I Dream of Gini

The Gini, in this case, is not Barbara Eden in the famous 70s T.V. show “I Dream of Jeannie”, but the widely used economic index which measures wealth inequality known as the Gini Coefficient.

The index has been around for over 100 years and was created by Corrado Gini, an Italian statistician, and sociologist. There is some very sophisticated math involved, but in simple terms, the coefficient is a numerical value that measures inequality (wealth or income) and ranges from 0 (no inequality) to 1 (extreme inequality).

The 10 most unequal wealth countries according to the Gini Index are:

  • – South Africa – 0.63
  • – Namibia – 0.59
  • – Zambia – 0.57
  • – Sao Tome and Principe – 0.56
  • – Eswatini – 0.54
  • – Mozambique – 0.54
  • – Brazil – 0.53
  • – Hong Kong – 0.53
  • – Botswana – 0.53
  • – Honduras – 0.52

Evolution of the Top 1% in the U.S.

As you can see, since the 1980s, income inequality and hence Gini coefficient in the U.S. has been on the rise. Even though overall household incomes have grown, upper-income households have seen much more rapid growth. Over the period, median middle-class income saw a gain of 49%, significantly less than the 64% gain for upper-household incomes. Income growth has been the most rapid for the top 5% of families.

Poverty is an increasing issue, with about 33 million workers earning less than $10 per hour, putting a family of four below the poverty level. Many of these low-wage workers have no sick days, pension, or health insurance.

Most of us are aware that the Covid-19 pandemic has further worsened this inequality by putting low-wage workers who worked mainly in the badly hit services sector out of work. However, the impact of the Fed’s quantitative easing used to stabilize the economy on inequality is often ignored.

U.S. household income Gini coefficient over the years (1990 – 2019)
(Source: Statista)

Did the Fed let the Gini out of the Bottle?

During the pandemic, the economy faltered due to a fall in aggregate demand. To prop up demand and stimulate spending from households and businesses, the Fed had to cut interest rates (cost of borrowing). However, because there has been a steady decline in natural interest rates over the years, the Fed finds itself being very close to the effective lower bound of policy rates. This means they have little room to cut rates further, and interest rate cuts are not enough to achieve the desired level of economic activity. To further stimulate demand, the Fed uses quantitative easing, which is a process of injecting money into the economy and further driving down rates.

Quantitative easing widened the inequality gap in 3 ways.

1 – Since quantitative easing drives down interest rates, it lowers the return savers get from depositing their money in the bank, for example. The lower returns have forced average savers to put more money into riskier investments such as stocks to receive stronger returns. This additional demand pushes stock prices upwards and benefits those who own stocks – high-wealth households. The wealthiest 10% owns 89% of stocks and mutual fund shares, so to say they benefitted greatly from the stock market’s $22.4 trillion gain in value since last year would be an understatement. To put it into perspective, $20 trillion went to just 10% of households, leaving the remaining 90% to split $2.4 trillion.

2 – Record-low policy rates of 0.25% during the pandemic meant that mortgage rates were also at rock bottom. Well-heeled households who may have benefitted from the stock market saw this as the perfect opportunity to buy second, more spacious homes to escape to during the pandemic.

The increased demand, together with the Fed’s large purchase of mortgage-backed securities, has caused home prices to soar – nationwide, median prices rose 22.9% y-o-y to $357,900 in 2nd quarter. This is nearly 10 times the median annual income of low-income families.

Affordability has declined in 45 out of 50 major markets, locking many low incomers out of the market. Home prices rocketing has also benefitted real estate owners, which happen to be middle to high-wealth households. The wealthiest 10% own 45% of real estate, and the remainder is owned largely by middle-class households. Low-incomers rarely own homes; hence they get a negligible share of the housing market’s $2.5 trillion gain in value.

20-city composite home price index
(Source: Bloomberg)

3 – A consequence of the Fed pumping more than $9 trillion into the economy and increasing money supply is inflation. In our previous article, we discussed the current inflation trends. Wage growth has been struggling to keep up with the sheer rate at which the cost of living has been rising. This means lower purchasing power for low- and middle-income Americans. Because they earn less and things such as groceries take up a larger portion of their income, they feel a greater pinch when prices of necessities rise. Thus, this is another instance of the poor suffering disproportionately more than the rich.

What our Crystal Ball says

Our macro team expects inequality to get worse. To keep low-income households employed, the Fed has to continue keeping rates low and the stimulus faucet running. This is especially so given the threat of the Delta variant that could potentially send us back into a recession. But an inevitable and perverse side effect of supporting the economy is increasing wealth for the wealthy, further broadening the disparity.

Once low-income workers start demanding higher salaries, there will be further inflationary pressures, but wage growth will unlikely outpace increases in costs. This means lower-income households will be playing a never-ending catch-up game and trying to get onto the “economic ladder.”

The Investment Thesis – Buy Investment Property. Yields will head higher!

