Displaying items by tag: income

Ever since the Fed embarked on its tightening campaign starting in the early months of 2022, the real estate market experienced the most immediate impact due to rising mortgage rates negatively affecting home affordability.

Initially, publicly traded real estate stocks saw deep drawdowns while private real estate performed much better. Now, this gap is beginning to shrink as private real estate has been following public real estate lower. One factor is that it’s increasingly becoming clear that high rates are not going to disappear anytime soon due to the resilience of the economy and inflation. In fact, inflationary pressures seem to be reigniting given the recent strength in oil and auto workers striking.

In terms of when private real estate will bottom, some indicators to watch are an increase in transaction volume even at lower prices, a change in monetary policy, and increase in lending standards. Currently, all 3 are working against private real estate given that many markets are ‘frozen’ as sellers are unwilling to cut prices, while buyers don’t see many attractive deals at current yields. The Fed’s focus remains on stamping out inflation whether through further hikes or keeping rates ‘higher for longer’. Finally, lending standards are unlikely to loosen especially with so many banks struggling with balance sheet issues and/or an inverted yield curve. 

Finsum: Private real estate was immune to the weakness in public real estate for so long. Find out why this is starting to change.

One of the consequences of tighter monetary policy is to curtail housing demand by squeezing affordability. As a result, all sorts of housing activity has cooled such as mortgage applications, new home construction, renovations, and house flipping. While there are all sorts of losers, it’s presenting an opportunity for many private real estate funds who are finding a buyer’s market.

 These funds raise money with multi year holding periods so are less affected by the change in the funding environment at least in the short and intermediate-term. Another factor in the real estate market is that many regional banks are pulling back from extending credit given their balance sheet concerns. Overall, it’s a risk for the broader economic outlook but a unique opportunity for private real estate investors.   

And, more money is being allocated to real estate - public and private. In the first-half of the year, 43% of institutions surveyed, increased their allocation to real estate by an average of 76 basis points. Sovereign wealth funds also increased real estate exposure from 6.9% to 7.9%. In terms of geography, private real estate continues to be dominated by North American investors.

One of the best real-time measures of the population’s interest in a subject can be gleaned through Google search data. Since the start of the year, searches for the topic are up by 50% and continue to climb with rates. In fact, there is a 0.9 correlation between search volume and longer-term rates.

According to Standard Life, interest in the topic really accelerated once rates exceeded 4%. Currently, many annuities are offering returns in the 7% to 8% range which is leading to strong demand from retirees or those close to retirement who are looking for income. 

Recent months have seen rates continue inching higher, while inflation expectations have moderated. Higher real rates are also adding to the appeal of annuities given concerns about the economic outlook and costs.

Two more contributing factors behind annuity demand are pent-up demand and demographics. For more than a decade, rates were so low that annuities simply didn’t deliver sufficient returns for investors or retirees. Instead, monetary policy was designed to push them higher up the risk curve in order to generate yield. 

Demographics also can’t be ignored. Next year, 12,000 Americans will be reaching retirement age every day. And by 2031, 70 million Americans will be above retirement age. The population is even older in Europe and Japan and will likely be interested in boosting their income during retirement. 

Finsum: Google search data shows that interest in annuities has surged since the beginning of the year. It’s not a coincidence that this happened as long-term rates were breaking out to multi decade highs. 

For decades, Americans have relied on pensions to fund their lifestyles during retirement. This is no longer the case with pensions being phased out in most workplaces. Given today’s high interest rates, it’s worth investigating whether annuities are a sufficient replacement.

It’s already clear that many advisors and investors feel the same way given that demand has soared in the last couple of years given the combination of high rates and an uncertain economic outlook. Last year saw a record of $302.9 billion in sales which was a 47% increase from last year. Further, 2023 sales are projected to exceed this figure by a decent margin. Demographics also support continued strength in annuity sales. 2024 is expected to see the largest number of new retirees in history, and around 40% have expressed concern about having sufficient income especially given the jump in inflation. 

According to an industry study, 32% of those buying annuities do so to have a guaranteed income stream in retirement. 25% do so to provide protection against their assets losing value. According to the same study, 80% of prospective retirees are interested in annuities, while 82% of recent annuity buyers said they would recommend the product to a friend or family member. 

Finsum: Annuity sales are booming due to high rates and an uncertain economic outlook. With a wave of retirees coming, they will play an important role in plugging the gap left by the exodus of pensions.

John Olsen, the founder and president of Olsen Annuity Education and the author of ‘The Advisor’s Guide to Annuities’ recently spoke with ThinkAdvisor to share some insights on how advisors can sell more annuities. 

His advice is somewhat counterintuitive. He believes the ‘secret to secret to selling annuities is to give up on trying to sell annuities.’ This is because an advisor must always think about a client’s financial plan and not about potential product solutions. Instead, advisors should consider all financial products, including annuities, like tools to accomplish a job rather than the goal.

Therefore, an advisor’s task is to gain a complete understanding of your clients which includes their financial situation, personality, risk tolerance, lifestyle factors, health considerations, etc., to determine what ‘tool’ will be the most effective. He also believes that most of an advisors’ job is about understanding their clients’ emotions rather than quantitative factors.

Most financial plans fail because advisors don’t understand that emotions are ultimately what drive decision-making. And, a plan that doesn’t take into account these ‘soft’ factors is bound to fail as most decision-making is ultimately driven by emotions. 

Finsum: John Olsen, the founder of Olsen Annuity Education and one of the top annuity salesman in past years, shares some tips on selling annuities.