Inflation and Other Hot Topics

When Your Dollar Shrinks

The best of financial planners must consider what happens to investors when their dollar begins to shrink. They planned on spending a certain amount per month in  retirement, for example, but … oops … the prices of gasoline and Cheerios went through the roof. If a set amount of dollars buys less, then the only solution is to increase the number of dollars available. Otherwise, the quality of life shrinks along with the U.S. dollar.

How to increase the number of dollars available? How to give yourself a raise?

Well, that’s what we’re here to do for you, our client. And we remain proud of, and steadfast in, that duty, especially these days when inflationary trends are sounding the alarm.

The Federal Reserve Beige Book

According to the Fed’s Beige Book, the recovering U.S. economy is grappling with significant labor shortages and higher prices for consumer goods.

The Outlook

The Federal Reserve’s latest deep dive on the economy confirmed the obvious: U.S. economic growth is picking up steam, but the recovery is being restrained by widespread shortages of labor and supplies.

While the economy has made a lot of progress, Fed Chairman Powell said on Wednesday that it still needs a lot of support from the Fed. He pointed to the millions of people currently out of work.

The Big Picture

The economy has plenty of momentum. Coronavirus cases are low, most government restrictions have been lifted, and Americans are spending plenty of money. Indeed, consumer spending accounts for about 70% of U.S. economic activity.

“The U.S. economy strengthened further from late May to early July, displaying moderate to robust growth,” the Beige Book said.

Cars and Trucks

In 2020, sales of used light vehicles in the United States came to around 39.3 million units. In the same year, approximately 14 million new light trucks and automobiles were sold here.

Currently, about 280 million vehicles operate on the streets of America. an increase of about 1.6 percent over the past year. The rising demand for vehicles means that used vehicle inventories are declining. The impact on prices is not surprising. Just last month, in June alone, the prices of used cars increased 10.5%. In the same month, new car prices rose 2.2%.

Construction

The construction industry in the United States accounts for 3.36% on the country’s GDP.  According to economic forecasts, construction in the United States will grow about 15.6% and amass a value of $1.515 trillion in 2021.

Although the construction and building materials industry in the United States has been facing challenges in the recent past that have slowed down its short-term growth, the medium and long-term growth in the industry is projected to remain relatively constant and positive. The expected compound annual growth rate will be 4.7% from the year 2021 to 2025. Moreover, the construction output for the US construction and building materials industry is projected to be as high as $1.819 trillion until the year 2025.

The Pandemic and the Building Industry

As the COVID pandemic has brought about a huge increase in outdoor renovation and construction projects, the demand for construction materials is also expected to rise. Consequently, the prices of construction and building materials have risen accordingly. The norm of social distancing during the pandemic has shifted people’s behavior from relaxing and entertaining visitors indoors to outdoors in patios, fire pits, and outdoor kitchens. Tents are in, ballrooms are out.

Even though construction activities have gained importance as the quarantine and lockdowns have lifted, the industry suffered significantly during the peak of the pandemic due to the weakened economy, disturbances in the supply chain, and delays in schedules. Contractors and construction workers suffered, too, as the lockdown required that they remain in their houses for months on end. Accordingly, the demand for building materials fell drastically.

Lumber

Lumber prices turned negative for the year as demand cooled after a red-hot rally.[1] Lumber futures fell 5.6% on Monday, taking it 0.6% below where it started the year. Home improvement demand has dropped, while suppliers have raised production.

Lumber prices have dropped into negative territory for the year after two months of dramatic falls, as the home improvement boom cools and producers increase supply to meet demand.

On Monday, lumber futures for September delivery fell 5.6% to $712.90 per thousand board feet, Bloomberg data showed. The fall took prices 0.6% below where they started the year.

Lumber soared in the first few months of 2021 as Americans stuck at home due to the pandemic renovated their houses and a booming property market added to demand. Prices peaked at more than $1,730 per thousand board feet in May as suppliers struggled to keep up.

