Please ensure Javascript is enabled for purposes of website accessibility

Tag: economy

The Pros and Cons of Investing in Real Estate During a Recession

Regardless of your finances, investing in real estate during a recession might be a hard concept to wrap your head around, and understandably so. Although a potential 2023 recession won’t be like the Great Recession of 2008, which was directly related to the housing market, people and businesses alike are tightening belts in anticipation of financial hardship on an unknown scale.

READ: What Does a Recession Mean for Your Finances? 

A recession is broadly defined as an economic contraction or two consecutive quarters of GDP decline. A potential 2023 recession would impact various individuals and industries, especially the real estate industry.

Home prices rose in 2021 and stayed high in 2022 as more people sought new homes further away from city centers. Now, rising interest rates and daily layoffs will have some bearing on real estate in the coming months.

This doesn’t mean all hope is lost if you want to invest in real estate this year. Real estate buyers in good financial standing will still have options to invest in property. Here are some of the pros and cons of investing in real estate during uncertain economic times.

Pros of Investing in Real Estate During a Recession

1. Lower purchase prices for home buyers

Even the rumors of an economic downturn can be enough to drive down the demand for residential real estate. This decline in demand will likely lead to a decline in real estate prices, which spiked in 2022.

Home prices are not as threatened as they were in 2008, but interested and prepared buyers can take advantage of a likely dip in listing prices in hot real estate markets like Colorado’s.

2. Diversified assets

The stock market is one of the most visible ways a recession manifests for consumers. People who have money invested in the market may benefit from investing in real estate and other alternative assets while stock prices are on the decline.

3. Reduced competition

Despite the pros, investing in real estate isn’t part of most people’s recession finance strategies. Recessions often lead consumers to reduce their discretionary spending and instead shore up cash and emergency funds. 

The result could be the opposite of the buying frenzy many markets have seen since the start of the pandemic. With less competition for real estate, you won’t have to take as many risks to win any potential bidding wars.

Cons of Investing in Real Estate During a Recession

Higher interest rates

Many recession fears began when the Federal Reserve quickly drove up interest rates in 2022 to ease the effects of inflation. These high interest rates are still in place, making it more expensive for potential buyers to borrow money. Lenders are also likely to be more selective when evaluating candidates for a mortgage, prioritizing higher credit scores and increased down payment requirements.

READ: Higher Interest Rates — What Does It Mean for Consumers, Bond Investors and the Stock Market?

Increased personal financial risk

Recessions are unpredictable, but they often trigger an increase in unemployment as businesses let go of employees to cut costs. Before making a real estate purchase, make sure you have enough cash flow and stable income sources. If you were to lose your job or face any other short-term financial hardships, it could jeopardize your ability to pay for essentials. 

Real estate is still a costly purchase when you consider the associated closing costs and broker fees. Find ways to reduce some of these costs, such as working with a discount real estate agent or negotiating the total price.

Fewer people selling homes

If you’re planning to sell a property you already own in favor of a new one, a decline in listing prices could mean lower profits from the sale. Smaller profits will make it harder to buy a new, high-value investment property. 

Best types of real estate to invest in

If you have cash flow and income stability, a recession shouldn’t stop you from investing in Colorado real estate. Aside from a single-family home purchase, here are some alternative types of investments to consider.

READ: What Is the Difference Between Class A, B, C, and D Properties?

Rental Properties

A recession may slow down first-time home purchases, but people will still need housing. Purchasing a rental property provides another source of income for your household, whether it’s a short-term lease or a consistent vacation rental. Colorado in particular has become a desirable destination for remote workers who value the flexibility of short-term and vacation rentals, and an economic downturn might mean rental property owners are ready to sell.

As with any property investment, owning a rental property also means taking on landlord responsibilities and maintenance costs. Be sure to factor those in as you evaluate whether a rental property purchase is right for you.

Properties you can “flip”

For those with time, patience and the real estate knowledge to flip a house, banks and owners selling homes for cash provide an opportunity to turn a respectable profit on a real estate investment. But flipping a house isn’t as simple as reality television makes it seem. Ensure you have the cash on hand to make the purchase and cover any expenses incurred during the renovation.

If you’re not ready to take on the financial risk of a fixer-upper, try wholesaling to earn extra income from real estate during a recession. Wholesaling is a short-term strategy similar to flipping but that doesn’t require the wholesaler to purchase the property. Instead, wholesalers work as intermediaries to help eager sellers let go of their properties, accumulating capital in the process.

READ: How to Sell Your House in a Down Market — 6 Easy Tips

Real estate and REIT ETFs

Investors who want the financial benefits of real estate investing without the burdens of home or property ownership should consider real estate or REIT exchange-traded funds (ETFs). REIT ETFs add the diversity that real estate investment offers in a financial portfolio without the surprise costs of physically owning and managing a property. These ETFs are also often low-cost, an added benefit during a period of economic downturn.

Investing in real estate during a recession is still possible

A recession shouldn’t mean an end to your dreams of real estate ownership. Potential buyers with cash flow and strong credit can take advantage of the decrease in competition and listing prices. Real estate investment, like any investment, comes with risk. As a potential investor, it’s important to evaluate how much risk you are willing to tolerate in exchange for the addition to your portfolio.

 

Screen Shot 2021 12 28 At 113128 AmLuke Babich is the Co-Founder of Clever Real Estate, a real estate education platform committed to helping home buyers, sellers and investors make smarter financial decisions. Luke is a licensed real estate agent in the State of Missouri and his research and insights have been featured on BiggerPockets, Inman, the LA Times, and more. 

Polis Administration Announces: Cannabis Business Loan Program

Earlier this week, Gov. Polis and the Cannabis Business Office (CBO) within the Colorado Office of Economic Development & International Trade (OEDIT) announced the Cannabis Business Loan Program for social equity licensed cannabis businesses in Colorado. The CBO has partnered with mission-based lender NuProject to provide financing that is not otherwise available to cannabis businesses through traditional lenders.

