Grandma Got Run Over By A Rate Hike

Grandma Got Run Over By A Rate Hike
rate hike

Grandma Got Run Over By A Rate Hike by Danielle DiMartino Booth, <

Some songs don’t merit remakes.

And yet, a little over seven years ago, a variation on a southern Christmas ditty sprang onto the scene. The original remake, in the event you didn’t catch it on your radio, involved changing “Reindeer” to “Rate Cut.” Some seven years and over half a trillion in foregone savings later, most would agree that seniors were flattened in the era of zero interest rates.

Early last year, the insurer Swiss Re released findings of a study which found that in the five years through 2013, U.S. savers had lost some $470 billion in what they would otherwise have earned in interest income had rates not been held at artificially low levels.

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Forget the shoulda, coulda, woulda nature of the matter – as if overwhelmed by a group epiphany, most economists now miraculously agree that the Federal Reserve was much too late in removing the punch bowl. The question for the here and now is what’s Grandma to do in the aftermath of the initiation of the long-feared tightening campaign?

As an aside, it’s beyond grating to hear every pundit on the financial news circuit brag about how they were all on board with the Fed hiking back in 2013. The term “taper tantrum” couldn’t have earned its name without most of Wall Street whining at the prospect of a mere reduction in the Fed’s quantitative easing campaign back in the summer of 2013.

Pardon the digression. Back to Grandma. What’s she to do when the recession does arrive? Take the best case scenario, that we’re talking 18 months from now and the re-writing of history books on lengthy economic expansions. Then what does she do?

By then, Baby Boomers will be endeavoring to retire en masse: according to a recent survey, two-thirds of boomers plan to retire by the time they turn 70. As it so happens, this year, the firstborn class of 1946 turns 70, meaning we are just at the outset of the trend.

Before continuing, the flipside of the above statistic is worth noting. If two-thirds of Boomers plan to retire by the age of 70, a solid one-third (think 25 million folks here) do not plan to leave the workforce. This goes a long way to explaining the relative strength of this cohort’s lofty labor force participation rate to say nothing of their propensity to be upsizing their homes.

According to a November Fannie Mae report, in 2013, the per capita rate of single-family home occupancy was unchanged with that of 2012 and in fact above 2006 levels. Far be it from downsizing, the average number of rooms per home increased from 2011 to 2013, the latest year for which data are available.

One interim observation:  While the explosion in apartment occupancy has been no mirage, it is entirely attributable to the Millennial generation. From 2011 to 2013, the number of Boomer apartment dwellers remained static while the number of Millennials living in apartments grew by a half million a year.

(Trivia – 2015 marked the year both generations numbered 75 million. From here on out, Millennials will increasingly outnumber Boomers, who’ve reigned supreme as the largest generation this country has known for what feels like a millennia.)

As for the Boomers who do want to retire, what exactly is it they’re willing to part with? For most, the answer is absolutely nothing. They want to keep their (large) home, their two cars and the lifestyle to which they’ve become accustomed. If only their desires matched up with their prospects. A survey released last spring by the Insured Retirement Institute found that Boomers’ “economic satisfaction” dropped to 48 percent last year from 65 percent in 2014 and 76 percent in 2011.

Delineating between retirees and those still working reveals a yawning gap: Retirees’ satisfaction caved to 45 percent from 72 percent in 2014 compared to 53 percent of working Boomers feeling satisfied vs. 60 percent the prior year.

In all, only six in 10 reported having saved adequately for retirement. This squares with a separate study that found those aged 55-64 had an average combined 401k and IRA balance of $111,000 in 2013.

So what’s a would-be retiree to do? Saving $10,000 a month to play catch-up would be a good start. That’s a steep order considering the median annual income in this country is somewhere in the neighborhood of $55,000.

Which brings us back to Grandma and that rate hike, which is sure to be blamed for the recession but in truth will be coincidental in nature. Whether she likes it or not, if that cruise she’s been planning is going to remain in her grand retirement plans, she might just have to sell off her beloved home sweet home.

According to 2013 Census data, the 32 million single-family abodes Boomers call home account for over one-quarter of the nation’s housing stock. This cache of cottages has an estimated market value of $8 trillion which equates to 42 percent of the value of all owner-occupied homes out there (they don’t call them McMansions for nothing).

