What’s Happening To The Middle Class? Pay Attention Real Estate Investors
Posted @ 11:05 pm - Filed under 401(k)'s & IRA's, Financial Planning, Goals, Purposeful Planning, Retirement
David Shafer, as I’ve said here often, is a very smart kinda guy. He’s written as a guest here before, and will again. His blog, Uncommon Financial Wisdom, is just that — uncommonly excellent. He’s a student of the what works, common sense, and Old School fundamentals. David’s the first planner type who understands the role of real estate and promotes it. I’m not sure, by I might be the only real estate investment guy who refers clients to him for non-real estate products required by Purposeful Plans I’ve created.
And for the record, when I refer my clients to David, no money comes my way. I do it, when I do it, ‘cuz it’s the right thing to do. Team is a fundamental concept at Brown and Brown, and we’re proud to be able to say David Shafer is on ours.
The Stressed (Disappearing) Middle Class
At first it was just a theory based on scant evidence. Then the evidence started piling up. Now it’s a full fledged sociological phenomenon. Yes, the middle class is slowly being eroded. That great middle, which developed two generations ago, the one that made our country unique, that allowed for the majority to feel secure, and to have opportunities in life that were previously unimagined, is slipping away. More and more our country’s economic demographics is looking like an hourglass.
What does that mean to an investor? First, let’s take a look at some interesting phenomenon. Take education. One generation ago people felt that with 12 years of schooling and hard work one could assure themselves a place in the middle class. And to accomplish this one only had to attend the free public school system. Most folks felt that the public school system was fine. Now, people think there are two years of pre-school, and four years of college which must be successfully attended in order to assure that middle class spot. And folks are worried about the public school system. So what that means is that instead of twelve years of free education getting one into the middle class, there are at least six years of paid education along with the 12 free. But even more than that, since people in general don’t trust the school systems there is competition to live in the best school districts. The data has shown that real estate in the best school districts has risen faster then the general area real estate. So folks who are trying to get their kids into the middle class have to bear the costs of more education as well as higher real estate cost.
Next are work relationships. Two generations ago is wasn’t unusual to find folks who worked their entire life for the same company. Now that is almost unheard of. Layoffs, business failures, etc. has lead to foreclosure and bankruptcy (at about the same rates). Both the husband and wife now work, allowing for little family life. On top of that the data indicates that this additional financial stress has pushed the divorce rate for the middle class up to astounding rates.
The retirement environment has changed. Last generation most folks had a defined benefit plan that paid them for the life of their retirement. Now most folks have a 401K style plan that forces them to manage their money. Of course, this guarantee’s nothing as far as how long your retirement money will last. People are now living 17 years in retirement. Regular readers of my blog will recognize this issue as a longstanding discussion point for me.
Now here is some additional information for you. Folks who are falling out of the middle class are the unlucky ones that get sick, divorced, or laid off from their jobs. Folks who manage to stay are the ones that don’t have any misfortune. And there is another group who are moving up out of the middle class into the mass affluent category and the wealthy category. These folks are one’s that have taken control of their financial life by starting businesses or learning how to invest and get double digit returns.
So what does that mean to investors? First whether it is real estate or stocks, think about what market you are aiming for. Is it the disappearing middle class? For example, if you own investment real estate in a great school district, you will be able to charge a premium for it (as long as it is appropriate size and design for families).
Or if you own real estate in a town with increasing unemployment, what will that do to the demand for rentals? Perhaps you want to own or invest in a restaurant. If the average meal price is above a certain threshold, then you can’t expect stressed middle class folks to flock to your restaurant no matter how good the food and service is. My favorite sushi restaurant was deserted when I ate there this afternoon, where only a year ago you would have had to be creative to find a parking place! Look at GM and Ford which spent a decade selling expensive SUV’s to the middle class. They are both in serious trouble and need to quickly convince folks to buy their less expensive cars or go out of business. The S & P 500, which is a stock index of the 500 largest American companies, will most likely not have much of a gain for this entire DECADE.
The bottom line is that this sociological change has to be accounted for if one is to succeed at the investment game. And you need to position yourself economically to deal with the new realities. I have said it before and will say it again and again, if you don’t come up with a real plan to build wealth, you better hope you are real lucky and life doesn’t smack you in the head forcing you down instead of up! Personally, I got tired of being smacked in the head by a lay-off and mutual fund underperformance. “Down goes Frazier, Down goes Frazier.” Don’t just sit there on the ground, get up and avoid those punches!
This entry was posted on Monday, July 14th, 2008 at 11:05 pm and is filed under 401(k)'s & IRA's, Financial Planning, Goals, Purposeful Planning, Retirement. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