“This landmark loan program will create and retain 239 good-paying jobs and promote equity in the cannabis industry by providing growing businesses access to funding,” Gov. Polis said. “I am committed to saving small businesses money and ensuring our state remains a great place to start and run a business in every industry. Thank you to NuProject for partnering with Colorado on this exciting milestone and working to support innovation in Colorado’s cannabis industry.”

READ: Native Roots Guest Commentary — Inclusivity in the Cannabis Industry

Traditional funding sources designated for small businesses often preclude the cannabis industry, causing cannabis business owners to experience increased difficulty accessing capital as they grow their businesses. To help fill this funding gap, the Cannabis Business Loan Program will provide loans between $50,000 and $150,000 for renovations or expansions, the purchase of equipment, real estate or use as working capital. Loans will have favorable and manageable terms based on borrower needs.

NuProject, which has a proven history of lending to cannabis businesses, specializes in mission-based and character-based lending. These practices help business owners obtain loans even if they have limited cash flow, lack the traditional assets necessary to secure financing or have experienced other challenges obtaining financing. NuProject also provides educational assistance and mentorship to assist business owners in preparing for loan applications.

“NuProject is committed to redirecting the typical flow of financing so that small business owners in the cannabis industry, especially those who’ve been historically excluded from access to capital, can access the resources they need to grow their businesses. When cannabis business owners have access to financial support and the know-how to put that funding to work, they can run better businesses and have the opportunity to build generational wealth through the cannabis industry,” said Jeannette Ward Horton, NuProject CEO.

NuProject and the CBO will manage the Cannabis Business Loan Program as a revolving loan fund. As loans are repaid, the interest generated will be reinvested into the fund to support future borrowers. The initial $1 million investment is expected to lend $2.9 million over the next 10 years, creating and retaining important jobs in Colorado.

“Colorado’s Cannabis Business Loan Program is at the forefront of the cannabis industry, creating a new model to help these small business owners access the resources they need to grow and thrive. Together with NuProject, the Cannabis Business Office is making it possible for cannabis businesses to grow, create new jobs and contribute to a Colorado economy that works for everyone,” said Eve Liberman, OEDIT Executive Director.

The Cannabis Business Loan Program announced this week is the third CBO funding source available for Colorado’s social equity licensed cannabis businesses. The Cannabis Business Grant, launched in 2021, provides $25,000 Foundational Grants to help early stage cannabis businesses with their startup needs and $50,000 Growth Grants to support existing cannabis businesses as they grow or refine their operations. The Cannabis Business Loan Program is designed to support larger, more established cannabis businesses as they continue to grow.

Recipients of Cannabis Business loans are required to be social equity licensed cannabis businesses that have been awarded a regulated business license from the Marijuana Enforcement Division. To be notified of future rounds of grant funding or developments related to the loan program, subscribe to the Cannabis Business Office newsletter.

 

About NuProject

NuProject works to build generational wealth and opportunity via the legal cannabis industry for the communities most harmed by cannabis criminalization. To that end, NuProject provides diverse-owned cannabis businesses with funding, coaching, and connections. Since founding in 2018, NuProject has delivered more than 1900 hours of coaching and funded $2.3M in loans and grants to historically underserved entrepreneurs. 100% of NuProject’s loans have been funded to socially and economically disadvantaged-owned businesses across five U.S. states and Canada. Culturally responsive and mission-driven, NuProject’s lending approach was designed for equitable funding. Visit www.nuproject.org for more information.

About Colorado Office of Economic Development and International Trade

The Colorado Office of Economic Development and International Trade (OEDIT) works with partners to create a positive business climate that encourages dynamic economic development and sustainable job growth. Under the leadership of Governor Jared Polis, we strive to advance the State’s economy through financial and technical assistance that fosters local and regional economic development activities throughout Colorado. OEDIT offers a host of programs and services tailored to support business development at every level including business retention services, business relocation services, and business funding and incentives. Our office includes the Global Business Development division; Colorado Tourism Office; Colorado Outdoor Recreation Industry Office; Colorado Creative Industries; Business Financing & Incentives division; the Colorado Small Business Development Network; Cannabis Business Office; Colorado Office of Film, TV & Media; the Minority Business Office; Employee Ownership Office; and Rural Opportunity Office. Learn more at oedit.colorado.gov.

Exploring Opportunities in the Global Stock Market: Unlocking Profit Potential in 2023

There is an old adage on Wall Street: “Sell in May and go away.” In theory, on a calendar basis, the worst months to be invested in the stock market are from May to November.

Whether this is true or not is anybody’s guess, but last year it certainly was. Today, investors must decide how best to position their portfolios for the rest of 2023. Should you buy dividend-paying stocks, longer-duration bonds to lock in yields, or invest money overseas? Before you can answer any of these important questions, consider what the Federal Reserve might do with short-term interest rates for the rest of the year to combat inflation, and how the debt ceiling gets resolved. Both issues will impact the direction of the markets and, quite possibly, your investments.

READ: 4 Key Asset Allocation Strategies for 2023

Interest rates & inflation

Since the fall of 2021, the Federal Reserve has struggled with the issue of inflation. At first, they considered it transitory, but last spring inflation became the real deal. Consequently, the Fed had to aggressively raise interest rates nine times. Fortunately, inflation has begun to come down, from over 9% to 5%, but the Fed’s inflation target is 2%. This means the Fed still has some more work to do. There is a chance with the latest regional banking crisis in March, small businesses and individuals will find it harder to get loans from their local banks, which, in turn, could slow down the economy. However, the Fed is poised to raise interest rates at least one more time on May 3. After that, it will be data-dependent, with the unemployment and consumer price index numbers being scrutinized carefully to get a read on inflation.