But since the May peak, prices have plunged almost 60%. Analysts have said that the loosening of coronavirus restrictions has caused consumers to spend less on home improvements such as new yard decking and more on services like dining out, getting haircuts, and even going to the movies.

The Housing Market Inflates

An inflation storm is coming for the U.S. housing market. Fast-rising housing costs have helped cause the largest increase in inflation since 2008. But the way that government statisticians track the price of consumer goods may be missing just how explosive home-price growth really has been in recent months.

The cost of shelter rose by 0.5% between May and June, according to the latest edition of the monthly consumer price index released Tuesday by the Bureau of Labor Statistics. Compared with last year, however, shelter costs were up 2.6%.

Altogether, the rise in housing prices accounted for roughly a fifth of the overall increase in inflation in June, a reflection of how heavily government economists weight this spending category.

But much of that increase was actually driven by the rising cost of hotels and motel stays, which are factored into the overall shelter figure. Between May and June, the cost of a hotel room increased nearly 8%. Comparatively, housing costs for renters and homeowners rose 0.2% and 0.3% respectively, per the government’s inflation measure.

The latest edition of the consumer price index indicated housing prices have risen 2.6% over the past year, while other reports suggest home prices are up more than 13%.

In 2021, buyers are driving up home prices and homes sell quickly. Some hyperactive buyers make offers without seeing the property and forego contingencies to win bidding wars in the highly competitive housing market. The record-low mortgage rates have really sparked the increase in demand, especially among millennials. And they are encountering a shrinking supply of available homes.

The housing market is still far from normal, with inventories down over 38% year over year and at historic lows. The current supply of homes on the market registers an all-time low, dating back to the turn of the century. Due to a lack of supply and decreasing interest rates or borrowing costs, home prices have continued to rise in double digits. With the recovering economy, more buyers are entering the market. And because of the still-limited supply of housing inventory, home prices continue to rise.

With increased supply, home price growth will gradually moderate, but a broad price decline appears unlikely. The housing market will continue to attract buyers as a result of the drop in mortgage rates, which have fallen below 3%, as well as an increase in new listings. According to Realtor.com’s Hottest Housing Markets data, as of June 29, the most improved metros over the previous year were Tampa-St. Petersburg-Clearwater, Fla.; Detroit-Warren-Dearborn, Mich.; Nashville-Davidson-Murfreesboro-Franklin, Tenn.; Riverside-San Bernardino-Ontario, Calif.; and Jacksonville, Fla.

·         The median existing-home price in May was $350,300, up a record 23.6% from May 2020.

·         Supply shortages are holding new home sales back.

·         New home sales fell 5.9% in May from April, to 769,000.

·         The median sales price of new houses sold in May 2021 was $374,400, up 2.5% from April and 18.1% year-over-year.

According to the latest data from the National Association of Realtors, existing-home sales in May declined 0.9% from a month before a seasonally-adjusted annual rate of 5.80 million from April’s rate of 5.85 million. The 0.9% setback in existing home sales in May was the fourth straight monthly decline. Only one major U.S. region experienced a gain in sales month-over-month, while the other three saw sales fall. Each of the four regions, however, saw double-digit year-over-year growth.

Although housing sales were up 44.6 percent year on year (4.01 million in May 2020), the comparison is heavily skewed because the housing market was effectively shut down for two months at the start of the pandemic. Last summer, the market recovered and remained strong for the rest of the year. In May 2021, the median existing-home price for all housing types was $350,300, up 23.6 percent from last May ($283,500), with price increases in every region.

This is a record high and marks 111 straight months of year-over-year gains since March 2012. The inventory of homes for sale remained relatively low. At the current sales pace, it would take 2.5 months to sell through available inventory—a slight increase from 2.4 months in April, but significantly lower than the 4.6 months of supply at this time last year.

The National Association of Realtors released research earlier this month from the Rosen Consulting Group, estimating that between 5.5 million and 6.8 million new houses are needed to meet the demand. “Home sales fell moderately in May and are now approaching pre-pandemic activity,” said Lawrence Yun, NAR’s chief economist.

