POP QUIZ

What’s the best-performing financial asset of the last decade? (You might be surprised by the answer; read to the bottom to see!)

IN THE NEWS

🏠 There’s Never Been a Worse Time to Buy Instead of Rent

Photo by Breno Assis on Unsplash

In America, nearly everyone wants to own a home. It’s the core of the American Dream.

Just yesterday, we asked you: If money weren’t an issue, would you buy or rent a home? The overwhelming majority of readers (~81%) said they’d rather buy. And while purchasing a home can be a tremendous investment over the long haul, it’s not always the wisest choice.

Like right now: It’s 52% more expensive to buy a home than to rent one because of sky-high prices and mortgage rates at their highest levels in decades. Tack on insurance, taxes, utilities, and other expenses that come with homeownership, and it’s not a great time to buy.

• Like many investments, it all depends on one’s unique situation.
• The last time renting was this inexpensive vs. buying? Never. Even before the 2008 crisis, the difference was “only” 33% (2006), adding evidence to economists who believe we’re in a housing bubble.

Shadow demand: In theory, buying and renting should be roughly the same cost per month. Owners benefit from appreciating home prices, but they also spend more money on their homes for repairs, taxes, refurbishments, etc.

• From 1996 to 2003, the average cost to rent or buy was about equal. But after the global financial crisis, rock-bottom interest rates and lots of housing supply meant it was 12% cheaper to buy than rent during the 2010s (on average; much of real estate varies by location).
• With the surging cost of debt in the past 18 months, things have changed. A homeowner taking out a 30-year mortgage today on a $430,000 house with a 10% down payment would pay $3,200 in monthly repayments, 60% more than if they had bought the same house in 2020.
• Meanwhile, rents have spiked 22% over the same period and outpaced inflation.

Rising house prices make it hard for renters to cobble together a 10% down payment, let alone afford a high mortgage. “There’s a lot of shadow demand for homes, with a bunch of first-time buyers waiting on the sidelines for the payment-to-paycheck calculation to work for them,” says one economist.

It’s also a brutal housing market for first-time buyers because sellers don’t want to move and take on higher rates. So it’s essentially a standoff, with high prices, high rates, and limited supply.

From The Wall Street Journal

Why it matters:

Warren Buffett says buying his home is the third-best investment he’s ever made, behind only he and his wife’s wedding rings.

In his 2010 letter to shareholders, Buffett says homeownership is a sensible investment for most Americans.

• But he has pointed out that he “would have made far more money had I instead rented and used the (home) purchase money to buy stocks.”

Contrarian view: One prominent leader in real estate says not to fret. Shark Tank star Barbara Corcoran, argues now is “the very best time to own a home” despite rates at 23-year highs. She believes that once interest rates fall even slightly, “all hell’s going to break loose and the prices are going to go through the roof.”

• Lower rates in 2024 or 2025 will be “a signal for everybody to come back out and buy like crazy, and the house prices (will likely) go up by 20%. We could have COVID (market) all over again.”

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🇳🇴 Norway’s Sovereign Wealth Fund is Having a Rough Year

Photo by Mikita Karasiou on Unsplash

If you’ve been cringing at your portfolio this year, rest assured that your losses aren’t that bad, at least compared to the world’s largest sovereign wealth fund, which lost over $33 billion in value last quarter.

That’s a drop in the bucket for the $1.4 trillion fund. Still, with a -2.1% return from July to September, it’s not exactly crushing the market.

By the numbers: The fund is actually pretty highly concentrated in stocks, representing almost 71% of the portfolio. And its performance in recent years has largely been derived from a “few super large U.S. tech companies.”

• We know the feeling — U.S. stock market indexes have more than leaned on mega-cap tech companies in recent years, too, and 2023 is no exception.
• But these companies (think Google, Meta, Amazon, Alphabet, Nvidia, Tesla, etc.) aren’t just carrying American investors’ returns; they’ve led the way globally while global indexes stagnate.
• Vanguard’s global stock ETF (ticker: VEU), which excludes U.S. stocks, is up just 7% in the past five years, while the S&P 500 is up almost 60%. So it comes as little surprise that Norway’s sovereign wealth fund is also leaning into America’s biggest companies.

Why it matters:

What’s a sovereign wealth fund, anyway? Well, Norway’s massive one was created in the 1990s as a way to invest surplus revenues from the country’s oil and gas sector. And now, it’s invested in over 9,200 companies across 70 countries worldwide.

• Its aim is to ensure financing for future government spending in a country known for its generous welfare state.
• The hope, then, is to “shield the economy from ups and downs in oil revenue,” according to Norges Bank (which manages the fund).
• It also “serves as a long-term savings plan so that both current and future generations of Norway get to benefit from our oil wealth.”

APF: It’s not so different from something Alaska has for its residents, known as the Alaska Permanent Fund (APF). It’s at a much smaller scale, but as of 2019, the fund wielded some $64 billion, funded by oil and mining revenues.

• It pays out an average of $1,600 annually per Alaskan resident.

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💬 The World is Witnessing a $600 Billion-a-Year Shift in Consumer Behavior

Photo by David Clarke on Unsplash

It’s a story you might have heard before: During the pandemic, everyone was sitting at home with little else to do than shop on Amazon, so they loaded up their carts and bought a lot of stuff (or “goods” in econ parlance.)

• From fancy massage chairs to exercise bikes, TVs, plants, and so much toilet paper, people couldn’t buy enough things.

The new consumer: This was a huge pivot from the previous trend driving consumption, where folks in developed countries increasingly spent on services.

• The Economist puts it like this: “As societies get richer, they demand more in the way of luxury experiences, health care, and financial planning.”
• Evidently, services-oriented spending reversed during the pandemic, but it still hasn’t returned to pre-pandemic norms.
• The Economist estimates that consumers are spending $600 billion less per year on services than they would’ve if the pandemic never happened, based on previous trends.

Hermits: Leisure activities related to hospitality and recreation have seen the biggest relative spending decline, while more is spent on things enjoyed at home, like chairs and fridges, clothes, food, and wine.

• Thus, the term “hermit habits” has been used to explain the shift. The pandemic made many of us more comfortable at home, and those hermit habits are proving persistent.

Why it matters:

In Japan, for example, which had longer lockdowns, the surge in hermit habits is clear: restaurant bookings for business purposes have declined some 50%. While countries with shorter lockdowns, like New Zealand and South Korea, have seen spending patterns return much closer to pre-pandemic levels.

Anecdotes vs. data: While it may seem harder than ever to score restaurant reservations, this may have more to do with limited supply than surging demand to eat out — the total number of Americans working in the hospitality industry is well below 2019 figures.

• Darden Restaurants, which owns chains like Olive Garden, suggested recently that it was seeing “80%” of the foot traffic it had before Covid.

So, we might all just be a little more hermit-like these days. Spending on social activities has dropped off, replaced largely by more isolated pursuits, like gardening, home cooking, reading magazines, and tending to pets — everyone knows someone who adopted a Covid puppy.

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TRIVIA ANSWER

Bitcoin is considered the best-performing financial asset of note over the past decade or so, with returns exceeding 10,000% since 2015 (and much more since before that.) And it’s still humming, up some 107% in 2023. Its annualized returns over the last decade come out to roughly 200% per year, which is 10x more than the Nasdaq 100 index.