February 22nd, 2025 | Senior Housing Market Boom, Young Investors, Weak Consumer Sentiments, Tax Traps with Rentals, Intel Corporation(INTC), Illumina Inc.(ILMN), The Kraft Heinz Company(KHC) & (HIMS)

Will the senior housing market boom continue going forward?

Investors may think with the population getting older that investing in senior housing could be a great investment going forward. They could be right as the oldest boomers turn 80 at the end of this year. What’s even more amazing is that the US population of 80-year-olds and older will hit 18.8 million in the next five years, that is a 27% increase from today. Senior housing hit a brick wall when the pandemic hit in 2020 and with the high infection rates, loss of life, and social distancing restrictions the demand fell drastically for senior housing. Both the high cost of labor and the shortage of it did not help either. It is estimated in five years they will need 560,000 new units to meet the expected demand. However, due to the high cost of development and the concern that about half of the seniors won’t be able to afford private senior housing costs, it’s estimated that only about 191,000 units will be added. The good news is more than 40% of seniors could afford senior housing on their income alone, which increased from 30% eight years ago. Unfortunately, those who can afford senior housing would rather not use it and prefer to age at home. Developers are willing to risk their capital on the higher end of the wealthiest seniors building luxury senior housing with fine dining, spas and movie theaters. One high end luxury senior housing project is expected to break ground this year at Rancho Santa Fe in San Diego with 172 units available. I think this sector for investing at this point is worth watching, but I don’t think I’d want to commit any capital at this time given there seem to be some substantial risks.

 

Are young investors taking too much risk?

A comparison of Gen Z, who were born between 1997 through 2012, versus baby boomers, who born from 1946 to 1964, show that Gen Z is taking on much more risk compared to when baby boomers were their age. In a study from the FINRA Investor Education Foundation, 36% of respondents between the ages of 18 to 34 had traded options. This compares to 8% of investors who were 55 years and older. Also revealed in the survey was younger and new investors were more likely to use margin when investing. This came at a surprisingly high rate with 23% of investors between the ages of 18 and 34 saying they had used margin when investing. This compares to just 3% of respondents age 55 and older. What was also interesting and informative is the lack of investing experience as 19% of investors with less than two years of investing experience stated they had used margin. However, just 6% of investors with experience of 10 years or more have used margin. I think many of these older investors are more cautious because they had learned their lesson. There’s no doubt that the younger investor today is taking on more risk than the more experienced investors. I believe this is for two reasons. First off, the access to trade and invest is so easy and it can be done on the phone in your hand at essentially any point in time. Compare that to 25-35 years ago when investors had to go through a broker to trade. The second reason I see is the Great Recession in 2008 was 17 years ago and the young investors today were only 5 to 15 years old and had no interest or care about the economy and the crash of the stock market. Investing successfully long-term involves many years of experience and research and unfortunately, I believe the younger investors will learn by experience that the risk they are taking today will not end well.

 

Weak consumer sentiment brings down stocks

Stocks fell on Friday after the headline consumer sentiment index came in at 64.7, which was down 9.8% from January and below the estimate for 67.8. This reading was also down 15.9% compared to this time last year. I was surprised to see the one-year expectation for inflation came in at 4.3%, which was the highest level since November 2023. The five-year outlook increased substantially to 3.5%, which would be the highest reading since April 1995. It was not a major surprise to see sentiment fall for Democrats and stay unchanged for Republicans, but it did fall for Independents. While I think it is important to look at various economic data, I wouldn’t say this survey is overly troubling. This survey comes from the University of Michigan and when I was researching how many people it encompasses, I found it includes at least 600 households and is conducted by phone each month. It is designed to be representative of all US households, excluding Alaska and Hawaii, but with such a small data set compared to total US households as of 2023 at 131.43 million, I must say I question how indicative of all US households it truly is. As I said, I don’t want to completely disregard this data point, but given the limited insight I would not be overly concerned. I do believe this shows how fickle the market is at this point and even an inkling of bad news could send stocks lower given the high valuations.  

 

Beware the tax trap of renting out your house

If you’re moving out of your current house, you may be considering converting your home into a rental property.  This may seem like an attractive way to generate additional income. However, before making this move, it’s important to be aware of the tax implications, especially the potential loss of the Section 121 capital gain exclusion.  When you sell a primary residence, you may exclude up to $250,000, or $500,000 for married couples, of capital gains if you owned and used the home as your primary residence for at least two out of the previous five years.  When renting out your home, you still own it, but it is no longer considered your primary residence.  If you decide to sell the property more than three years after beginning to rent it, it no longer qualifies for any capital gain exclusion, resulting in a potentially large tax bill, exceeding $185,000 in some cases.  Not only that, but while renting a property you claim depreciation each year.  This reduces your taxable income while owning a rental, but that accumulated depreciation must be “recaptured”, which means taxed, at ordinary income rates when the property is sold.  This recaptured depreciation tax also cannot be offset by the Section 121 exclusion regardless of the timing of the sale. If you want to rent out your home, make sure you either sell it before losing the exclusion, or be committed to being a real estate investor for the long haul.

 

Companies Discussed: Intel Corporation(INTC), Illumina Inc.(ILMN), The Kraft Heinz Company(KHC) & Him & Hers Health, Inc. (HIMS)