As wealth dislocations continue around the world, we see above that it will benefit those who own assets. We argue that it will particularly benefit those who own homes, given the potential of future rental yields. With how unaffordable homes are right now, an increasing number are turning to rent; this has driven up rental prices significantly. In fact, in July, rentals for new leases increased by 17% compared to what previous tenants paid. We foresee that in 3 years’ time, the rental yield will be 15-20% on average! Investing in rental property is one of the best trades we can have now and can help prevent one from slipping down the “economic ladder.”

Read our previous research called Does Hedonism affect CPI? which discusses why rental yields will continue to rise.

Get in touch with us today to find out more at www.americamortgages.com.

What real estate investment earns 150% return? Fix-and-Flip!

What real estate investment earns 150% return? Fix-and-Flip!

In our never-ending crusade to bring awareness to the U.S. residential real estate market, we want to introduce you to the first part of our Launchpad Series – Fix-and-Flip. In each part of this series, we will be sharing more about the new programs we have to offer and why you should be excited about them.

What’s Fix-and-Flip or Fix-and-Hold?

A Fix-and-Flip home is when an investor purchases a property, “fixes” (or renovates) it up, then “flips” (sell) it for a profit shortly after. The investor can also choose to keep and rent it out at a higher rental amount than they would have received in its initial state; this is called a Fix-and-Hold.

How is it used?

A Fix-and-Flip is often used for investors who have a good eye for value, feel comfortable with the intricacies of construction, and have knowledge of a specific area. The U.S. property market is red hot right now, and investors are interested in getting involved. However, many may not have sufficient capital to go the buy-to-rent route as they cannot afford a market-priced property. In that case, purchasing a discounted property, fixing it up, and selling at a higher price would be the perfect solution. It would also be good if investors are well-versed in the area and are able to spot undervalued properties accurately. The “get the worst house on the best street” strategy has resulted in many success stories.

The Market

Fix-and-Flip is more popular than ever. During the first quarter of 2021, 32,526 single-family homes and condos were flipped, and the average house flip generated a gross profit of $63,500! Given U.S. foreclosures are +5% month-on-month, we can expect a larger share of discounted properties to enter the market, meaning that it is prime time to snap up low-cost properties for flipping.

The average time to flip a house is also at the lowest level since 2013, significantly reducing holding costs (recurring costs that you spend from the time you purchase a property until you sell it). Furthermore, in the current low-interest-rate environment, the U.S. for-sale housing market has been experiencing record increases in prices; this translates to higher revenue when selling the flipped property. Overall, low costs and high revenue makes the fix-and-flip market very attractive to investors now.

The Problem

Historically, Fix-and-Flip and Fix-and-Hold loan programs were only available for U.S. citizens who were living in the U.S with strong U.S. credit – until now! Most overseas investors have never considered Fix-and-Flip because of their distance from the market and how daunting renovating a home in a foreign land seems. However, in reality, the project is not as formidable. The U.S. is very transparent, and there are many reliable general contractors in major cities that can help you with flipping your home. In places like Pittsburgh (deemed the best market for house flipping in 2021), contractors are plenty (J Francis Company, Main Street Renovations, etc.). What is better is once you find 1 reliable general contractor, they will likely have good recommendations for others (e.g., plumbers), and very soon, you will have a team that will take care of home flipping for you.

Our Solution

Let us introduce – America Mortgages Fix-and-Flip loans!

Our AM Fix-and-Flip program is available to both Foreign Nationals as well as U.S. citizens living abroad! Our Fix-and-Flip loan programs have a unique twist; America Mortgages can structure these mortgages, allowing our clients to obtain the ARV (after-repair-value) financing required to acquire and renovate. We also have the knowledge and experience to refinance the property, once completed, to a long-term standard mortgage.

How it works

Let us walk you through the process. Let’s say Mr. Smith, a foreign national living in London, wants to buy a house in Pittsburgh with the intention of fixing and selling it. The house is in decent condition, so it will only need standard rehab. He obtains an AMNR Fix-and-Flip loan.

The table below shows a breakdown of the Costs, Fees and Income Potential.

Fix-and-Flip Property sale price $100,000
Rehab Costs $20,000
Down-payment $15,000
Max possible amount financed using AMNR Fix-and-Flip loan. $85,000 (85% LTV)
Interest rate 8% p.a.
Monthly interest rate costs 567
Holding or Carrying Costs (5-month estimate) 5,000
Closing Costs $5000 (Conservative rule of thumb: Closing costs is 5% of property sale price)/td>
Total costs after 159 days (the average time to flip a house in 2021) $132,835
After-Repair-Value $222,500 (Average house price in Pittsburgh)
Potential Profit $89,665
Return on Investment (ROI) 67.05%!!
Fix-and-Flip Property sale price $100,000
Rehab Costs $20,000
Down-payment $15,000
Max possible amount financed usingAMNR Fix-and-Flip loan. $85,000 (85% LTV)
Interest rate 8% p.a.
Monthly interest rate costs $567
Holding or Carrying Costs (5-month estimate) $5,000
Closing Costs $5000 (Conservative rule of thumb: Closing costs is 5% of property sale price)
Total costs after 159 days (the average time to flip a house in 2021) $132,835
After-Repair-Value $222,500 (Average house price in Pittsburgh)
Potential Profit $89,665
Return on Investment (ROI) 67.05%!!

