to 2008,
2009 to 2014 and
2015 to 2020.
Why swim upstream, if the current is moving everything in the opposite direction, right?
The first knowledge lab, conducted during the 5-year timeline between 2003 to 2008.
“4 – Basic innovation in communication technologies is allowing more people to relocate their homes to small towns and exurbs, and telecommute to business.
3 – The baby boomers are moving into their vacation-home-buying years, which, in combination with the first trend, will stimulate demand for property in attractive resort towns.
2 – The echo baby-boom generation is now moving into its household formation years, which will stimulate demand for apartments and rental property in the cities, and has already caused commercial property in these areas to appreciate,
1 – There is a broad geographic migration towards areas of the country with warmer climates. You can expect the first three trends to be accentuated in the southwestern United States. “
He included a bubble wildcard as a fifth forecast.
The mother-of-all depressions, arriving sometime in the 2009 to 2015 time horizon.
Which presented itself as the mother-of-all Great Recessions.
More on that later.
But, let’s say you decided to investigate opportunities triggered by the warm climate migration?
How do you explore the possibilities?
How do you go about it?
Dent borrowed from innovation, growth, and maturity product lifecycle curves to describe the potential for community growth and real estate appreciation.
You might say he spoke my language coming from my career in high technology.
Innovation – .1%, 1% to 9%.
Growth – 10% breakout to 25% and from 50% to 75% and
Maturity then to 90% – 99% percentiles.
What if the lifecycle model could be applied to resorts – estimating investment appreciation and community growth?
How does that work?
“The time it takes for an idea to move from a .1% idea to a 1% prototype, and finally to a 10% niche in the marketplace (Innovation), is roughly the same amount of time it takes for that niche to accelerate up the curvilinear curve of market acceptance through 50% to 90% (Growth).”
In the innovation stage, the risk is high and the potential reward could be astronomical.
If you found a small pristine mountain community at this stage and moved or invested in a vacation home on a lake, you may see your small down payment and mortgage pay off handsomely decades later.
Buy low, sell high.
As an investor, you’d want to find that goldilocks moment.
You wouldn’t want to invest too soon and wait forever, but definitely not too late when it is way too expensive to buy.
Pick sometime in the early growth stage but before the late growth phase turned into maturity.
When everyone else has heard of the premier destination.
As the mix of community residents begins to shift from High Country Eagles to Wireless Resorters.
You might find Pawnee attractive, but you probably missed the golden opportunity to move to Eagleton.
And by “season six” you’d be glad you did.
In priority order for finding the first three driving trends in one place – broad communications, Baby Boomer vacation-home buyers and echo-boom (Gen-Y, Millennials) entering the rental market, he lists:
Small College and University Towns
Revitalized Factory Towns
Emerging New Cities
What if you’ve already built your mobile knowledge company, “Mobile KnowCo” and weren’t bound by your current fixed location?
How would you know if you found a town to fit your needs?
On your next vacation Harry Dent said to keep your eyes open for:
“A new look that includes intelligent town planning for increased human interaction; and abundant open space;
flexibility in home design;
planning for safety; shared facilities; and high-tech communications infrastructure.”
With those criteria in mind, we initiated coverage of “Resort Towns” in western United States like…
And, continued to aggregate lists of “Best Places” that fit Dent’s other eight categories of towns and cities.
From those thousands, we focused on and curated only those from six western and island regions:
Hawaii and other Tropical Regions;
Southwest Region (Arizona, Nevada, Utah and New Mexico);
Pacific Northwest Region (Washington and Oregon);
California Regions; and of course my favorite
Rocky Mountain Region (Colorado, Montana, Idaho and Wyoming).
But guess what?
All vacation destinations aren’t equally attractive and the reasons why aren’t obvious until you dig in and find out for yourself.
So, the only real question becomes, which one is right for you?
Especially if you longed for a fresh start.
Or were forced to take one.
(22) Selectively evaluate the best quality-of-life communities to live in and weigh the tradeoffs of risk and rewards for accruing real estate appreciation along a progression of rural and small towns that meet what your pocket books can afford.
“Psychologists have found that midlife is typically a time when many of us take stock of our values and goals.
