Real Estate Opportunities

Who’s Responsible for This Economy, Anyway?

We have heard a lot about the part Wall St. has played in the downturn of the housing market. And we cannot ignore the fact that certain government policies have allowed the banks free reign with the nation’s money without substantial accountability. Before we put the “black hat” of sole responsibility on these institutions, let’s examine another essential factor.

There is a storm of epic proportions brewing as we speak. While the government is in crises, the largest market of the century is passing their peak spending years and a record number of these are heading into retirement. America is traditionally driven by consumer spending. Over 70% of the nation’s Gross Domestic Product (GDP) is represented by consumer spending. So, how people as consumers spend their money is the largest influence on our economic report card.

Spending patterns are very predictable, at very predictable times in one’s life. Thus, at ages 46-50 we usually see families earning the most and putting their kids through college. They will likely spend the most during these years. Whereas, during their 50s, couples become “empty nesters” and significantly reduce their expenditures. Once they reach age 60 they are moving into retirement, which for all intents and purposes, is when people traditionally spend the least. Hence, the boom in consumer spending from the “Baby-Boomer” is coming to an end.

The point is that trends can accurately be predicted years in advance based purely on demographics. The age and stage of life determine spending patterns. As financial expert, Keith Springer of Capital Financial Services states: “As we move through stages of life which correspond with different ages, we change our spending in very predictable ways. What we buy at each stage is predictable and consistent.”

Now, consider something we call the “adjusted birth index.” Fewer babies were born during the great depression than either before or afterward. Thus, we would expect that 48 years later (the stagnant 1970s) there would be less middle age people. Alternately, “Generation X” represents the children of the “Baby-Boomer” (born 1946-1964). Alarmingly, “Generation X” cannot physically keep up the pace of spending set by the “Baby-Boomers.”

We must acknowledge that great busts generally follow great booms and the bubbles they create. The most likely situation would be with a decline in the real estate sector. We have already seen the effect on real estate, which likely will not rebound for quite a while when the “Echo Boomers” begin to buy their first homes. There simply are not enough people to absorb the homes of the current generation, coupled with the ridiculous pace of building during the first seven years of the new millennium. Clearly, there is just too much housing “inventory” on hand and not enough people to occupy these homes (consult my recent article on Supply and Demand).

In conclusion, it pays to be well-informed before launching out into real estate investment. If you buy for cash flow, it can work to your advantage as values have finally come down to favorable level. If you wish to “fix & flip,” this too can prove profitable provided you do not plan on holding onto the property for an extended period. Avoid involved remodeling projects and stick with simple rehabs when you buy houses and you should do quite well under these prevailing stormy economic conditions.

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