The household median value of rental real estate is $170,000 but the value in stocks is only $18,300, according to the US Census Bureau, which explains why the economy could experience an extended period of slow growth not seen by anyone living today. The reason having so much in real estate will have such an impact on us is due to an economic term called “The Wealth Effect”, which states consumers will spend more money if they perceive they are wealthier but also will reduce and postpone spending when they perceive they are less wealthy.
We are currently experiencing a period where there is a perceived loss of wealth since the median value of household assets fell 35% from 2005 to 2010, according to a study compiled by Alfred Gottschalck at the US Census Bureau’s Study of Income and Program Participation. The numbers are worse for those age 35-44 where household asset values fell by 58%. This decline in household wealth by such a large percentage may result in wealth failing to regain its peak value in our lifetime, because a 58% drop in value of an asset that grows at 2% takes 27 years just to get back to its original value, and growth at 3% takes 18 years to recoup. Growth rates of 2% to 3% are difficult to find today, since Certificates of Deposits are around 1%, GDP annual growth is 1.9% and you have to tie up your money for 30 years to earn 2.50% in US Treasury bonds. This new paradigm will take some getting used to because we are just not used to extended periods of slow growth. “The Wealth Effect” makes everything different this time by reducing consumption which reduces economic growth, and two-thirds of our economy is driven by consumption. The chart below shows that since 1901, unless we were in a recession, the US economy has never experienced more than a two years growth less than 2%. That is, we have either been growing our economy more than 2% annually or suffering a recession caused by excessive growth.
This new normal explains why 30 year bond yields are at 2.50% and the latest #GDP growth was 1.9% annually. The new trend will catch most people by surprise because we naturally expect a regression to the mean and anchor our expectations on a V shaped economic rebound since low interest rates have always spurred the economy on. Not this time, and it will take some time to wring out the excesses. It took Japan ten years to come out of a financial/banking collapse because they propped up their banking system and did not let free markets allocate assets and risk properly, and our government is repeating their mistake. A slow economy for the next 5 to 10 years means investments in consumer staples could excel but there is little room for pricing power and inelasticity. Commercial real estate could be a big winner, since current cash flows are higher than any other investment and in a slow growing economy, cash flow is king. The good news is that 10 years from now, maybe even Obama will understand how businesses are good for the US because businesses have an incentive to adapt and evolve. The free market system and competition always brings us out of our doldrums with a resurgence in creativity and technology, because business has an invisible hand guiding it to seek new ways to deliver better products at lower costs to consumers.
http://blogs.census.gov/2012/06/18/changes-in-household-net-worth-from-2005-to-2010/http://www.census.gov/hhes/www/wealth/detailed_tables.htmlAlfred Gottschalck , US Census Bureau, 301-763-5883
copyright 2012. Louisiana Commercial Realty, LLC.New Orleans commercial real estate.