Podcast Archives - Jay Garvens

 

What is a generation juggernaut? The definition of a juggernaut is an substantial and overwhelming force. So how does that apply to a generation? A generation that can overwhelm the economy is considered a juggernaut. Take the Baby Boomers (born 1946-1965), they are responsible for the largest economic boom on record, a huge generational juggernaut. With that in mind, I’ve been getting a lot of questions that can be answered by understanding generation juggernauts. Questions like, why is the rental market so hot right now, why are houses under $200,000 selling in less than 15 day, but houses over $800,000 are staying on the market up to 18 months, why are the car manufacturers and airlines making a comeback when they were failing 5-15 years ago. All of this can be be explained with generational economics. In the last 100 years or so, we had the Great Generation (born 1900-1925), the Silent Generation (born 1925-1945), the Baby Boomers, Generation X (born 1965-1983), and the Millennials (born 1983-2001), and with each generation we have seen a lot of change. We are going to focus on the Baby Boomers, Generation X (Gen X), and Millennials, as they are what make up most of the current economy, and what has shaped our economic climate. With 78 million people in the Baby Boomer generation, they outnumbered their parents in the Silent Generation by 18 million, causing the huge economic boom of between 1986 and 2006. People are in their prime for consumption between 40 and 60 years old, as they are trying to support families and prepare for retirement, and you can clearly see that the economic boom occurred as the Baby Boomer Generation was turning 40. The Baby Boomers started consuming at a rate like no one had ever seen, simply because there were so many of them. As we reached 2006 and 2007, and the Baby Boomers stopped consuming at such a fast rate, the economy suffered, because with only 45 million members, Gen X could not keep up. But even as the economy slowed, Gen X was still trying to consume and they were trying to provide for their kids, the Millennials. The Millennials are the largest generation to date, with 87 million members. This is almost double Gen X, and is going to create a huge boom, as they start reaching their 40s. So how can you prepare for the upcoming explosion that is going to happen to our economy? Well the good news is you have some time, the Millennials are going to be hitting their 40s in about 5 years, and the decades from 2020-2040 are going to be some of the most prosperous this country has ever seen. However, in the next five years you need to make sure you have eliminated your debt, increased your reserves, and that you have a plan. Once our economy starts growing, it is going to grow so fast, you won’t be able to keep ahold of it. The Millennials are going to create the best economy we have ever seen, and you have to be prepared for the generation juggernaut.

2015 has proven to be an incredibly busy and exciting year so far. We’ve had constant surprises from Greece, the Eurozone, and China, among other places; the Fed has continued to keep everyone guessing by suggesting rate hikes but refusing to pull the trigger; and our city and statewide housing markets have consistently defied rationality, particularly in Denver. With so much to discuss this year, I have forgotten to return to the single-most important topic of all: demographics. This week’s show is first in a two-part series exploring the fundamentals of demographics and how they affect economic conditions both in America and globally.

Demographics is the study of populations and the subgroups composing a given population. Typically, my show considers the population of the United States and breaks its population into age-based subgroups commonly known as generations. Occasionally we will consider demographics on an international scale to see what effects one country’s demographic composition may have on other nations individually and the world economy as a whole. When we discuss the United States and its generations, we generally divide the population into:

 

* The Greatest Generation – Those born between 1900 and 1925, who lived through the Great Depression and fought in World War II;

* The Silent Generation – Those born between 1926 and 1940;

* The Baby Boomers – Those born between 1941-1962 as the children of The Greatest Generation.

* Generation X – Those born between 1963 and 1982;

* Millennials – Those born between 1983-2000;

* Generation Z – Those born after the turn of the millennium.

 

Of these generations, we spend most of our time discussing the Baby Boomers, Generation X, and the Millennials. We do this because each of these generations is markedly different from the generation preceding it, and these differences have had tremendous effects on our economy. The Baby Boomers are responsible for the extraordinary economic growth that occurred between the 1980’s through 2006, and the economic lull that has ensued since then can be attributed to Generation X, which was substantially smaller than the Baby Boomer generation. As the Baby Boomers retire, they are less economically productive and shift their spending habits in ways that are less conducive to robust economic growth. Generation X, because of its relatively small size, has been unable to pick up the slack to keep the economy growing at the same rate it enjoyed for the previous two decades.

