Senior Housing Market Boom, Young Investors, Weak Consumer Sentiments, Tax Traps with Rentals, Big banks and the Crypto Explosion, MicroStrategy, Raising Money Smart Children & Household Debt

Will the senior housing market boom continue going forward?

Investors may think with the population getting older that investing in senior housing could be a great investment going forward. They could be right as the oldest boomers turn 80 at the end of this year. What’s even more amazing is that the US population of 80-year-olds and older will hit 18.8 million in the next five years, that is a 27% increase from today. Senior housing hit a brick wall when the pandemic hit in 2020 and with the high infection rates, loss of life, and social distancing restrictions the demand fell drastically for senior housing. Both the high cost of labor and the shortage of it did not help either. It is estimated in five years they will need 560,000 new units to meet the expected demand.

However, due to the high cost of development and the concern that about half of the seniors won’t be able to afford private senior housing costs, it’s estimated that only about 191,000 units will be added. The good news is more than 40% of seniors could afford senior housing on their income alone, which increased from 30% eight years ago. Unfortunately, those who can afford senior housing would rather not use it and prefer to age at home. Developers are willing to risk their capital on the higher end of the wealthiest seniors building luxury senior housing with fine dining, spas and movie theaters.

One high-end luxury senior housing project is expected to break ground this year at Rancho Santa Fe in San Diego with 172 units available. I think this sector for investing at this point is worth watching, but I don’t think I’d want to commit any capital at this time given there seem to be some substantial risks. 

Are young investors taking too much risk? 

A comparison of Gen Z, who were born between 1997 through 2012, versus baby boomers, who born from 1946 to 1964, show that Gen Z is taking on much more risk compared to when baby boomers were their age. In a study from the FINRA Investor Education Foundation, 36% of respondents between the ages of 18 to 34 had traded options. This compares to 8% of investors who were 55 years and older.

Also revealed in the survey was younger and new investors were more likely to use margin when investing. This came at a surprisingly high rate with 23% of investors between the ages of 18 and 34 saying they had used margin when investing. This compares to just 3% of respondents age 55 and older. What was also interesting and informative is the lack of investing experience as 19% of investors with less than two years of investing experience stated they had used margin. However, just 6% of investors with experience of 10 years or more have used margin.

I think many of these older investors are more cautious because they had learned their lesson. There’s no doubt that the younger investor today is taking on more risk than the more experienced investors. I believe this is for two reasons. First off, the access to trade and invest is so easy and it can be done on the phone in your hand at essentially any point in time. Compare that to 25-35 years ago when investors had to go through a broker to trade.

The second reason I see is the Great Recession in 2008 was 17 years ago and the young investors today were only 5 to 15 years old and had no interest or care about the economy and the crash of the stock market. Investing successfully long-term involves many years of experience and research and unfortunately, I believe the younger investors will learn by experience that the risk they are taking today will not end well. 

Weak consumer sentiment brings down stocks

Stocks fell on Friday after the headline consumer sentiment index came in at 64.7, which was down 9.8% from January and below the estimate for 67.8. This reading was also down 15.9% compared to this time last year. I was surprised to see the one-year expectation for inflation came in at 4.3%, which was the highest level since November 2023.

The five-year outlook increased substantially to 3.5%, which would be the highest reading since April 1995. It was not a major surprise to see sentiment fall for Democrats and stay unchanged for Republicans, but it did fall for Independents. While I think it is important to look at various economic data, I wouldn’t say this survey is overly troubling.

This survey comes from the University of Michigan and when I was researching how many people it encompasses, I found it includes at least 600 households and is conducted by phone each month. It is designed to be representative of all US households, excluding Alaska and Hawaii, but with such a small data set compared to total US households as of 2023 at 131.43 million, I must say I question how indicative of all US households it truly is.

As I said, I don’t want to completely disregard this data point, but given the limited insight I would not be overly concerned. I do believe this shows how fickle the market is at this point and even an inkling of bad news could send stocks lower given the high valuations.  

Beware the tax trap of renting out your house

If you’re moving out of your current house, you may be considering converting your home into a rental property. This may seem like an attractive way to generate additional income. However, before making this move, it’s important to be aware of the tax implications, especially the potential loss of the Section 121 capital gain exclusion. When you sell a primary residence, you may exclude up to $250,000, or $500,000 for married couples, of capital gains if you owned and used the home as your primary residence for at least two out of the previous five years.

When renting out your home, you still own it, but it is no longer considered your primary residence. If you decide to sell the property more than three years after beginning to rent it, it no longer qualifies for any capital gain exclusion, resulting in a potentially large tax bill, exceeding $185,000 in some cases. Not only that, but while renting a property you claim depreciation each year. This reduces your taxable income while owning a rental, but that accumulated depreciation must be “recaptured”, which means taxed, at ordinary income rates when the property is sold.

This recaptured depreciation tax also cannot be offset by the Section 121 exclusion regardless of the timing of the sale. If you want to rent out your home, make sure you either sell it before losing the exclusion, or be committed to being a real estate investor for the long haul. 