Pending Home Sales Rebounded Strongly in May

According to the National Association of Realtors, pending home sales reached their highest level in May since 2005, with gains recorded in all four U.S. regions both month-over-month and year-over-year. Pending home sales increased by 8% in May compared to April and were up 13.1% year on year. Home sales activity had dropped at the same time last year due to the onset of the COVID-19 pandemic.

A pending sale status indicates that the seller accepted an offer from a prospective buyer but that the transaction has not yet closed. Many sellers will prefer to wait for the best and highest offer. Pending home contracts are viewed as a forward-looking indicator of the housing market’s health because they become sales one to two months later.

Existing Housing Sales in May

According to data from the National Association of Realtors:

·         In the Northeast, existing home sales decreased 1.4% in May, but the annual rate of 720,000 represents a 46.9% jump from a year ago.

·         The median price in the Northeast was $384,300, up 17.1% from May 2020.

·         Midwest existing home sales rose 1.6% to an annual rate of 1,310,000 in May, a 27.2% increase from a year ago.

·         The median price in the Midwest was $268,500, an 18.1% increase from May 2020.

·         In the South, existing-home sales declined 0.4%, posting an annual rate of 2,590,000 in May, up 47.2% from the same time one year ago.

·         The median price in the South was $299,400, a 22.6% jump from one year ago.

·         In the West, existing home sales fell 4.1%, recording an annual rate of 1,180,000 in May, a 61.6% climb from a year ago.

·         The median price in the West was $505,600, up 24.3% from May 2020.

New Residential Home Sales

Buyer demand for new homes remains strong, and builders in most markets have little trouble selling the homes they have built. However, supply constraints limit the number of homes they can build and eventually sell, and the sales volume they can comfortably take on without exposing themselves to additional price risks is somewhat limited. Still, new home sales have risen during the pandemic. Those sales allow builders to raise prices.

Buyer traffic is converting into sales at a record rate. Residential construction ended in 2020 on a strong note. Housing starts rose 5.8% to 1.67 million annualized units in December. Total starts were 2.8% higher than a year ago. The demand remains strong as the prime buying season begins to heat up. Sales of new single-family homes in the United States fell to a one-year low in May 2021, as the median price of newly built houses rose due to high raw material costs, including framing lumber.

New home sales decreased 5.9% in May to a seasonally adjusted annual pace of 769,000, down from an upwardly revised April rate of 817,000, according to estimates released jointly by the U.S. Census Bureau and the Department of Housing and Urban Development. Higher building costs, longer delivery times, and general unpredictability in the construction supply chain are now having measurable impacts on new home prices. The median sales price of new houses sold in May 2021 was $374,400.

The average sales price was $430,600. The seasonally‐adjusted estimate of new houses for sale at the end of May was 330,000. This represents a supply of 5.1 months at the current sales rate. The median sales price of new houses jumped 18.1% from a year earlier to $374,400 in May. The average sales price was $435,400. The seasonally adjusted estimate of new houses for sale at the end of April was 316,000. This represents a supply of 4.4 months at the current sales rate.

Because new house sales are recorded when contracts are signed, they are considered a leading housing market indicator. The decrease in new housing sales suggests that demand is diminishing. Applications for house loans have declined this year, as have housing market surveys of potential purchasers.

Shoes? Yes, Shoes

The global footwear market is a multi-billion U.S. dollar industry. The United States has the largest footwear market in the world, amounting to over 91 billion U.S. dollars in revenue in 2019. A part of the clothing and apparel industry, the footwear market is comprised of shoes, sneakers, luxury footwear, athletic footwear, and sporting shoes, as well as other related goods. Footwear products are commonly made of leather, textiles, and a range of synthetic materials.

Nike’s share of US footwear market is 17.9%. Pairs of shoes imported into the USA total 2.47 billion. Advertising spent in the US footwear industry totals $12.6 billion.

Brace Yourself

We don’t have to look far to see evidence of inflation. And we don’t have to wonder why prices are rising. When the Federal Reserve increases the U.S. money supply at an annual rate of 37%,[2] those dollars have to go somewhere. They go into the stock market, into real estate, into art works, and … into the gasoline for your car and the Cheerios for your breakfast.

