February 11, 2023 | Short-Term Rentals, Young Investors, Super Bowl Betting and When to File your Taxes

Short-Term Rentals
We've talked a lot about the affordability problems when buying a new home, but one area we haven't discussed as much is the real estate investor. The short-term rental craze I believe created new investors who thought it would be easy to make money in real estate. Looking at the numbers, in 2021 investors made up 24% of single-family homes and in the first half of 2022 that number was still around 22%. This compares with a range of 15-16% annually going back to 2012. Unfortunately, things have started to change in the short-term rental market. According to the Wall Street Journal, one investor in Encinitas was able to rent her 2-bedroom condo for $1,000 per night on a holiday weekend, but she has had to drop her rates to $275 per night due to waning demand. The problem is not the demand, but it comes from the oversupply in the market. In fact, nights stayed were up 21.3% in the month of October when compared to last year, but listings surged 23.3% during the same time frame with 66,000 new rental properties listed in the month of October alone. With rising interest rates and lower rental rates, it becomes a whole lot harder to justify an investment in these properties and some prior investors could become at risk of not being able to keep up with the cash flow required to maintain the house. I believe this will lead to less demand in the housing market and a potential source of supply if investors need to sell underperforming properties. These factors could help bring down home prices even more.

Young Investors
Young investors across the nation who experienced big losses in investing are now pulling away from investing in stocks. Goldman Sachs estimates households will pull as much as $100 billion in 2023 from the stock market. This will hurt companies like Robinhood who encouraged young traders to do a lot of trading. Back in March 2021 Robinhood had as many as 4 million trades per day, that has now fallen to about 1.2 million trades per day. I personally think this is a good thing, many young investors just thought they could buy anything, and it would go up. Then they started using leverage and options which magnify the risk and that ultimately cost them even more. I have said for years if you’re averaging around 10% on your money over a 7-to-10-year period you’re doing pretty good. Unfortunately, some younger investors laughed at that and now have nothing left. And worse than that, they won’t come back to investing for many years missing out on some good growth over the years to come. Investing takes a lot of work and it’s not something that can be done quickly by trading stocks. There are very few people who can invest over the long term as their impatience and lack of discipline costs them good results.

Super Bowl Betting
America is excited about Super Bowl betting this year! A record 50.4 million Americans are expected to wager bets on the big game this Sunday. This a massive 61% increase from last year's record of 31 million Americans that said they would place a bet. In terms of the dollar amount this year it is anticipated there will be $16 B worth of bets on the game, which is more than double last year's amount of $7.6 B. From the financial standpoint, I must say this is a positive for the economy as consumers clearly have enough confidence and comfort in their financial situation to place bets. Personally, I won't be partaking in any bets this year. One thing that will be missing from this year's Super Bowl is those crypto commercials, especially from FTX. As for my pick, I'm going with the Eagles!

Eurozone
Approximately 6 to 9 months ago it was thought that the Eurozone was going to have an economic downturn that would destroy the region. That was mostly based on the fact that Russia had invaded Ukraine. In a surprise turn around, the Eurozone experienced economic growth in 2022 of 3.5%. That’s not the only surprise. It also surpassed the economic growth of the United States and China.

Unemployment Rate
Last week we saw the US unemployment rate drop to 3.4%, a low not seen since 1969. Keep in mind that is the average across the country so there are states that are below the 3.4%. The state of Utah has the lowest unemployment in the nation, coming in at 2.2%. You may be asking what state has the highest unemployment in the nation? That honor would go to the state of Nevada with an unemployment rate of 5.2%.

AI & Home Prices
There is a lot of buzz around ChatGPT and Bard from Google. I'd be very careful falling into the hype around this AI trade. Just a couple of thoughts here for potential risks. At this time the chatbot can contain factual inaccuracies, one that was pointed out was inventing fictious names or books that don't exist. With all the concern around misinformation that was spread on social media, how quickly will lawmakers need to step in and regulate this AI. Also, there are potential cases that could be extremely harmful to society liking hackers using it to write malicious code or students using it to do their homework. I do see there are some potential benefits here, but I do believe we should be extremely careful with this technology, and it could be years away before it can be trusted. While there are some exciting trends we will miss as value investors, I never like to fall for the hype and get burned. Some examples of this in the past include 3-D printing, pot stocks, and blockchain.

Auto Insurance
I was listening to a conference call from one of the insurance companies that we hold in the portfolio. Their earnings were down mostly from bad returns on the auto insurance side. They stated two reasons. First, increasing used car costs which by the way are coming down and will help the insurance company. Second, were higher settlement claims. In 2022 settlement claims in the United States were over $62 billion. This ultimately is a cost that is passed on to consumers. I have talked about this before with some overzealous attorneys increasing settlement costs. Don’t get me wrong, there are some good attorneys out there, but there are some that are very greedy. What this does as I’ve been saying all along, and this was also stated from the insurance company, is they now must raise insurance premiums. The company also pointed out that they will be pulling out of five states. This is where the consumer loses because they must pay higher premiums for excess settlements from those bad attorneys and there’s less competition in those five states and auto premiums will probably be increasing in those states. More competition means lower prices, less competition, higher prices.

Movie Theaters Post Covid
Movie theaters have had a hard time since Covid returning to the pre-pandemic days when they had profits. AMC has come out with what they call Sightline for shows that start after 4 PM. You will now have assigned seats in the movie theater and pay more for prime seats which are in the middle of the theater. If you want to sit down in front and break your neck that will save you some money. I guess the days of standing in line and rushing to be the first in the movie theater to get the best seats are over. I don’t think this will do much to improve the stock price which currently trades around $5/share. If you remember, this is one of those meme stocks and back in June 2021, the stock traded as high as $62/share.

Daycare
We continue to talk about the strong job market and how there are 11 million jobs that remain open. One obstacle for potential employees, specifically moms, has been daycare. There are currently about 58,000 fewer daycare workers in the US compared to February 2020. The cost of daycare for infants has also skyrocketed ranging anywhere from $8,000/year to as high $17,000/year in major metro areas. The cost may have to go higher because the average daycare employee earns about $19.74/hour. They just can’t compete with the national average of private sector workers earning around $32.93/hour. What is starting to happen is one of the spouses may elect not to go to work and instead stay home with the kids

 

Harrison - "When to file your taxes"