Big banks want in on the crypto explosion

Big banks, which are supposed to be a safe place for people are getting greedy as they are seeing others profit from bitcoin and now, they want part of the action. The major banking regulators like the Federal Reserve, the Office of the Controller of the Currency and the FDIC have had significant safety and soundness concerns for banks getting into cryptocurrencies. Now with a new administration, there is pressure for them to change their feelings on crypto.

I do want to separate blockchain and crypto because there are benefits to blockchain, but I worry that banks could get too loose and could begin getting too involved in the speculation of cryptocurrencies. I was disappointed in a statement from the Bank Policy Institute, which is an industry lobbying group, as it said banks are ideal vehicles for exploring the benefits of new technology like blockchain.

I don’t know about you, but I don’t feel comfortable having our big banks exploring anything that could cause a major disruption to our banking system. If you’re old enough, go back to your memories of 2008 when the banking system nearly failed. It was only a couple years ago when Silvergate Bank and Signature Bank collapsed due to the large connection with Bitcoin and the digital market. I was disappointed that the CEO of Bank of America, Brian Moynihan, described crypto as just another form of payment. I think that’s a silly statement because of the volatility with cryptocurrencies.

If companies held these assets, the volatility could wipe out their profits. For example, on December 14th Bitcoin hit a high of $104,000 and by February 9th it was trading at $96,000, a 7.7% decline. If a company has a 5% profit margin and they were holding money in Bitcoin they just wiped out the profit from the business. If people want to speculate on Bitcoin congratulations go ahead, but our banking system needs to be rock solid and should not get into speculation of cryptocurrencies. 

MicroStrategy needs more money and it issued a new convertible offering

MicroStrategy sold 7.3 million shares of convertible preferred stock recently and just like Bitcoin the volatility is there. The face value was $100 with an 8% yield, but the offering did not go very well as they were priced at $80. As the security drops in price, the yield rises. After the first full week of trading, it closed at $87, which gave a yield of 9.2%. The problem I see is this company has no earnings and no cash flow. I’m wondering where they will get the $58 million per year in interest to pay the $730 million convertible?

Maybe investors who love Bitcoin are getting excited about the conversion feature that they can swap each preferred share for 1/10 of a MicroStrategy common share. Maybe those investors are thinking they get a little bit of yield while they wait because they have an investment tied to Bitcoin and if Bitcoin goes up the stock price of MicroStrategy will increase and they can convert into the stock for a nice gain. Why should an investor worry about silly things like earnings and how to pay the debt that keeps compounding if it’s all backed by Bitcoin. I’m sure this means those investors should be able to sleep well at night, right? What do you think?

How to raise money smart children

Raising kids is probably the hardest thing people do, but it also gives them the most joy. One of the responsibilities of a parent is to try and teach their kids financial responsibility. This starts when kids are younger, even at five years old is a good time to start. Have the kids do some chores and when they receive chore money and gift money as well have a piggy bank that they can put it into to learn how to save. Once they learn this skill, the next step would be open a savings account at the bank.

When a child becomes nine or 10 they may start to understand the concept of investing. A parent can talk about investing in a business that is a public company and the value of that business along with earnings and debt. Try to pick a company that they know and like because it will keep them more interested. It’s also important to make sure the children have goals and you have set up rewards for them when they reach those financial goals. It can be something very simple like just putting a few dollars into their account with them. Make sure you relate the reward to reaching the goal. When they become teenagers, you can give them some financial responsibility and let them make mistakes. Ultimately, that is how they will learn. Instead of just giving them money for things to buy, tie it back to their chores, and if they spend all their money and want something else at the end of the week before they get paid again you must resist and say sorry next time you have to budget your money better.

As they turn 18, start sharing with them more about the family finances. You don’t need to give them details, but you want to give them a sense of how much things cost and how you as a parent have handled your income and expenses. This will not happen overnight and it takes years of a commitment, but if you stick to it, your children will become financially responsible as adults.

Household debt is increasing

The economy is doing OK as people have jobs, there is low unemployment, wages are up from last year, and there have been nice increases in people‘s net worth. One downside people see is with a growing economy we will see US household debt increase, which it did in the fourth quarter of 2024 hitting $18.04 trillion. This was a 0.5% increase from the third quarter. The debt increase was across the board, which means it includes mortgages, car loans, credit cards, and even student debt.

Because of the economy growing, it is normal to see debt rise, but unfortunately it will hit the lower end the consumer. They will feel more pressure and delinquency rates will likely increase, which happened in the fourth quarter as the 90 day or greater delinquency rate stood at 1.7% for all household borrowing. This was an increase of 0.3% from the fourth quarter of 2023 when it was 1.4%. Credit card delinquencies are always the first sign that the lower end consumer is starting to have problems. The total delinquency rate climbed from 6.4% a year ago up to 7.2%. A bad sign is seeing the delinquency of auto loans which did increase to 3% from 2.7% one year ago. The reason why this is more concerning is because while consumers do hold the asset of the car, if they don’t pay the car could be repossessed. The main issue here is cars are generally a depreciating asset.

I don’t see any reason to panic at this level as we are coming from a position of strength, but it is worth keeping your eye on. What’s important to remember is the economy is larger so we will see more debt on the consumers balance sheet, we just want to make sure assets and incomes are progressing near the same rate or faster than those debt levels.