We see that Mr. Smith earns a whopping 67.05% ROI! This is high compared to other forms of investing, such as buying stocks, which earn you a return of 10% per year on average. Even though, in reality, there may be some other associated costs that can decrease one’s potential profit, it is still much higher than other alternatives. In the fourth quarter of 2020, the average ROI was slightly lower than the one in our above example but still relatively high at 40.3%.

Given how high the ROI is, many investors have already contacted us regarding this loan product.

Check out our case studies section on our website where we highlight our AMNR Fix-and-Flip scenarios.

To really drive home the point on why you should care about our new product, home flipping is good because investors do not need to be concerned about selling the property given the ample demand for Fix-and-Flip properties. Many home buyers want to purchase a home that is already in a liveable condition because it saves them the effort of doing refurbishment works. Homebuyers also prefer residing in more established metropolitan areas, but the scarcity of land in these areas often means there are few new housing projects. As a result, most turn to Fix-and-Flip projects because it gives the feeling of having a newly built home.

Get in touch with us today to find out all about our AM Fix-and-Flip program for Foreign Nationals today! www.americamortgages.com

Who’s afraid of a Wolverine?

You should be!

As we know, The Wolverine is the school mascot of the University of Michigan, the publisher of the widely referenced monthly Consumer Sentiment Index.

This index in early August reached the lowest level since 2011!!

Consumer Sentiment Index

Why is this happening?

This “Stunning Deterioration”, as Bloomberg puts it, is a strong reflection of how inflation and the Delta Variant are worrying consumers. As seen from last week’s article, fast-rising rents are taking up an extremely large portion of peoples’ disposable incomes and it is a very real issue. The prices of goods and services (measured by CPI) are also at record high, and we all know it is only going to go higher.

U.S. Consumer Price Inflation Rate

Rising prices are bad news for low-income individuals and fixed-incomers because it erodes their purchasing power. Hence, it is not surprising that their sentiments lean on the negative side. The rising number of Delta variant cases and several states (California, New York) reinstating mask mandates have dashed peoples’ hopes that the pandemic will end soon and has triggered negative emotional reactions which further dragged down the Consumer Sentiment Index.

Why should we pay attention to the fall in this index?

This index is indicative of how people are viewing the future environment and, specifically their confidence. Lower consumer confidence has serious negative implication on the economy. Lower confidence could also create a negative feedback loop – businesses will look at a fall in consumer spending and delay investments. Consumers will look at delayed investments and have even more negative assessments about the economy.

Given how consumer spending is almost 70% of aggregate demand in the U.S., a fall in it will undoubtedly erase all the economic recovery gains made in the past few months (Just look at Australia as an example).

All in all, lower confidence could mean reversing back into the economic recession, which we were in the majority of last year. Except, this time, it could be much worse. Given how high inflation is currently, if the U.S. economy plunges, we could be entering an era of stagflation (high inflation, high unemployment). The 2020s could very likely be the new 1980s…

In conclusion, despite the ‘summer of joy’ we’ve enjoyed so far, this index signals a potential ‘winter of discontent’ ahead.

Does Hedonism affect CPI?

Can Hedonism affect CPI? Yes, it can…

Well…not “hedonism” in the pleasure-at-all-costs-kind-of-way but Hedonic pricing, which is how CPI is constructed. Without getting too deep into the math behind it, we can say that it tends to underreport the actual number.

As most of you have seen, July CPI was +5.4% year-on-year. While that is certainly high and higher than expectations, we feel that the number is too low OR will really surprise on the upside in the future.

Rents (or Shelter as it’s defined) are about 30% of the CPI basket. Meanwhile, in July, rents rose 8.7% year-over-year for 2 bedroom apartments. and overall 2.5% month-on-month. Elsewhere, The Fed expects future rental prices to rise 4.5% in coming years! Yes, the Fed expects future rental inflation to be 4.5%.

The largest single-family homeowner in the U.S. with over 80,000 units which it rents out, Invitation Home, says new lease rentals rose +14%! To put it in a different way, if a home was $1,000 to rent a month last year, it would cost $1,140 a month now!

Meanwhile, exogenous events such as the Delta Virus outbreak globally will put further strain on the global supply chain, causing cost-push inflation.

Last but not least, does anyone think that used cars costing more than new cars in America makes sense?

So, if you ask me if 5.4% is a real number…I would say no.

2020s are the new 1980s

Many of you would have heard us discuss this over the past 18 months – the upcoming economic cycle will be very similar to the 80s recession, where rental yields skyrockets since no one could afford to buy a home (high rates + recession).

Buying rental property right now in the U.S. is one of the best trades we can have at the moment!

Heck, even Steven Cohen has joined the bandwagon.

*Sources: CNBC, WSJ, Bloomberg