When those prices rise, so too must your income.

We keep a constant eye on these developments and recognize our duty of making sure your wealth grows at a rate that will protect your standard of living.

If you’d like to review your assets, please call us at 301-294-7500. We are always happy to answer any questions you have.

 

 

[1] https://www.nasdaq.com/market-activity/commodities/lbs   

[2] https://mises.org/wire/us-money-supply-was-37-percent-november

Making a List and Checking It Twice

As one of the strangest years ever thankfully draws to a close, it behooves us to take stock and see our situation as it now stands. A host of questions inevitably arise, the type that beg for our honest and, we hope, astute answers.

So let’s make a list. Look over each item and ask yourself how you stand. Try to envision any changes you think you should make. And for those questions that involve your account here at RFS, we invite you to raise them with us. Perhaps together we can come up with the perfect answer. You can always call me personally 301-294-7500.

Making a List

1. Do I Have Enough Cash?

Do you have enough cash available to pay for short-term needs. If not, you might raise cash by realizing some of the gains in your portfolio—either the one we manage or any self-managed accounts you might have. Potential 2021 changes to the tax laws—including significant increases in the capital gains tax—might make this the perfect time to set some gains at current tax rates. Any action along these lines must occur before December 31, 2020. See our Note in item #2.

2. Are Losses Really a Good Thing?

If you have other brokerage accounts, a careful look at your holdings might reveal some with that awful red color. Of course, everyone likes to avoid that color as best we can, but no one can predict where a particular investment might go. If a position does dip into the red, now might be a good time to sell it while at the same time selling some of those with that lovely green color. The red will cancel out the green, much to the tax man’s chagrin.

Note: We can look at any self-managed holdings you have and provide you with a “second-opinion” analysis. You might very well have some gains you should take and some losses to offset those gains.

3. Do My Retirement Accounts Need a Pick and a Shovel?

Retirement accounts can serve as your private gold mines. But to make those mines productive, you have to do some digging. Are you contributing as much as the law allows to your retirement accounts? If not, take your effective tax rate and multiply it by the amount you’re not contributing. The result is the amount you’re failing to find in that gold mine of yours.

Make sure you do some thinking and figure out if you’ve left some 401K or other retirement accounts at previous employers. These you should roll over into an IRA or other tax-deferred account.

Have you considered converting an IRA into a Roth IRA? Have you thought about gift-funding Roth IRAs to family members who have earned income?

4. How Can I Help My Family with the Costs of Education?

You might want to consider giving to 529 accounts for children or grandchildren. They can then enjoy tax-exempt growth if the account is used for educational expenses. You might even be able to “Superfund” these accounts by giving five years’ worth of exclusion gifts ($75,000 for individuals, $150,000 for married couples).

5. Am I Ready for Changes to the Gift-Tax Laws?

Right now, you enjoy an $11.58 million lifetime gift-tax exemption. But if you listen carefully, you can hear serious discussions in Washington about reducing this amount by 50% or more. Gifts now (before the law changes) can lock them in as free from gift taxes. And they can help reduce taxes by moving income-producing holdings to taxpayers in lower brackets.

6. Are There Some Charities I Want to Support?

If you have some assets that have appreciated significantly, you can give them to a charity and deduct the market value of the asset at the time of the gift. The charity can then sell that asset and pay no taxes on the gain. Poof! The gain escapes the clutches of the tax man.

The CARES Act changed deductibility of some charitable gifts. In 2020, if you itemize deductions, you can give away (and then deduct) your entire adjusted gross income and pay zero income tax. Of course, only some people can afford to live on other assets and ignore their adjusted gross income. But if you find yourself among those fortunate few, a charity awaits your generosity.