The Millennials, however, are not only more numerous than Generation X but even vastly outnumbers than the Baby Boomers. They are also beginning to entire the peak productive years of their careers, which occurs around age 40. This is when a person is no longer studying or building their career skills and is able to devote all their efforts and energy to maximizing their personal productivity. As more Millennials enter their 40s, they will finally be able to replace the lost levels of productivity that Generation X was unable to cover when they entered their peak productive years.

These few paragraphs only scratch the surface of all there is to know about demographics. Next week we’ll continued with this subject by exploring what demographic changes mean for a nation and its economy. We’ll also use our knowledge of demographic trends to make predictions about what the economy will look like in ten, twenty, or thirty years, and explore ways to reshape our present financial and personal situations to take advantage of the unique opportunities these demographic changes will afford.

 

We’ve had an incredible streak of excellent shows throughout July on the Jay Garvens Show, and we’re continuing that streak today by having Chandra Hall of Colorado Mesa Realty on to talk about the different types of properties available for purchase. Potential homebuyers will find that the options available in their local real estate market will range in styles and condition, and it’s imperative that they be educated about the positives and negatives inherent with properties of varying types and quality.

‘Condition’ is the first thing to consider when purchasing a house, as the condition of properties can vary wildly in the same neighborhood, or even on the same block! You can buy a property in virtually any condition depending on what your goals are for that property. Many are comfortable buying a dilapidated house to fix up; for them, an FHA 203K ‘rehab loan’ is an ideal method of financing. Others would prefer for their house to be as move-in ready as possible with as few upgrades or changes as possible. Still others want a brand-new home built to their exact specifications, and for them a new-build home in a new neighborhood is the way to go. The builder can modify the overall design and use the buyer’s preferred paint colors, floors, countertops, etc.

However, there are trade-off when choosing between various conditions. New homes will give fewer headaches and require less patience and elbow grease, but will take between 3-5 years for equity to start building. Rehabs and existing homes offer a better value and will start appreciating immediately, especially after repairs and upgrades have been made. Buyers should consider whether the ‘new home premium’ is worth the benefit of living in a brand-new home or whether the savings of a fixer-upper better fits with their goals. There is no right or wrong answer; it’s all personal.

After condition, buyers should consider what style of home best fits them. The most traditional is the typical single family, stick-build residence with four independent walls and a yard. This is best for families who enjoy solitude, working on their yard, and so on. In many cases there will be no active homeowners association, so the owner can paint his house any absurd or obscene color they want.

Some people, however, do not want to maintain a yard or worry about the exterior of their residence. For them, townhomes and condominiums may better suit them. These are attached units—meaning they share at least one wall with a neighbor—that typically have an active homeowners association that takes care of all exterior maintenance and enforces the HOA covenants. The difference between townhomes and condos is simply that a condo owner only owns the interior of the unit while a townhome owner owns the exterior of their structure and the land beneath it. While most condos will look similar to apartment complexes, it’s possible to find condos that look like townhomes or multi-level patio homes.

Other buyers may want the opposite of the clustered lifestyle of a condo, and for them a manufactured home on land will be the best fit. These can range from mobile homes to manufactured homes, but financing for these properties can start to get tricky. Very few lenders will lend on mobile homes—that is, a home that can be hitched up and moved—while other lenders may have pricing hits and additional requirements for manufactured homes versus stick-build single family residences.

Before you even start buying, it’s crucial to know what’s actually available in your market, what the benefits and tradeoffs for those properties are, and how each property fits with your personal goals and desires. As with individuals, each home is unique and varies by style and condition. Knowing your priorities in advance will help you choose the perfect home.

There seems to be a general impression about homeownership and the home-buying process that it’s all just terribly generic—that it applies and appeals to a very specific segment of society. Many non-homeowners seem to think homeownership is only for married couples that are ready to start a family, and that once they’re ready to buy they just need to get “a loan.” In reality, homeownership appeals to a diverse range of individuals, and there are unique loan products to suit each of them. On this week’s show, I sought to dispel certain myths about who is and who should be buying homes.