Debt ceiling

Looming in the not-too-distant future, the debt ceiling issue could turn into a full-blown crisis if the Republicans in the House of Representatives and President Biden do not raise the debt ceiling before the government is no longer able to pay its bills.

Treasury Secretary Janet Yellen has warned Congress that time is running out — if the April tax receipts are not high enough, the due date could be as soon as early June instead of August. Republicans would like to extract spending cuts from the Democrats/President Biden in exchange for passing a debt ceiling resolution. At this point in time, neither side wants to compromise. If they do not find common ground, the country could face financial Armageddon by defaulting on its debt. The consequences would be catastrophic. We came close to a debt default in 2011. Because of that threat, America’s debt rating was downgraded by Standard & Poor’s from AAA to AA+ for the first time. A default could make borrowing costs increase, cause a massive sell-off in the stock market, or bring on a recession.

READ: What Does a Recession Mean for Your Finances?

Investment ideas

Despite higher interest rates, inflation, and the debt ceiling issue, the stock market is the greatest discounting mechanism ever created. By the time all the bad news comes to fruition, investors are already looking ahead and markets tend to climb a proverbial wall of worry and go higher. Knowing this, where are logical places to invest money for the rest of 2023?

Dividend-paying stocks

When markets are volatile and the headlines are scary, a great place to ride out the storm is with a diversified mix of blue-chip dividend-paying stocks. Invest in companies that can increase their dividends regardless of what economic cycle we are in. Today, stocks that provide meaningful and growing dividends are in the consumer non-durable, industrial, energy, and utility sectors. Another positive is that these stocks have been underperforming year-to-date versus the largest technology stocks and should be able to weather a recession because their products tend to be essential.

Bonds and money market funds

After the worst bond market in decades and much higher interest rates, now is a decent time to buy bonds or money market funds. In the bond market, you may want to consider a barbell approach. You do this with bond ladders, where you buy both short-term bonds and long-term bonds. If you do this, you could benefit if interest rates rise because you will have new money from your shorter-term maturities to reinvest annually. If interest rates drop, you will get appreciation on your longer-term bonds. If you want to have more liquidity and less interest rate risk, you can keep your money in a brokerage money market fund yielding almost 5%. 

International stock market

For the first time in a decade, the international stock market is outperforming U.S. stocks. This makes sense for a myriad of reasons.

First, the dollar has quite possibly peaked; when this happens, international companies make more money by selling their products to consumers in the United States. Second, China has recently reopened for business after three years of tight COVID-19 restrictions. Third, international stocks are inherently cheaper. Today they trade at significantly lower price earnings multiples. And finally, Americans typically have a home investment bias and may be under-allocated overseas. If international stocks continue to outperform, money could move out of the U.S. to international markets to find higher returns.

The bottom line

It has not been easy being an investor since the spring of 2020 and the pandemic, but despite all the volatility and negative headlines, we believe you have been better off staying invested through all the ups and downs. Moreover, for the first time since 2008, if you want to play it safe, you can own short-term bonds and brokerage money market funds. They all yield close to 5%. For longer-term investors, collecting dividends from great companies here and abroad is not a bad way to go either. 

Thumbnail Fred Taylor HeadshotFrederick Taylor is a Partner, Managing Director at Beacon Pointe Advisors, LLC. The information contained in this article is for general informational purposes only. Opinions referenced are as of the publication date and may be modified due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed. Past performance is not a guarantee of future results. Beacon Pointe has exercised all reasonable professional care in preparing this information. The information has been obtained from sources we believe to be reliable; however, Beacon Pointe has not independently verified or attested to the accuracy or authenticity of the information. The discussions, outlook, and viewpoints featured are not intended to be investment advice and do not consider specific investment objectives or risk tolerance you may have. All investments involve risks, including the loss of principal. Consult your financial professional for guidance specific to your circumstances. 

Silicon Valley Bank Failure: Could Your Bank be Next?

If you haven’t been following the second-largest bank failure in history, you may want to start. To recap, Silicon Valley Bank (SVB) located in California was the 16th largest bank in the United States, with $209 billion in assets. Just a few weeks ago, it failed. Shockingly, the Silicon Valley Bank failure happened in just 48 hours. As it turned out, this was simply an old-fashioned 1930’s style run on the bank. Why is this important to you? Simply put, fear causes contagion, and if SVB could fail that fast, your bank might be in trouble, too.

Certainly, nobody wants another Great Financial Crisis like we had in 2008-2009. However, there are major differences between these two crises. The SVB problem wasn’t a credit crisis, as in subprime mortgages. It was a liquidity crisis, as in depositors took their money out so quickly that SVB management could not raise capital fast enough by selling more shares in the bank or their fixed-income assets. At the end of the day, the Silicon Valley Bank failure happened because SVB didn’t manage its interest rate risk. This caused what is known as a Black Swan event, defined by the Corporate Finance Institute as “an extremely negative event or occurrence that is impossibly difficult to predict.”

Silicon Valley Bank Failure: The Primary Cause

During the pandemic, there was just too much money going into banks at a time when the economy was shut down and nobody needed loans. Instead of this cash earning nothing, SVB bought longer-dated (duration) treasury bonds and mortgage-backed securities with very low yields and, as it turned out, at very high prices.

Last year, when the Federal Reserve raised short-term interest rates rapidly to almost 5%, the older bonds that SVB purchased back in 2020 were immediately underwater and showing massive losses. This was a real problem because it made their balance sheet look weaker and this alerted the credit agencies. SVB wasn’t the only bank to do this. This unrealized loss on the balance sheet for SVB shouldn’t have been a problem under normal circumstances. All SVB had to do was hold these bonds to maturity and they would get their money back and not have to take any losses. However, when depositors wanted their money back so quickly, SVB had no choice but to sell some of these bonds at a loss to raise the cash.