7. Am I Missing Out on Any Benefits Associated with COVID?

Congress responded to the COVID outbreak by passing a number of laws assisting businesses and individuals. Many of these advantages dwell within the tax code. According to Mark Luscombe, principal federal tax analyst at Wolters Kluwer Tax & Accounting, “Both individual and business taxpayers may need to act before year-end to take advantage of many of these tax breaks.”[1]

Mr. Luscombe’s analysis appears in an article in Accounting Today, which summarizes his checklist as follows (some of these appear on our list above):

“Here’s a breakdown of the items that may need to be acted on according to Luscombe:

• “More than 30 tax breaks that Congress has permitted to regularly expire and then renew currently expire at the end of 2020, including individual, business, and energy tax breaks.
• “More generous charitable contribution deduction provisions expire at the end of 2020, including a new above-the-line charitable contribution deduction.
• “The ability to make expanded penalty-free withdrawals from retirement plans for COVID-related expenses expires at the end of 2020.
• “The deadlines to apply for Economic Impact Payments expire before the end of the year, although tax credit is available on the 2020 tax return.
• “Employers must continue to deal with a variety of tax credits and deferrals related to employee payroll taxes that expire at the end of 2020.
• “A number tax provisions provide retroactive relief, which might require filing of amended tax returns for prior years, including net operating loss carrybacks, modifications to deductions for non-corporate business losses, modifications to business interest deduction limitations, qualified improvement property, the Kiddie Tax, disaster relief, and the 30-plus regularly expiring provisions.
• “The possibility of higher taxes in 2021 might suggest a reversal of the usual year-end tax planning strategy, which is to defer income and accelerate deductions. Taxpayers may also want to realize capital gains, make lifetime gifts, and engage in Roth conversions.”[2]

Checking It Twice

The above list includes some of the major items you should consider as the curtain draws on 2020. After you review your list, you can call on me to help you with checking it twice; we can explore these and any other issues we might identify. Feel free to call my office at 301-294-7500. We can discuss your list and perhaps add to it.

All of Us

All of us here at RFS extend our best wishes to you in the holiday season. Play it safe. Wear your mask. No holiday hugs (bummer). And count the many blessings we enjoy as a free people in the country we all love.

Best wishes,

Jack, Val, Toni, Chris, Jim, Michael, Jay, Dinah, and David

[1] https://www.accountingtoday.com/news/new-end-of-year-tax-planning-issues
[2] https://www.accountingtoday.com/news/new-end-of-year-tax-planning-issues

 

Them’s your odds.

Heads a normal, relatively healthy retirement. Tails long-term care (LTC).

So it’s 50-50.

Actually, the stats show differing percentages for men and women over 65. For men, 46.7% will need LTC, for women it’s 57.5%. ¹

For all, roughly 50-50. Flip a coin. Heads or tails.

No one should plan a financial future with a coin flip.

Unfortunately, many do just that: they take the chance that the coin flips to heads. Then, something happens. A broken hip. Onset of dementia. Or these days, COVID-19. Suddenly, the husband or the wife, or both, need assisted care. The cost can spell financial disaster.

Horror Stories Abound

Writing for MoneyWatch, Steve Vernon recounted “3 Horror Stories” involving the need for long-term care. 

Here’s one:

A seventy-something friend of ours is taking in her 98-year old aunt, who ran out of money. The aunt’s son can’t or won’t help his mother, for whatever reason. Our friend and her eighty-something husband feel very strongly about letting her aunt live with them, despite the extreme disruption to their lives. But what happens when the aunt needs some form of long-term care? Our friend still works full time, and her husband isn’t really qualified or able to help if the aunt needs extensive care. ²  

​Many will face situations requiring LTC. And when they check their balance sheets, the question inevitably arises: Just how the heck am I going to pay for this?