While it’s true that married couples make up a majority of homebuyers, they do not command a very large majority over their single counterparts. Sixty-five percent of homebuyers are married, which means that one in three homebuyers are single. The idea that homeownership only makes sense for married couples getting ready to start their family is false. In fact, there are a multitude of great financial reasons to own a home, and we discuss these reasons weekly on the show. Even young, single individuals who anticipate moving out of their area in the near future will benefit from homeownership—and the younger they can start the better!

There also seems to be a misconception that, among single people, men are more likely to buy a home than women. Perhaps people think that the amenities a home offers, like garage and workshop space, are more likely to be utilized by men. In fact, more single women have been purchasing homes than single men. On average, over 16% of homebuyers are single women, compared to just 8% being single men.

Because homeownership can—and should!—appeal to so many different people, it’s important to understand what kinds of loan products are available and which one best suits your specific needs. Just looking at the Garvens Mortgage Group team helps demonstrate the diversity of potential homebuyers and the versatility of the different loan products available. In our office alone, we have had:

 

* a five-person family that used an FHA rehab loan to purchase and renovate their ideal home;

* a four-person family that used the husband’s VA eligibility to buy a new home while keeping their old home as a rental property;

* a single man who used his VA eligibility to purchase a townhome;

* and a single man who used a conventional loan to purchase his first home.

At Garvens Mortgage Group, we have seen virtually every type of borrower you can imagine come through our office, and in every case we were able to find the right mortgage product for them and their situation. Nobody should be under the impression that there’s a ‘right type’ of homebuyer. There isn’t. Potential homebuyers shouldn’t ask themselves whether they’re the ‘right type,’ but whether it’s the right time. That’s the only question that matters, and answering it is the first step to getting out there and buying a home.

As Wayne Gretzky once famously said, “a good hockey player plays where the puck is, while a great hockey player plays where the puck is going to be.” This is true of every competitive endeavor: most individuals will pursue an objective while always remaining a step or two behind, while the best will position themselves to intercept that objective—that is, they will keep themselves a step or two ahead of their objective. This is, of course, easier said than done, but with patience, practice, and some intuition, most individuals can learn to anticipate where ‘the puck’ will be and how to be the first one to reach it.

For our purposes, we will consider the puck metaphor in terms of the economy and housing. There are innumerable influences affecting where the puck will be and when it will be there, and oftentimes it will be heading in a direction you don’t want to follow. This happen to me right before the housing collapse, when I had just started acquiring real estate and making plans to start adding rental properties to my investment portfolio. I saw where the market was going, and as much as I wanted to stay in, I knew it was time to exit the market and weather out the storm. I sold my real estate holdings (including my primary residence!), moved into a rental house for a few years, and once I was confident the market had bottomed out I decided to start rebuilding my real estate portfolio.

I don’t believe the economy or housing market have returned to full health, but I believe they will eventually. The very slow economic recovery has offered me a chance to really study the market and anticipate where things will be in five to ten years and beyond. I know interest rates and house prices have nowhere to go but up, and I know that with current demographic trends we will start seeing massive demand for rental space as Millennials move out of their parents home and start families of their own. In fact, demand for rental units is already red-hot and will only continue to increase.

For now, I am positioning myself and my financial resources to take advantage of the market as it will look several years from now. I am skating to where the puck will be. But what many people may not realize is that they may currently be standing precisely where the puck is heading. That is, they may be able to take advantage of the present market to accomplish their immediate financial goals. For example, with interest rates incredibly low, it’s a perfect time to buy a house either as a first home or a rental property. With money still relatively ‘loose’ it’s a great time to take out a HELOC or a cash-out refinance to upgrade a kitchen or bathroom and add value to an existing home.

Few people realize how unique our current lending and housing climates are and how to take advantage of them. They can’t even see the puck heading right toward them! But if they know where to look, they’ll be able to see it. And if they dedicate themselves to learning the fundamentals of economics, investing, and real estate, they’ll be able to anticipate where the puck will be years or even decades into the future and how to make sure they’re in the right place to intercept it.

If you’ve wondered why the cost of renting continues to climb, why the recent rise in home values has been comparatively modest, and why there seems to be a new apartment complex being built everywhere you look, you only need to understand that this is all part of the demographic dance—the shuffling of generations into, out of, and between houses.