The other issue SVB faced was over 90% of the deposits in the bank were uninsured. The Federal Deposit Insurance Corporation (“FDIC”) covers up to $250,000 per depositor, but in this instance, most of the customers at SVB were start-up technology companies with much more cash in the bank than was FDIC insured. For example, the digital media player company ROKU had almost $500 million of cash deposited in SVB. As rumors spread that a Silicon Valley Bank failure was increasingly evident, venture capital firms urged their technology clients on social media to move their deposits out of SVB as soon as possible. When they did that, SVB ran out of cash and had to close their doors.

Government Reaction

To stem the panic and a similar run on the smaller regional banks around the country, the Treasury Department, the Federal Reserve, and the FDIC guaranteed all the depositors in SVB would get their money back regardless of the amount. Another move the Fed made, according to Politico, was “the Fed also announced that it would offer cash loans of up to a year for any bank putting up safe collateral — an action that, in theory, would allow banks to handle deposit withdrawal of any amount. The goal: to reassure people that they don’t need to take their money out at all.”

Unlike 2008, shareholders in SVB lost their entire investment. As President Biden and Secretary of the Treasury Janet Yellen have made it perfectly clear, taxpayers will not bail out SVB shareholders. The FDIC was covering the uninsured depositors in SVB with a dedicated fund to be used for situations such as these. Fees paid by banks cover this. Another idea under consideration by the FDIC is they would guarantee all loans, regardless of the amount, for the next two years. If they do this, then depositors wouldn’t have to move their money to one of the ‘too big to fail’ banks: JP Morgan, Bank of America, Citicorp, or Wells Fargo. Today it isn’t clear whether deposits above $250,000 would be covered in the event of another bank default, which is probably why bank stocks keep going down.

The Fed

It wasn’t too long ago that some economists were thinking the Federal Reserve would raise interest rates 50 basis points at their next meeting. Now odds favor only 25 basis point moves going forward. This is important because the Fed’s inflation fight might take a back seat to resolving the banking crisis first. There is also the possibility this latest crisis throws the U.S. economy into a recession which would help bring down inflation on its own. Perhaps that could be the silver lining to all this; however, no one could have predicted that just a few weeks ago.

READ: Finding the Silver Lining Amidst Rising Interest and Inflation Rates

Foreign Problems 

As if the Silicon Valley Bank failure, alongside similar failures of U.S. banks including Signature and Silvergate, weren’t enough this month, Europe has had its problems, too. Credit Suisse Bank in Switzerland has just been rescued by UBS Bank. Credit Suisse has been in trouble for years now, but the banking issues in the United States triggered worries about the solvency of this Swiss banking giant. At the 11th hour, UBS Bank took over Credit Suisse and hopefully stopped other European banks from going under.

What Is Next

While it may be too early to know if the rapid responses by the Fed, the Treasury, the FDIC, and UBS will be successful in calming markets here and abroad, at some point, fear will turn into greed and there should be some bargains in the banking sector. If investors can find value in battered regional bank shares, the hedge funds who have made a fortune shorting these banks will have to cover to realize any profits. If they start to do that, these stocks should recover. Only time will tell. The other side effect emanating from the demise of SVB will most likely be tighter government regulations of smaller banks with regard to interest rate risk on their balance sheets. Maybe next time banks won’t be so quick to buy treasury bonds and mortgage-backed securities thinking they were risk-free.


Thumbnail Fred Taylor HeadshotFred Taylor is a Partner, Managing Director at Beacon Pointe Advisors, LLC. The information contained in this article is for general informational purposes only. Opinions referenced are as of the publication date and may be modified due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed. Past performance is not a guarantee of future results. Beacon Pointe has exercised all reasonable professional care in preparing this information. The information has been obtained from sources we believe to be reliable; however, Beacon Pointe has not independently verified or attested to the accuracy or authenticity of the information. The discussions, outlook, and viewpoints featured are not intended to be investment advice and do not consider specific investment objectives or risk tolerance you may have. All investments involve risks, including the loss of principal. Consult your financial professional for guidance specific to your circumstances. 

OPINION: Higher Costs, Higher Crime, and More Red Tape — How Government Interference May Be Hurting Coloradans’ Wallets

Coloradans are feeling the consequences of recent elections: higher costs, higher crime, more red tape and new regulations on just about everything we do. The inflation in Colorado is getting out of hand.

When voters turned out in November, they were faced with 11 statewide ballot measures, more than 150 state and local races, plus local ballot initiatives. Voters also faced a real challenge — finding reasonable candidates from either party who support economic empowerment for all Coloradans, or candidates willing to sacrifice Colorado’s traditional political pragmatism on the altar of ideological extremes.

Colorado by and large had a ‘blue wave’. Heading into election night in Colorado, experts and officials had predicted that the Democrats’ majority in both the state House and Senate would narrow, especially with poll after poll showing staggering inflation in Colorado and soaring cost of living as top concerns in the lead up to the midterms. Instead, Democrats narrowly won some closely watched — and heavily financed — legislative races across the state, padding majorities in both state chambers and easily winning all statewide offices.

READ: The Colorado General Assembly Is Open for Business — What Should Employers Expect in the 2023 Legislative Session?

