September 07, 2021

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TOGETHER WITH

Happy Tuesday. Can you take a guess at what percent of Americans own a home (per the Census Bureau)? a. 45%, b. 65%, c. 85%. Check the answer in the "Trending" section below.

Here are the personal finance topics for today:

Vanishing starter homes
An aging population a sign of booming healthcare?
Inflation update—make that a double

REAL ESTATE

Vanishing starter homes

Giphy by Jackée Harry

Along the path of "adulting," one of the most noteworthy financial accomplishments is buying your first house. This makes starter homes a key component of the housing market. They allow first-time homebuyers to get their foot in the door, some experience, and maybe even build some equity too.

Unfortunately though, "starter homes" by definition are becoming more and more scarce with time, making it even more difficult for those on the hunt for a place to call their own.

What's the deal?

According to Freddie Mac, a GSE that plays a big role in the smooth operation of the mortgages market, a starter home is defined as something up to 1,400 square feet. If you live in New York that might seem huge, but in terms of single-family housing, it's below average.

The construction of homes that fit this criterion has been declining for decades and is now sitting at its lowest point in 50 years. In the 1970s, over 400,000 new entry-level homes were being built annually, and in 2020, only about 65k. And new construction from the National Association of Home Builders shows that single-family homes are a lot bigger than they were years ago. What gives?

Does the past predict the future?

Leading up to the 2008 financial housing crisis, the "easy" mortgage market meant buyers could afford more square footage and we also saw builders chasing greater profits found in larger homes
After the crash, when many homes went into foreclosure, the housing market and the first-time homebuyer profiles had changed. Investors were buying up foreclosed homes, renting them out, and new homebuyers were wealthier with better credit histories. And ultimately, builders catered their offerings to this new segment of buyers.
This all meant that few starter homes were being built and fewer homes were on the market. In fact, the average price of a starter home has gone up 57% in the last 5 years, according to Zillow.

And the future? Only time will tell. On one hand, people are re-evaluating their housing needs by leaving small spaces in expensive cities and moving to larger homes in suburbia. On the other hand, the data seems to point to a growing demand for starter homes as more than 45 million more Millennials (who already own 46% of US mortgages) enter the average age range for time-time home buyers.

INVESTING

An aging population a sign of booming healthcare?

Thanks to the pandemic, we may have learned a thing or two about healthcare. The rise of telehealth, for example, could revolutionize healthcare. Health systems have also segmented and diversified into specialized facilities, notably in retail spaces.

An aging population could make healthcare real estate demand "pop"

Between 2000 and 2040, the number of Americans aged 65 and older could more than double, while adults aged 85 and older may quadruple. By 2040 almost one in five Americans could also be aged 65 or older compared to one in eight back in 2000.

Why is this such a big deal for healthcare real estate? The older you are, the more healthcare needs you'll have. And when you look into where the oldest Americans live per the Census Bureau, it's what you would expect: Maine, New Hampshire, and Vermont top the list, with pockets across Arizona and Florida.

If you then take that data and compare it to regions of the country that saw the most medical office building constructions, you'll see further overlap that paints a consistent picture about the opportunity: our aging demographics have a direct correlation to healthcare real estate demand. As the population ages, it could create rising demand for healthcare properties.

Demographics aside, why healthcare real estate?

Better resistance to economic cycles. Healthcare real estate is one of the most defensive property types in the industry. It's easy to cut back on expenses like vacations when times get tough, but people need healthcare no matter how the economy is doing.
Long-term nature of leases. Tenants usually sign leases with initial terms of at least 10 years, and renewal rates are high. Healthcare leases are also typically triple-net (NNN), which means tenants are responsible for property taxes, building insurance, and most maintenance expenses.
Predictable revenue streams. According to JLL Research, healthcare/office REITs have consistently grown rents year over year since 2009, supported by stable fundamentals.
High occupancy rates. In fact, medical office buildings have maintained greater than 91% annual occupancy rates since the fourth quarter of 2009.

How to invest?

Some may be able to crowdfund or form a joint venture with other investors or try and do it themselves. But unless you have significant capital, these are high-risk, high-reward, illiquid and often inconvenient ways to invest.