Long-Term Care: The Price Tag

The numbers provide little solace. According to the National Association of Insurance Commissioners and the Center for Insurance Policy and Research, of those turning 65 between 2015 and 2019, 57.5% can expect to pay less than $25,000 on long-term care during their lifetimes. But 15.2% can expect to pay more than $250,000. ³

In 2016, the median annual cost of a semiprivate room in a nursing home was $82,125. A private room ups the ante to $92,378. ⁴

Planning for Long-Term Care

Many have looked to insurance to stave off the costs of long-term care. In the late 1970s, LTC insurance was called “nursing home insurance.” Only a few insurance companies wrote these policies. Back then, the annual national cost of long-term care totaled $20 billion. By 1980, those numbers grew to $30 billion. Now they have ballooned to $225 billion. ⁵

When the calendar flipped to the current century, many carriers started to exit the market. In the words of the NAIC Report:

Most insurers’ [LTC policies] issued before the mid-2000s have seen adverse experience when compared to their original pricing assumptions. Rising claims, low mortality and lower than expected lapses have led to higher prices often unaffordable to a large segment of the affected population. A number of insurers have also opted out of the market, leaving only a relatively few insurers to provide much needed LTC products. ⁶

The LTC policies provided back then were reimbursement, term-type policies. They resembled car insurance. They provided no cash value and no refund options if you died suddenly. You received no guaranteed renewal options. The insurance company could cancel your policy or raise your premiums. Not a pretty sight.

Needless to say, buyers of these products stopped buying. So insurance companies came up with hybrid products.

Now, using a guaranteed “no lapse” life insurance policy with two important riders, clients can protect their families from their early death, from disability, and from running out of money at, say, age 85.

The NAIC study describes this new approach:

One area of continued growth in the market is with combination or hybrid products. These products combine LTC benefits with either life insurance or an annuity. They can pay out if LTC is needed, but if not needed, there is a death benefit or annuity payout. In cases where an individual uses some, but not all, of LTC benefits, the remainder would be payable as a death benefit. This is one of the principal appeals of combo products. If LTC is never needed, there is still a return on the money invested in the premium. ⁷ 

Example of the Hybrid Approach

To take just one example, a one million dollar life insurance policy with LTC and annuity riders protects your family from your premature death with the payment of a tax-free amount of $1 million. If you become disabled and can show an inability to perform certain daily routines, the LTC rider provides up to $120,000 of annual long-term care costs. And, if you live to age 85, the annuity feature kicks in: you can receive the entire $1 million death benefit through 10 annual payments of $100,000.

Give Us a Call

For 30 years, Research Financial Strategies has helped families like yours achieve their financial goals by providing a customized investment solution that is not only easy to understand and but is also focused on meeting your goals.

This starts with an in-depth understanding of you and your family, your current situation and your aspirations—not just for your money, but for your entire life. Often, that’s where LTC insurance, life insurance, and annuities can play a big role.

We always provide first-class service by taking the time to gain a deep understanding of you and your family. We work closely with you to develop a customized strategy that connects all aspects of your financial life. By focusing on all risks, we can help you protect what you’ve earned and guard against events that can take it away.

​Give Jack Reutemann a call at (301) 294-7500.

 

 

 

1 75 Must-Know Statistics About Long-Term Care: Sobering data on usage, cost, insurance products, and the toll on unpaid caregivers, by Christine Benz, Aug 31, 2017. https://www.morningstar.com/articles/823957/75-must-know-statistics-about-long-term-care (“Morningstar Report”)
2 The Long-Term Care Threat: 3 Horror Stories, by Steve Vernon, Updated on: July 28, 2011 / 6:03 PM / MoneyWatch, CBS News. https://www.cbsnews.com/news/the-long-term-care-threat-3-horror-stories/
3  The State of Long-Term Care Insurance: The Market, Challenges and Future Innovations, by Eric C. Nordman, Director, Center for Insurance Policy and Research, May 2016 (“NAIC Report”). https://www.naic.org/documents/cipr_current_study_160519_ltc_insurance.pdf
4  Morningstar Report https://www.morningstar.com/articles/823957/75-must-know-statistics-about-long-term-care
5  NAIC Report https://www.naic.org/documents/cipr_current_study_160519_ltc_insurance.pdf
6  NAIC Report https://www.naic.org/documents/cipr_current_study_160519_ltc_insurance.pdf
7  NAIC Report https://www.naic.org/documents/cipr_current_study_160519_ltc_insurance.pdf

 

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Investment advice offered through Research Financial Strategies, a registered investment advisor.