The 5 R’s of the New Economy

These five factors are driving the new economy. In one way or another they’ll impact all of us, our finances, and our futures. What are they, why do they matter so much, how can we navigate them successfully?

The American economy appears to have changed significantly in 2017. People feel differently about the future than they did last year, new emerging trends continue to lead macro changes in our lives, and a variety of pivoting metrics appear likely to continue to separate the wealthy from everyone else. It is vital that we recognize these things, and if we are smart we will get out in front of them.

Five factors to watch now…

Rates

Interest rates are heading up. They have been sitting at around half of their historical average for a number of years. Many have never really experienced normal rates in their investments, business, and borrowing. Few may realize that mortgage rates could go back to double digits. Chances are that we may be in a rising rate environment for a number of years, at least. That doesn’t just effect those trying to get mortgage loans for purchasing homes or refinancing them either. It means rising housing costs for those with existing adjustable rate mortgages and lines of credit. It means more expensive business loans. It means auto loans and consumer product costs will likely rise. In turn people are going to need to earn more money in order to pay for all of this. Wages will need to rise for people to keep up. Businesses need to build in these rising costs in order to stay profitable in the future.

Remote Working

Remote working is exploding. One company in San Francisco, CA recently began offering employees $10,000 to move away from the crowded and high cost city. Technology has made it easy for people to launch themselves into independent careers. Companies are increasingly finding they can’t be competitive if they are weighed down by heavy overheard, with physical offices and in-house employees. At the lower end, fast food joints no longer need half of their staff thanks to new tech. Mark Cuban has said that even tech workers are becoming redundant as AI makes it possible for computers to write new programs without the need for humans.

Between rising housing costs, more jobs only being offered remotely, and the technology making it possible, housing patterns may change too. Why pay $1M for a shack in San Francisco, when you can make just as much money and get 3x the home in the Midwest? Others are just going 100% mobile and may no longer be drawn to full time housing in any one place. This will change the dynamics of housing demand, property prices, and how people buy and rent property.

Rentals

American home ownership rates dropped significantly with the 2008 crisis. With the massive buying spree that big funds and individual investors went on, there are far fewer homes available for regular buyers to buy. With mortgage lending criteria still tight, a great percentage of those that would like to buy residences just can’t. Financing may be easy for investors right now, just not for regular home buyers. Millions of individuals seem okay with renting. As referenced above, many prefer the mobile lifestyle. However, rising rents, in a low interest rate environment have meant it is a lot more expensive for most to rent than own a home. Lack of affordability for renters is squeezing many out of their home towns.

The remote work trend may help alleviate some of the pain of this, as people no longer need to be near old job centers. However, in the long term it is creating a massive divergence between landlords and everyone else. Landlords are becoming incredibly wealthy, and are enjoying the freedom of passive income, and control the land, while renters are just shelling out more and more every month for smaller and uglier rentals. This will play a massive role in who retires well, and is able to pass on a good inheritance, versus those that can’t afford to live in retirement.

Retirement Preparation

Retirement is expected to be the next big global crisis. Around 7 in 10 Americans have less than $1,000 in savings. Retirement account balances may have grown recently, but only 18% of Americans even have an IRA. Now, in April 2017 Fox Business reports that companies are scrambling to stop raiding the $7T in 401k accounts. Boston College’s Center for Retirement Research warns that current trends in tapping these savings threaten to reduce retirement savings by 25%.

Real Estate Investing

One of the biggest economic trends in 2017 is a new boom in real estate. January saw a new record set for home sales, builder confidence is up, and individual investors are hunting for deals. The world is bullish on US real estate. Right now individuals have a great opportunity to invest with low interest rates, strong demand for rentals, the ability to travel and work from anywhere, and the big need for others to make their retirement investments work harder for them. Those that are investing now are locking themselves into a great financial trajectory. Those that fail to pay attention to the opportunities may find it is far harder to try and catch up later.