Predictable Real Estate and Consumer Trends as Generations Change Aging through Life Stages.
Part One in a 4-part Series evaluating real estate and consumer predictions as generations transition throughout successive life stages.
Fifteen years ago in 2002, as Mammoth Lakes realtor Paul Oster reminded us, Harry Dent built several real estate scenarios on shifting demographics called “Age Demographics, Buying Cycles and Real Estate Appreciation”.
And years earlier management guru Peter Drucker wrote about how dismal most predictions turn out, except for one type.
Those based on fundamental demographics.
If I remember correctly he coined the phrase “Demographic Determinism”.
Dent said as a new generation enters the workforce around age 20, we can expect commercial real estate to boom.
The influx of new workers stimulates demand for office space and manufacturing facilities.
Since these new workers are also consumers, there is increased demand for new stores and shopping malls.
Of course Amazon, losing money quarter after quarter in 2002, had only just begun to exercise its disruptive influence over traditional retailing.
And the older Millennials coming of age in high school may have remembered a time when Amazon didn’t exist, but their younger brothers and sisters act as if they didn’t.
But as a rule of thumb, when it comes to residential housing you can identify five age-specific buying cycles.
Over the life span of a generation, spending on each category accelerates to peak at predictable age intervals.
When an entire generation goes through such predictable property spending patterns, we get a macroeconomic view of the wave-like fluctuations in real estate demand.
As a result, investors can know years and even decades in advance what kinds of properties are going to be hot and when.
For example, someone who is 52, a “youngish Baby Boomer” or “oldish Gen Xer,” and at the peak of his earnings doesn’t typically rent a one-or two-bedroom apartment for himself—though he might rent one for his 24-year old daughter.
Instead, he’s thinking about what kind of vacation home he wants or, if he’s already purchased it, how to transition to retirement in 10 years or so.
But, his daughter, just now transitioning from school-to-work, represents the median age for the Millennial generation.
In 2015 we already know her generation ranges in ages from 18 to 35.
They will be segmented into at least six life stage lifestyles.
20-29 Year Old Singles
20-44 Year Old Families
25-54 Year Old Singles and Families
30-44 Year Old Singles and Couples.
What’s their impact on apartments and retail shops?
The demand for rental apartments and retail space including shopping centers, begins to accelerate from 19 and peaks around age 26.
Here’s where the rules of thumb may need to hitch hike down the road for a few years.
Starter home purchases begins accelerating at around age 26 and reaches a peak around age 33.
Maybe, something else is going on, as we track Millennials through time.
DOUBLE AND TRIPLE CHECK YOUR SCENARIOS WITH A FINANCIAL PLANNER WHOSE FIDUCIARY DUTY IS TO YOU!
Option Four – Stay in your home, invest your equity
Reverse Mortgage or
Home Equity Line Of Credit (HELOC)
HELOC rate is 8.0%; this is based on a loan for 80% of the home’s value and is .25% below prime (Source: Countrywide).
Assume that there is one refinance after 10 years.
HELOC mortgage interest deduction is limited to the interest on the first $100,000 of the loan.
Assumes home is sold off to pay the loan; if another mortgage is taken out, transaction costs could be lower.
Allows both couples to live in their home.
Works well when the home continues to appreciate in value.
The HELOC debt is covered by the increase in value.
After paying off the credit line heirs receive substantial legacies
Remember both couples could deduct the mortgage interest by itemizing on Federal taxes attributable to the first $100,000 of the loan.
HELOC transaction costs are also quite low at about 1% of the loan and the credit line offers flexibility in timing any drawdown.
The costs and responsibility of home maintenance.
As cost of living expenses increase both couples may be tempted to spend down more than the initial 80% debt value ceiling.
Or, as their home value increases they may continually ramp up their debt.
Of course, they will need to make regular monthly payments on their HELOC or face the risk of foreclosure.
Reverse Mortgage scenarios:
Assumes that proposed legislation is enacted that would change housing limits to a national limit of $417,000.
Limit increases at 4% annually.
Assume current interest rate of 7% – includes the 6.5% interest rate and the .5% insurance premium.