Most winning candidates promised they would reduce costs and increase affordability. “We will save Coloradans money,” they touted. They would restore our cities, protect our families and rebuild our economy post-Covid. But just look at the major bills that have come so far and ask yourself if any of them actually restore communities or reduce the price of anything:

  • Rent control (which has made housing scarcer and more expensive everywhere it’s been tried) would have been laughed out of the Capitol a year ago. It’s now passed the State House.
  • The flexible scheduling employees requested post-Covid was nearly made illegal under the guise of creating a “Fair Work Week.”
  • The healthcare system that was so resilient through Covid is now the target of State control and unfair competition – the state’s more expensive plans are algorithmically promoted ahead of lower-cost private plans (that doesn’t save money), while elsewhere the state’s attempting to prohibit funding for outpatient hospital care. It doesn’t save people money when they have to drive to Denver for care because their rural hospital was shuttered by state rules.
  • Clean, affordable natural gas is vilified and called unreliable (which is demonstrably false) — and they are, in fact, coming for your stoves (and boilers, and chillers, and light bulbs and lawnmowers – no joke). Rushing through mandated change doesn’t save people money.
  • Hundreds of millions of dollars are dedicated to homelessness and substance misuse, and the problems are getting worse and more visible everywhere.
  • Organized efforts to eliminate or minimize responsibility for committing what recently were considered serious crimes.

Controversial bills that significantly and radically change Colorado’s well-diversified and well-balanced economy are literally flying in from the coasts, written by national political ideologues and interest groups, and passing on party-line votes. And none of them are making anything less expensive.

READ: How the Inflation Reduction Act May Impact Your Business

As we reach the midpoint of the 2023 legislative session, the Denver Metro Chamber is calling on legislators and the Governor to slow down and more carefully consider whether they’re actually introducing legislation that “saves Coloradans money.” Are you making it easier or harder to live and work here? Are your economic plans coming from the small, medium and large Colorado businesses who are local Chamber of Commerce members, or are they coming from national interest groups who introduce the exact same no-compromise bills nationwide hoping to get a foothold anywhere they can?

We would assess that our legislators are too frequently acting as activists instead of pragmatists. They are still politicking and not really governing. Nuanced and precise debate on complicated and complex issues is degrading into pure party-line politics and poll-tested talking points. It’s kind of astonishing to see just how expensive it can be when the government tries to ‘save us money.’

Thus far, legislators are making Colorado less competitive by interfering too much in markets. They are increasing costs while attempting to defy basic market principles. Housing prices, crime and substance misuse are still going up, public safety is still challenged, and new pathways for litigation and division are being created. The 120-day constitutional limit on their session, and veto threats from the Governor, seem to be the only things that will stop them. We don’t agree with the Governor on every issue, but the legislative majority would benefit from his private-sector business background and market knowledge.

Contrary to virtually every press release title, inflation in Colorado is increasing across the board. Our government seem unwilling to acknowledge that basic economic laws still apply at altitude. Efforts at the Capitol to legislate, regulate and litigate every issue under the sun is only making it less affordable to live in our state and increasingly difficult to operate a business.

Coloradans understand the importance of a thriving, healthy economy; that employers care about their employees and that employees want their companies to succeed. Just 10 months ago, Colorado added some 500 new laws to the books and countless new regulations on top — some are still to be written.  Before that ink is even dry, more than 400 new laws have been introduced this year already.

If you really want to save us money, give us all a chance to catch our breath and earn a little first. If there’s anything we can do to slow down inflation in Colorado, now is the time to do it.

 

J J Ament Headshot 3J. J. Ament is the president and CEO of the Denver Metro Chamber of Commerce.

The Economics of Housing Inflation in Colorado: Exploring the Supply and Demand Imbalance

The lack of affordable housing in Colorado for middle and lower-income households is a lesson in economics. Unlike the healthcare market, which is muddled with third-party payors, the housing market is straightforward supply and demand analysis. Demand has been far outpacing the supply of housing for the last decade in both the ownership and rental markets, driving up housing inflation across Colorado. 

READ: Evergreen Real Estate Group Leads Affordable Housing Development in Globeville

Housing costs have been rising dramatically throughout the state and nation. Since the pandemic, housing has been the greatest driver to our high inflation rates. Even slow- and no-growth areas like the Lower Arkansas River Valley east of Pueblo have experienced dramatic housing inflation even though job growth is minimal in the area. Moderate income Front Range retirees and workers are relocating to the area due to affordability, and investors have followed suit thinking cheap housing assets within a couple of hours of urban areas are a good long-term investment. 

Housing is a basic need where demand is driven by household growth, which is influenced by birth and death rates and urban concentration of economic opportunity pushing migration. In recent decades, relative affluence across much of America has also resulted in housing as an investment through second homes and the acquisition of investment properties. Even the tourism market is increasing housing demand through short-term rentals. Global capital markets, perceiving better potential returns from housing investments, are funneling dollars into the U. S. from around the world. This started after the 2001 dot-com bust and has continued except for the years surrounding The Great Recession. The low-interest rate environment since 2009 added massive fuel to the fire until 2022.

For prices to be increasing so dramatically, demand growth must be far exceeding supply growth – at least supply that meets societal expectations of “suitable housing.” As a result, market adaptation is occurring. More rental households are paying at least 50% of their income in rent. Households are doubling up. Multi-generational households are increasing. Average new unit sizes are decreasing. There is some localized pushback on short-term rentals. RV and van alternative lifestyles are becoming much more prevalent. Innovators are manufacturing tiny homes, pre-fab factories, and even 3-D printed homes.  These substitutes for traditional housing attempt to remain a step ahead of homelessness. 

Our governments, at every level, effectively limit housing supply that could be suitable alternatives to the above market adaptations. They constrain the housing supply growth through adoption of more stringent building codes, planning and zoning limitations, and cumbersome land entitlement processes. A study we did for the Colorado Springs Home Builders Association a few years back found local government requirements equate to 26% of the total price of new housing. Even when local land use policies support new and more affordable housing types being developed, democratic processes are heavily influenced by people who advocate for greater housing opportunity as long as it’s “not in my back yard.” The result is discrimination based on income at the very least. 

READ: New Approaches to Affordable Housing in Resort Communities

It is not just governments and NIMBYs that greatly constrain the housing supply. Great hindrances to the supply side come from insurance companies, fire professionals and environmental groups interested in protecting property, public safety and long-term sustainability, respectively.