Another and more accessible way is to invest is through healthcare REITs. REITs are companies that own and/or operate income-producing real estate assets and trade on exchanges like stocks. There are more than a dozen healthcare REITs, which also tend to be some of the top dividend payers in the market. Here are some largest ones.

But buyer beware. With REIT investing, rising interest rates tend to lower REIT prices because investors expect a similar increase in yield from income-oriented investments like REITs. Because price and yield have an inverse relationship, rising rates tend to send REITs lower. Don't be surprised if your REITs take a dive when the 10-year Treasury yield spikes.

ECONOMY

Inflation—make it a double

Earlier this year, the Office of Management and Budget, (OMB) put out an inflation prediction of 2%. Now, they've more than doubled that estimate to 4.8% while also raising their economic growth projections to 7.2%. So what does that mean?

The trending data

Outside of the 1972-82 range, which is another history lesson entirely, US inflation rode a consistent oscillating chart pattern between 1 and 4% annually. The number rose and fell cyclically, adding or subtracting a bit during any given 12-month period relative to the last.

Since 2018 though, we've logged two net negative campaigns totaling a -1.2% change in inflation versus 2017 data. And accounting for a 4% decline in 2009, the net inflation from 2009 - 2021 averages out to about 1.54% annually, which is 25% lower than the nominal 2% benchmark.

In light of that, notching a 4.8% year-over-year change in 2021 doesn't seem so bad, and the takeaway may just be that we don't have to panic just yet.

Some reminders since we're on the topic

Inflation is a necessary part of a growing, stable economy that helps incite and suggest aggregate demand growth. But too much inflation could cause the economy to slow down quickly and unemployment to increase, which could trigger another recession.
Inflation is usually an aggregate calculation. But the reality is that assets inflate much more than average under the right conditions. For example, the average inflation on housing from 1967 to 2021 was double the usual 2% level, and periods like 2020-2021 show us catalysts that can take it even higher. When you own something (an asset) that inflates, you outpace inflation. When you own money that inflates... you lose buying power.
Inflation effects plus the Fed's actions through their monetary policy drive most of the broad stock market sentiment. A contractionary monetary policy or rate hikes can send investors running for safe-havens, while lower rates generally contribute to expectations of economic growth.

🧵 Ideas on how to position your investments from inflation—if you have a view, join in on this discussion thread:

Protecting investments from inflation

Sep 07

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ASHU'S CORPORATE CORNER

Today's Movers & Shakers

Match Group (+11.5%) could be joining the S&P 500
Nvidia is facing greater opposition to its acquisition of UK's Arm for $54 billion. The EU says that the US chipmaker's proposal doesn't go far enough to ensure fair competition
JD.com (+1.4%) appointed a new president after the founder & current CEO decided to step back from day-to-day operations
Moderna is trading slightly lower after reports that its booster shot could be delayed
Spotify (+4%) after KeyBanc upgraded the stock to overweight
Morgan Stanley downgraded large pharma firms (J&J, Merck, and Amgen) saying that there's limited upside
Terminix (+2%), the termite and pest control company, after BofA said that the recent selloff created a "solid buying opportunity"
Cirrus Logic (+3%), the chipmaker, was upgraded by Barclay's

This commentary is as of 9:02 am EDT.

📈 TRENDING ON FINNY & BEYOND

Answer: The homeownership rate in the US was 65% in the 2nd quarter of 2021—that's 2.5% below the year prior (Census Bureau)
Rare & authentic confessions of a real estate investor (Parent Portfolio)
More than 7 million Americans to lose jobless benefits on Labor Day (The Hill)
Finny quiz of the day. With all the talk about real estate and REITs, brush up on what a REIT is:

What is a REIT?

7 mins

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The Gist is Finny's newsletter to our community members who are looking to make and save more money, protect their finances and be their own bosses! Finny does not offer investment or stock advice. The Gist is sent twice a week (Tues & Thurs). The editorial team: Austin Payne and Chihee Kim. Thanks to Ashu Singh for Today's Movers & Shakers.

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Trip Guide News

☕ Make that a double

Tuesday 7 September 2021