Monthly servicing fee of $30/month is added annually.
This scenario assumes that interest rates stay fairly constant.
Reverse mortgage interest deduction is limited to the interest on the first $100,000 of the loan; accrued interest is deductible by the heirs in the year that it is paid.
It is assumed that the heirs will be able to deduct the mortgage interest in the year that it is paid, and that the heirs will be able to utilize $100,000 of that interest deduction.
The utility of the deduction will depend on the individual tax situation of the heirs.
Assume home is sold to pay off loan; if another mortgage is taken out, transaction costs could be different.
Enable these couples to receive regular payments (actually loans) secured against the value of their homes and be assured that they can remain in those homes for life.
Homeowners live in their homes and tap into their substantial amount of equity.
Depending on their age.
Prevailing interest rates.
As long as they live in their home, life is good.
No payments need to be made on the reverse mortgage (though they must, of course, cover the home’s routine expenses and maintain it).
Better still, loan payments to the borrower may feel — and function — like ordinary income, but they are not taxable income.
Under current law, payments received by a reverse mortgage borrower don’t count towards Medicaid resource limits provided they are spent each month and not accumulated.
Here’s the bonus while you live in your home.
They don’t count toward the income threshold for determining whether regular Social Security payments are subject to federal income tax.
Also, reverse mortgages do not count toward the $500,000 – $750,000 home equity test for nursing/long-term care assistance under Medicaid.
Here’s the bonus for your kids.
Heirs to a home carrying reverse mortgage debt do sell, they should be able to deduct the mortgage interest (subject to any applicable limitations).
During 2007 Fidelity cautioned.
Because the reverse mortgage market is still emerging, upfront costs are much higher than a HELOC — up to several percent of the loan value.
The product is complex and the amount available for lending is inversely correlated to interest rates — which are difficult to predict and impossible to control.
Are these five options the only scenarios for both couples?
It is possible to combine these strategies in various ways.
Both couples could choose to combine the first scenario,
Sell Home and Buy a Less Expensive Home, with either a HELOC or a Reverse Mortgage on the new home.
Why would this be in their best interests?
They could generate incremental cash flow.
Heirs would benefit from the new home.
Equity could be extracted for their comfort or future investments
But, here’s the kicker.
Time to age 94.
One couple’s planning horizon is 32 years while the other is just 19 years.
You need to take into account the difference in possible home values, cash flows and other variables.
Think of it this way — if these couples chose one of these options in the (year 2016) — the results we project would be realized for the Walkers (by 2035)… the Smiths would not see the results the table suggests until (2048 )— the last year of their 32-year planning horizon.
Since this age and timeframe difference is so substantial, the only meaningful comparisons to make are among each couple’s own options.
Remember, don’t rely solely on your home equity as a significant retirement funding source.
Recurring cyclical downturns in real estate can inflict severe damage.
Investment returns on residential real estate have been lower historically than
on stocks and bonds.
If you pour all your funds into your home you’ll have nothing left to invest for higher marginal returns.
Don’t count out the emotional components of owning a home.
The emotional aspects of homeownership can also present significant barriers to the use of home equity for retirees.
Whatever the financial case, the emotional investment involved can make it hard to sell, rent or float debt on a home after a lifetime of paying off mortgages — even if that strategy makes sense financially.
The comfort of living in a familiar home as one ages or the desire to leave the home’s full value to heirs compound many retirees reluctance to tap their home equity by either sale or leverage.
If you’ve planned well and acquired significant equity when reaching retirement age you’ve got multiple options for mobilizing it.
Decisions on precisely how to tap home equity require careful analysis and he financial and emotional trade-offs change as retirees age.
Non-financial personal preferences may quite reasonably trump sheer financial or cash flow benefits.
Peace of mind, convenience, familiarity are all real, if hard-to-quantify values.
Reverse mortgages do offer many advantages for retirees —
… notably, regular cash flows that do not count as taxable income.
But this market needs to mature.
High initial costs of reverse mortgages scare off many retirees.
Many fear losing their homes to the lender, even though there is no such risk.
The reverse mortgage market will likely grow substantially once upfront costs drop, securitization takes hold, and customer awareness of potential advantages grows.