We are experiencing a massive cultural and economic transition as Boomers begin to retire and Millennials enter the economy in full force with a polite, “May I cut in?” As the largest generation in this “demographic dance,” the Millennials are having the most profound effect on the entire market. Because their behavior and preferences vary so wildly from the behaviors and preferences of past generations, their influence appears even more pronounced. Compared to the Baby Boomers and Generation X, the Millennials’ effect on the market is different in both degree and in kind.

Behaviorally, it seems Millennials have stepped onto the dance floor with two left feet. They have made, and continue to make, several false and clumsy moves: They have acquired massive amounts of student loan debt; they are delaying major life events like marriage and child-rearing; they are living at home with their folks well into their twenties and even thirties; and once they move out, they are electing to rent rather than own. Each of these is a marked difference from past generations. Preferentially, Millennials prefer smaller spaces with fewer rooms, both because a lack of children demands less space and because they enjoy lower-maintenance living spaces. They prefer smaller, higher-quality spaces with luxurious amenities (granite countertops, on-site pools, etc.) versus large homes on large lots.

As a consequence, rents continue to rise much faster than home prices. For those in a position to take advantage of this phenomenon, the benefits could be extraordinary. As an example, I recently spoke with a radio listener living in Pueblo who has acquired three rental properties for less than $60,000 each, and each clears over $600 a month in rent. Demand for homes, particularly in the sub-$100,000 range, is still fairly week while demand for rental space, again particularly in the sub-$1,000 per month range, is very strong.

This will continue to be the case as long as the Fed keeps the music going, and they have given every indication that they will continue their policy of extremely low rates for the foreseeable future. It is this policy that has made the cost of homeownership extraordinarily low and, coupled with Millennials’ preference for renting, allows people like my listener in Pueblo to acquire properties that they can immediately rent out at a profit. Although Millennials will no doubt continue to prefer renting, the Fed will eventually raise interest rates, making it imperative that anyone interested in acquiring rental properties do so as soon as possible, before the cost of financing properties begins to climb.

The “Dog Days of Summer” started a little early in the Garvens household, as we are now the proud owners of two new puppies: a Vizsla and a Yorkie. We picked up the Vizsla, whom we named Redford, over the Memorial Day weekend. The trip, while impetuous and 1,400 miles long, afforded me a lot of time to think about this country and all the blessings to be found in it. Driving through the Midwest always shows the best of what our nation has to offer, and I thought I’d share a few of the blessings I noticed along the way.

The first blessing I noticed was the simple fact that I could drive through three countries without being stopped or marauded by drug cartels. And yes, I meant to use the word “country” even though we stayed inside America. Our states are geographically equivalent in size to entire nations in Europe and Africa and just as diverse. But here you can easily zip through each state with efficiency and security.

Efficiency is the theme of a different blessing: our interstate highway system is a marvel. It’s a comprehensive network of quality roads—especially compared to some other nations—that allows everyone to freely move all around the country, from the very edge of the Florida Keys to the Pacific coast. Of course, to take advantage of the highway system you need something to drive. And so I consider the modern automobile to be a blessing worthy of mentioning. It’s extraordinary to be able to pack the family into an automobile for a 1,400-mile trip without even worrying whether the car will make it. And the level of comfort and luxury is something our parents couldn’t even imagine in the most pricey luxury cars of their time.

With my two kids in the backseat working on their homework, I was able to consider our local school system and how immense of a blessing it is that every individual in this country can acquire a high-quality education and that a top-tier education is within the reach of most families. But they didn’t spend their entire trip doing homework, thanks to the blessing of modern technology and things like mobile hotspots. I was literally able to turn my iPhone into a hotspot on the highway and have everyone in the car access the Internet: my wife studying Spanish, my son playing Minecraft, and my daughter watching YouTube.

But the biggest blessing of all was the ability to make family memories such as this one: an impromptu trip half-way across the country, all to add a new member to the family and make even more memories. And really, that’s what ties this show into the broader theme of personal finance. Things like wealth, and the ability for each individual in this country to acquire wealth on the scale that we do, are ultimately good for one thing: to create a safe, secure, and healthy life for yourself and your loved ones. With all the talk of saving and investing, never forget that wealth is merely a means to a higher quality of life.

5-30-15 Dog Days In America