Culturally and politically constraining our ability to increase the supply of traditional housing results in housing-costs indices rising much more rapidly than incomes over the last half-century. No wonder the corporate and investment sectors see nothing but long-term opportunity in housing and are funneling money into the market. 

The federal government’s effort to counter the supply constraints through low-income tax credits or direct investment through local housing authorities is absurd. Building enough housing to standard housing codes and socially acceptable sizes probably cannot be done without dramatic cutbacks to Medicare and Medicaid – assuming neighborhoods did not organize to oppose workforce or affordable housing. 

We need to re-engineer our societal constraints on the housing supply. Re-engineering requires radical redesign with targeted cost savings of at least 30%. Throw out the legacy models that hinder us and start over, using new technologies and emerging realities like climate change. Re-engineer building codes, public inspection processes, and land entitlement rules and regulations. There should be six objectives:

  1. Mitigate fire risks where fires are most likely to erupt.
  2. Pursue density.
  3. Allow development generally consistent with current zoning, and reallocate planned land uses to minimize NIMBYism
  4. Encourage existing small property owners to participate through the addition of mother-in-law apartments and accessory dwelling units.
  5. Keep residential areas residential as opposed to commercial tourist zones; 6) embrace new housing designs, materials and production approaches. 

Unfortunately, re-engineering requires we quit being our own worst enemy – something much easier said than done. It’s time to fight housing inflation in Colorado, once and for all.

 

Tom BinningsTom Binnings is a senior partner at Summit Economics in Colorado Springs. He has more than 30 years of experience in project management, economic and market research, real estate development, business analytics and strategic planning. He can be reached at (719) 471-0000 or [email protected].

Open for Business — Four Priorities for Maintaining Colorado’s Economic Competitiveness

It’s easy to forget that Colorado businesses aren’t buildings, they are real people — employees, business owners, suppliers, investors — that make up the foundation of Colorado’s economic success. It’s also easy to forget that the economic concerns affecting individuals and families, like inflation, high interest rates, supply chain issues and more, also impact business. Additionally, recent surveys have reported that business owners share some apprehensive feelings toward Colorado’s economic competitiveness.

The most recent Leeds Business Confidence Index from the University of Colorado reported that business leaders show more pessimism today than this time last year when it comes to the state and national economies.

READ: Our Economy in 2023 — What to Expect

When asking large employers in Colorado for their priorities that state leaders should consider for building a stronger economic outlook, these are the items that rose to the top:  

Prioritize a competitive tax and regulatory agenda.

Colorado’s economy has been among the strongest in the country and consistently ranks high in comparison to other states. However, new regulations, taxes and fees at the state and local levels have contributed to a higher cost of doing business in Colorado. 

READ: How Will FTC’s Proposed Ban on Non-Compete Clauses Impact Colorado Law?

Public policy has a profound impact on these costs. One recent example is the enacted Family and Medical Leave Insurance Program (FAMLI). On January 1, Colorado employees started seeing paycheck deductions for FAMLI and businesses are also footing the cost. While the numbers may seem innocuous, adding yet another cost to employers will not go without effect. This payroll impact is one of many that increases the cost of doing business in Colorado and speeds up a costly trend that, if gone unchecked, could cause employers to find more affordable places of operating.

Modernize training pipelines and ensure a cohesive partnership between academia and business.

A trend currently being experienced across nearly all industries in Colorado is the number of businesses facing workforce shortages. For companies looking to retain talent and attract a strong workforce pipeline, this is an issue that needs to be addressed.

Building a “tomorrow-ready” workforce requires modernizing training pipelines, embracing technology and strengthening post-secondary education options to allow Coloradans to be trained to fill critical job openings. 

Partnerships between the private sector, traditional education systems and talent producers are critical to meeting the current and future talent demand and providing relevancy. If Colorado leaders want to create a strong future, they must continue to focus on building strong training pipelines. 

READ: 6 Ways to Find New Employees During the “Great Resignation”

Invest in future-forward infrastructure.

A future-forward infrastructure system is critical to unleashing Colorado’s long-term competitive potential. Colorado must focus on issues such as sustainability of our natural resources — including water quality and quantity, transportation mobility, aviation, energy, broadband and 5G access. These essential pieces of modern infrastructure are the backbone supporting a strong economy, business growth and quality of life.

Lead with purpose: Support communities and people in need

Many companies and nonprofit organizations that serve our Colorado communities take ongoing, meaningful action to support individuals in need and improve their quality of life. The shared passion that surrounds philanthropic giving, community engagement and a commitment to environmental and social responsibility has a profound impact on the lives of thousands of Coloradans. This work needs to continue.

Some of our biggest state challenges — affordability, community safety, health and wellbeing — can only be confronted when leaders from many sectors work together to find and implement solutions. 

READ: Maximize Your Charitable Giving Donations —Aligning With Your Budget and Passions

Colorado has a strong foundation for growth. We are a hub for countless industries, a home for world-class higher education and medical institutions and, most importantly, we share a community spirit grounded in growth and helping those in need. Looking ahead, we can secure our footing in a global economy by championing Colorado’s economic competitiveness through the priorities outlined here, and doing so will ensure our state remains a thriving place to live, work, play and innovate.

 

Debbie Brown is the President of the Colorado Business Roundtable.

Guest Column — Closing the Racial Wealth Gap With Education and Financial Planning

As a financial advisor, I have witnessed the profound and long-lasting generational impacts of the racial wealth gap in our society, which exists due to historical factors that continue to impact the wealth, earning potential and distribution of assets in our communities. According to the Bureau of Labor Statistics, the median weekly earnings in 2022 for Black Americans was $896 and Hispanic Americans was $837, compared to $1,101 for white Americans.