Aside from the observation that we’re talking about a whole heck of a lot of house, who exactly is going to buy them? Would you answer, “Why, the Millennials naturally”?

I’m personally going with AMC Lending’s Logan Mohtshami’s take on this one. He forecasts that demand for single-family homes won’t improve meaningfully until 2020 or so. “Until then, expect a slow and steady rise for (housing) starts and permits.” That, by the way, is just what we’ve had in recent years – slow and steady, as in new single-family home construction is a fraction of what is should be given population growth.

As for all that touted Millennial pent-up demand, even last year, the ranks of 25-34 year olds bunking up with mom and dad rose in number. The generation is effectively going in reverse vis-à-vis what the broad housing market needs, which is for this generation to fly the coop once and for all.

“We need the young to rent, hook up, date, find a steady relationship, pop the question, and have kids before we have any major boom in single family home sales,” Mohtshami wisely observes.

Of course, some of these choices are cultural as we’ve all learned. Why not live in your parent’s basement and drive a nicer set of wheels than you could otherwise? But surely that thinking is not representative of every member of this whole 75-million strong army?

On a more fundamental level, broad-based, higher paying job growth is what’s needed to solve this entrenched issue. That’s difficult to foresee given shrinking corporate profits and contracting manufacturing activity to say nothing of mounting evidence of a slowdown in the labor market, the most lagging of all indicators.

What transpires between now and 2020 is what really matters for the economy, and by extension for housing, which has yet to fully recover from the great housing crisis. Some 15 percent of U.S. homeowners still owe more on their home than it is worth. Many who borrowed against their home equity during the housing boom are just now having to start making good on that promise.

That said, mortgage applications have picked up over the past year and anecdotal evidence suggests more first time homebuyers are entering the market, albeit at inflated prices. But first timers are not what Boomers need. McMansions are sold to the generation that moves out of their first home, known as move-up buyers.

Will Grandma and her friends and neighbors with roofs over their heads be the only damage exacted by the coming recession, whenever that inevitably descends on the economy? We can only hope.

The starting point for the Baby Boomer generation is nothing to laugh about. The United States ranks 29th among 33 developed countries for seniors living in poverty – 21.5 percent of Americans ages 65 and older live in poverty vs. 12.6 percent for all developed countries.

It is hard to say when, and even if, monetary and fiscal policymakers will ever own up to the part they’ve played in encouraging debt in lieu of prudence. We can only hope they rue the day such darkly humorous lyrics sprang to mind (substitute “Hike” for 2015 version).

Grandma Got Run Over by a Rate Cut
Walking Home from D.C. Christmas Eve
You Can Say There’s No Such Thing as Free Lunch
But as for me and Grandpa, We Believed

rate hike

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Called "The Dallas Fed's Resident Soothsayer" by D Magazine, Danielle DiMartino Booth is sought after for her depth of knowledge on the economy and financial markets. She is a well-known speaker who can tailor her message to a myriad of audiences, once spending a week crossing the ocean to present to groups as diverse as the Portfolio Management Institute in Newport Beach, the Global Interdependence Center in London and the Four States Forestry Association in Texarkana. Danielle spent nine years as a Senior Financial Analyst with the Federal Reserve of Dallas and served as an Advisor on monetary policy to Dallas Federal Reserve President Richard W. Fisher until his retirement in March 2015. She researches, writes and speaks on the financial markets, focusing recently on the ramifications of credit issuance and how it has driven equity and real estate market valuations. Sounding an early warning about the housing bubble in the 2000s, Danielle makes bold predictions based on meticulous research and her unique perspective honed from years in central banking and on Wall Street. Danielle began her career in New York at Credit Suisse and Donaldson, Lufkin & Jenrette where she worked in the fixed income, public equity and private equity markets. Danielle earned her BBA as a College of Business Scholar at the University of Texas at San Antonio. She holds an MBA in Finance and International Business from the University of Texas at Austin and an MS in Journalism from Columbia University. Danielle resides in University Park, Texas, with her husband John and their four children. In addition to many volunteer hours spent at her children's schools, she serves on the Board of Management of the Park Cities YMCA.
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