With your financial planner double-check all of the
your spreadsheet calculations.
If the calculated risks are baked in, then go ahead with your eyes wide open.
Like all carpenters know, measure twice and cut one.
Pulling the trigger on any major decision like this one with consequences (intended or unintended) will significantly impact the rest of your life.
An excerpt from Book Four in “The Knowledge Path Series” dedicated to helping you find the place of your dreams in the Rocky Mountain State.
“Buy land, they’re not making it anymore.” — Mark Twain.
Figure out if you should unlock that equity for investments.
Or more specifically, how to tap into your source of capital to fund your retirement.
Part One in a 4-part series weighing the pros and cons of investing in real estate over the course of a life time.
Leaving aside rental and commercial property or other indirect forms of investing in real estate, such as REITs, a more common scenario involves typical homeowners.
Those who bought years ago, paid off their mortgage or will have shortly and despite the negative impact of The Great Recession managed to build a decent amount of equity.
Don’t take what follows as financial advice.
If you haven’t consulted professionals, well, what are you waiting for?
Do so at once!
Back in February of 2007 I read a FidelityReport published by Fidelity Research Institute that compared unlocking equity for investments to risks and relative returns of stocks, bonds and cash.
Fidelity emphasized how much a home, and therefore it’s equity, is subject to market cycles.
Previous generations of Americans treated home equity as an illiquid asset being built up almost invisibly as mortgages were paid down.
They considered this growing equity either as an “asset of last resort” or as a source of bequests to heirs.
And, of course, back then those homes cost what a luxury car today goes for today.
So, it’s no surprise that future generations are on track to carry much larger mortgages.
And, they will continue to do so into their late middle age and even deep into their retirement years
… perhaps on the assumption that these larger debts will be compensated for by a continued rise in home values.
By 2007, more than 80% of all Americans over age 65 owned homes.
The median price of new homes in the United States has averaged an annual appreciation rate of 5.9% since 1963.
Fidelity cautioned, even before the more recent Great Recession
… historical experience suggests that real estate investments can suffer serious and sometimes prolonged downturns.
Sometimes it can be across the board.
But, baring a prolonged deflationary slump teetering on an economic depression, it is certainly true for local regions struck by extended economic decline.
Local real estate prices and your return on investment rise and fall with economic factors
… such as interest rates, per capita income, building costs and unemployment rates.
Shifts in your mortgage loan market can reduce your monthly payments.
Those innovations make housing more accessible.
Like variable rate and interest only loans.
But, they don’t come without their own set of risks.
Beyond the loan market, don’t forget to monitor important variables expanding or constricting the local supply of real estate properties.
General availability of land.
Land use restrictions.
Tough zoning rules.
Slow administrative procedures.
And, of course shifts in demographic trends
Average household size.
Household formation age (individuals in their thirties).
Fidelity said American real estate values endured three sharp “corrections” during ten-year intervals.
From the early 1970’s to the early 1980’s.
During the early 1990’s.
And, during The Great Recession at the end of the 2000’s to mid 2010’s
With the severity and duration of the downturn that occurred in 2006 still uncertain (published in 2007).
Fidelity tracked investment performance back to before you were born.
How did they say real estate investments held up?
Returns on a dollar invested in residential real estate in 1963 have been only lightly better than returns on low-risk Treasury Bills.
What about compared to stocks, then?
Over this more than forty-year time period, real compound returns to stocks outpaced realty, averaging 5.95% versus returns of just 1.35% to real estate after adjusting for inflation.
So, if you took a dollar and invested it in the 1963 stock market it would have “compounded to $12.36 by 2006.”
But, the same dollar invested in real estate would have grown to just $1.79.
What about those higher appreciation regions on the coast?
Even the highest appreciating regions of the country, the Northeast and West Coast, only realized real returns of 2.35% and 2.49%, respectfully, and underperformed the returns on bonds at 2.74%.
Don’t they say past performance isn’t a guarantee of future performance?
Still data are data.
Home values have underperformed stocks and bonds in terms of average annual returns over every five- and ten-year period from 1963 to 2005, but have only been slightly above the returns on treasury bills.