READ — Do Hispanics Bear the Brunt of the Energy Crisis?

Historical factors continue to impact today’s Black communities, and because wealth and overall livelihood are so closely linked, it is important to consider the unique financial planning needs this gap has created for Black individuals — and why building generational wealth is so important.

For too long, minorities have been left behind when it comes to creating wealth, often due to systemic barriers that make it harder to access the resources and opportunities required to build intergenerational wealth.  

To address this issue, we must prioritize and amplify effective strategies including education, financial literacy and access to financial planning to ensure that everyone has an equal chance to build wealth and create a better future.

Keys To Building Generational Wealth

Studies consistently show that education is strongly correlated with higher income and greater financial stability. For example, according to the Bureau of Labor Statistics, the median weekly earnings of someone with a bachelor’s degree are over 60% higher than the median earnings of someone with a high school diploma. In addition to higher wages, education also provides individuals with valuable skills, knowledge and networks that can help them navigate the complex world of finance and investment. 

Achieving financial equality requires that we invest in education at all levels. This includes providing adequate funding for schools and expanding access to higher education through scholarships, grants and other forms of financial support. Innovative programs that help students from disadvantaged backgrounds succeed in furthering their education and skill set also need support and funding to continue their important work. 

Like education, financial planning is foundational to creating generational wealth however, there is a lack of trust in financial institutions given the history of discriminatory practices that have targeted Black Americans. 

READ — The Importance of Filling Our Community Pipelines with a Financially Literate Workforce 

For instance, Black Americans have historically had less access to essential financial education and resources on important areas such as life insurance, banking, homeownership, building credit and financial coaching. However, it’s important to recognize that not all financial institutions are the same. 

While there is much to do to address the broader systemic issues, each day is an opportunity to bolster individual situations. It’s time to lean into new resources and build trust with financial experts who understand your unique needs and have experience working with Black Americans. This is a person-to-person relationship that requires open communication, transparency, and willingness to work and learn together to improve financial literacy and build wealth and economic security.

The racial wealth gap is a significant challenge for Black Americans, but it’s not insurmountable.  By proactively using the financial tools and resources to learn what you don’t know and relying on an experienced and trusted advisor, individuals and families can take steps to change the trajectory of the racial wealth gap toward creating a more equitable and prosperous future.

 

Unknown3A Denver-based financial advisor, Derek Ansah is a Certified Financial Planner ™ and serves a diverse group of clients at Northwestern Mutual in Denver, Colorado.

What is the Debt Ceiling Crisis?

There has been a lot of news lately about the debt ceiling, but what exactly does that mean? According to Wikipedia, “In the United States, the debt ceiling or debt limit is a legislative limit on the amount of national debt that can be incurred by the United States Treasury, thus limiting how much money the federal government may pay on the debt they already borrowed.”

If Congress does not approve raising the current debt ceiling in the United States, our government might default on its debt obligations. If this happens, the economic fall-out could be catastrophic and send the financial markets into a tailspin. Unfortunately, the annual debt ceiling vote in the House of Representatives has become a political game of brinkmanship with nerve-wracking drama on both sides of the aisle. Here’s what you need to know.

READ: Our Economy in 2023 — What to Expect

Timing

The last time the debt ceiling was raised was in December of 2021 to $31.381 trillion. This year, Congress needed to extend the debt ceiling again on January 23, 2023, also known as the “X” date. But that date came and went, and Congress did not approve a new debt ceiling. Secretary of the Treasury Janet Yellen had to use accounting tricks that she labeled as “extraordinary measures” for the U.S. government to keep paying the bills and avoid default on its debt obligations. These actions did buy some time, (most likely to early June), but if this deadline isn’t met, the rating agencies may be forced to downgrade the credit rating of the United States because of default.

The Problem

The national debt continues to rise year after year because of annual budget deficits. The first debt ceiling limit was set at $11.5 billion back in 1917, and the ceiling has been raised more than 100 times since then. Until we balance the annual budget, the debt ceiling limit must be increased every year. The last time we had a budget surplus was in 2001. Under President Clinton we had surpluses from 1998-2001. Since then, we haven’t had any. The Great Financial Crisis in 2008-2009 and the COVID-19 Pandemic in 2020 have only exacerbated these deficits with massive government spending.

The Issue

The Republican Party, led by Speaker of the House of Representatives, Kevin McCarthy, wants to use the debt ceiling issue to impose a spending cap in exchange for temporarily raising the debt ceiling. McCarthy wants Democrats to negotiate on federal government spending. President Biden has stated that he doesn’t want to be held hostage to any conditions.

The problem here is there aren’t any easy ways to reduce spending. The government can’t cut Social Security, Medicare, or fail to pay interest on the national debt. Defense spending might be an area where they could cut costs, but with the threat of China invading Taiwan and Putin’s invasion of Ukraine, that doesn’t seem likely or prudent.

READ: Biden is Right About One Thing — Oil and Natural Gas Aren’t Going Anywhere

Déjà Vu

The last time the debt ceiling was so prevalent in the news was back in 2011, which ultimately led to the Standard & Poor’s rating agency downgrading the debt of the U.S. from AAA to AA+. Before this, the United States had the highest AAA rating since 1941.

This was a huge deal. A spokesman for the agency said, “the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenge.” Today, the political landscape is just as nasty as it was back then, and with rising interest rates causing an inverted yield curve, the U.S. could be headed for a recession in the next 12 months.

Ramifications

Once these extraordinary measures run out and the debt ceiling is reached in early June, the government will no longer be able to issue debt and will have no cash to pay its bills.  Consequently, the federal government could no longer pay social security and salaries of government workers. Our government would effectively shut down. The Committee for a Responsible Federal Budget says “without enough money to pay its bills, any of the payments are at risk, including all government spending, mandatory payments, interest on our debt, and payments to U.S. bondholders. While a government shutdown would be disruptive, a government default could be disastrous.”

Market Reaction

The last time Congress and President Obama played a game of chicken with the debt ceiling and spending cuts, the stock market fell 16% in the five weeks between July and August of 2011. There is no reason to believe a severe and negative reaction wouldn’t be felt again. So far, neither the stock nor bond markets seem too concerned about the debt ceiling. Both have had a great start to 2023. Possibly by May, investors will start to pay attention to what Congress will do; until then, this issue doesn’t seem to be on the market’s radar yet.

Defaulting on our debt is financial Armageddon and not a viable option for Congress. Cooler heads must prevail as they did back in the summer of 2011. The fall-out for the stock, bond band U.S. dollar could be horrific for investors here and abroad. There is really no way to quantify the damage or years it would take to recover. This is one instance where the Federal Reserve likely can’t save the day. Powell doesn’t have the power to force members of Congress to pass any bills. Fortunately, over half the members of Congress are millionaires, so any financial damage from a default will be acutely felt by them as well.

 

Thumbnail Fred Taylor HeadshotFred Taylor is a Partner, Managing Director at Beacon Pointe Advisors, LLC. The information contained in this article is for general informational purposes only. Opinions referenced are as of the publication date and may be modified due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed. Past performance is not a guarantee of future results.

Beacon Pointe has exercised all reasonable professional care in preparing this information. The information has been obtained from sources we believe to be reliable; however, Beacon Pointe has not independently verified or attested to the accuracy or authenticity of the information. The discussions, outlook, and viewpoints featured are not intended to be investment advice and do not consider specific investment objectives or risk tolerance you may have. All investments involve risks, including the loss of principal. Consult your financial professional for guidance specific to your circumstances. 

Biden is Right About One Thing — Oil and Natural Gas Aren’t Going Anywhere

A funny thing happened when President Biden went off script during his recent State of the Union speech and began jousting with a raucous group of Republican lawmakers.

He told the truth.

Now, that’s not to say the rest of what he said was lies, but in this unscripted moment, which began just as he was talking about climate change, he injected a moment of reality into his speech.

“We’re still going to need oil and gas for a while,” he said, probably to the chagrin of his speech writers.

READ — Understanding ESG & Colorado’s Energy Transformation

He then quickly added, in another off-the-cuff remark, that we’re going to need oil for “at least a decade.” It drew laughs from Republicans because, as conservative Jonah Goldberg tweeted, that’s like saying we’ll need water and oxygen for “at least a decade.”

Even though President Biden has continuously vilified this industry and made it harder to develop our natural resources, beginning with campaign pledges to shut down all drilling to his first few days in office when he shut down the Keystone pipeline and froze federal leasing, his unscripted moment brought a much-needed dose of reality to our national conversation on energy.

We need oil and natural gas to survive. And will, for years to come. Not just a decade.

The federal government, through its Energy Information Administration, projects that by 2050, we will need more oil and natural gas than today, not less. (To be fair, they also expect an even greater share of renewables in our energy mix.)

The global population is growing, and access to efficient, reliable and affordable energy is a human right. We will need all forms of energy to thrive, and attacking domestic production, shutting down infrastructure and making it harder to develop here only means we’ll rely on foreign countries for our energy, which is not an environmental solution and makes our country less secure.

READ — Do Hispanics Bear the Brunt of the Energy Crisis?

Today, oil and natural gas are the primary sources of energy for the global economy, supplying roughly 70 percent of the total global energy demand. In 2021, 81 percent of our primary energy in the United States came from fossil fuels. We will continue to need oil and natural gas for decades to come for many reasons. It is our challenge to produce it cleaner, better and safer here than anywhere on the globe.

But we need realistic conversations about where our energy comes from, and the trade-offs and benefits of all energy sources.

In Colorado, the governor recently renewed his pledge to move our state to 100 percent renewable energy by 2040. But just a few days prior, for nearly three days when the temperature hovered around 0, renewables provided almost no power to our electrical grid as the wind wasn’t blowing and the sun wasn’t shining. Natural gas and coal were the workforces that kept us safe and warm during that cold snap.

Knowing that we need these resources, we need to do a better job of sharing the positive environmental changes we’ve seen in recent years: The new technologies, the lowering of emissions and the promise of innovation and ingenuity.  Our elected leaders need to embrace that as well.

If you’re concerned about climate change, it’s important to note that today we’re powering our electric grid with more natural gas, wind, and solar energy than ever before. The environmental benefits have been, and will continue to be, profound because natural gas, as an energy source, has a low carbon dioxide emissions profile.

But that’s just part of the story. Numerous emissions reductions beyond CO2 have occurred as a result of this trend, with sulfur dioxide down 88 percent and ground-level ozone down 22 percent. The six most common pollutants (PM2.5 and PM10, SO2, NOx, VOCs, CO and Pb) are collectively down 73 percent. That’s a tremendous success story for our environment and our air quality.

In Colorado, we also can be proud that methane emissions from oil and natural gas production are decreasing, and our industry’s volatile organic compound (VOC) emissions have dropped nearly 60 percent since 2011. Technology improvements and regulations that reduce the chance for methane and VOCs to escape into our atmosphere are working.

Our industry continues to make tremendous progress in both the efficiency of energy consumption and in reducing greenhouse gases. However, more work must be done.

We can have the economy we desire and the environment we need, but we need to have realistic conversations about climate, where our energy comes from and what’s feasible. We also need to support policies and infrastructure that allows for continued domestic production, especially here in Colorado where we’re producing some of the cleanest molecules of energy on the planet.

Clean, affordable energy is the key to our world’s future, and oil and natural gas have an important role to play.

Picture1 Coga

 

Dan Haley is president and CEO of the Colorado Oil & Gas Association.