🎙️ Real Estate Retirees

In 2023, 401(k) accounts kept climbing. The average percent of salary funneled into plans maintained 2022’s record pace of 11.7%.

On the flip side, financial stress was also evident: A record 3.6% of participants took hardship waivers last year, up from 2.8% in 2022. Nearly 40% of these withdrawals were used to prevent home foreclosure or eviction. (Medical expenses were the next most common reason.)

The data present a seemingly contradictory economic picture, with record wealth growth but uneven distribution: The wealthiest 10% of Americans own more than two-thirds of all household wealth. Much of that wealth increase comes from rising home values and stock market gains.

— Matthew & Shawn

Here’s today’s rundown:

Today, we'll discuss the biggest stories in markets:

• How long can high rates last?

• Real estate as your 401(k)

This, and more, in just 5 minutes to read.

Chart(s) of the Day

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In The News

🤔 How Long Can High Rates Last?

The bond market is sending mixed signals about the future of interest rates and economic growth. 

While optimism is growing for a potential rally in U.S. Treasuries, a key indicator suggests caution may be warranted.

Treasury yields have declined recently as signs of cooling inflation and a softening labor market emerge. That’s led traders to anticipate Federal Reserve interest rate cuts as early as September. Yet the market's view of the neutral interest rate — the rate that neither stimulates nor slows economic growth — remains much higher than the Fed's projections.

Forward contracts indicate the market expects the neutral rate to be around 3.6% in the medium term. That’s over a full percentage point higher than the average of the past decade and well above the Fed's estimate of 2.75%. 

A higher neutral rate could limit the extent to which the Fed can cut rates and potentially cap gains in the bond market.

The implications of this higher neutral rate are noteworthy because:

• It suggests interest rates may remain elevated compared to the past decade, even as the economy slows.
  

• It could mean current Fed policy is less restrictive than perceived, given relatively easy financial conditions.
  

• It may require a more pronounced economic slowdown to prompt deeper rate cuts than the Fed currently anticipates.

Yet investor sentiment toward bonds has improved. Treasury returns have nearly erased their yearly losses, with benchmark yields down about half a percentage point from their 2024 peak. Bloomberg reports that traders are increasingly positioning for potential Fed rate cuts and a bond market rally.

Why it matters:

Could the Fed’s policy not be restrictive enough? It’s possible. Some analysts cite the S&P 500’s near-daily record highs as performance that suggests the Fed hasn’t been as restrictive as it should be. 

What’s clear is that we “have a market that’s been incredibly resilient in the face of higher real yields,” noted one portfolio manager. 

We see you, cash: Also, the debate over the true level of the neutral rate continues. Factors potentially driving it higher include expectations of large government deficits and increased climate change-related investments.

• As the market grapples with conflicting signals, some experts suggest caution. Bob Elliott of Unlimited Funds Inc. notes that given current economic conditions and limited risk premiums in long-term bonds, "cash looks more compelling than bonds do.”
  

• He added: “We’ve only seen fairly gradual slowing of the economic growth, and that would suggest the neutral rate is meaningfully higher.”

Bottom lines: The bond market's performance in the coming months will likely depend on whether inflation continues to moderate and economic growth slows more. Both factors will be key in determining the Fed's policy path and the potential for further gains in Treasury securities.

Read more

More Headlines

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💼 The spectacular rise and fall of WeWork

📉 Bitcoin cools off to $60,000 as ETF selling picks up

🎬 The world’s top media franchises by all-time revenue

💰 Under Armour to pay $434 million after misleading investors

🏠 When Real Estate Is Your 401(k)

With 401(k) balances as high as they’ve ever been, some investors are turning to something else: real estate. 

For some retirees, real estate has become a fairly popular alternative to traditional retirement investments like stocks and bonds. Here’s a sampling of what some retirees with real estate, not traditional 401(k)s, told The Wall Street Journal:

• “I remember telling people that my retirement was sitting on Main Street rather than in a 401(k).”
  

• “I chose not to invest in things I didn’t understand or couldn’t touch.”
  

• “Buy the worst property in the nicest neighborhood that you can afford.”

Benefits: Some retirees fund their retirements using properties, not stocks. Specifically, they rely on rental income as a steady cash flow. Many appreciate the stable monthly income that rental properties can provide, and some feel more secure owning physical properties they can see and touch rather than intangible stocks.

• Tax advantages: Being a landlord can offer tax benefits like deductions for property expenses and depreciation.
  

• Potential for appreciation: Over time, real estate values may increase, growing the retiree's net worth.
  

• Inflation hedge: Rental income and property values can rise with inflation, helping protect purchasing power.

Drawbacks: Real estate as one’s 401(k) doesn’t come without challenges, like property management (some hire property managers to reduce the workload), vacancy and repair risks, and concentration risk — having most retirement assets in real estate could mean a lack of diversification.

Then there’s always the risk of market fluctuation: Real estate values and rental rates can decline, as seen in recent distress in some multifamily markets. Plus, unlike stocks, real estate usually can't be quickly sold if cash is needed.

Why it matters:

One primary reason retirees turn to real estate is the stability and tangibility it offers. Unlike stocks, which can be volatile and intangible, real estate provides a physical asset that can be seen and managed. The retirees interviewed by WSJ also say they feel more secure knowing their investments are in properties they can visit and maintain — creating a sense of control and security. 

• About 10% of households in the U.S. with someone 65 or older earned rental income in 2022 vs. 7% of households of people under 65. Many real-estate retirees say the rewards outweigh the risks, especially for those who have benefited from home price appreciation and locked in low mortgage rates before 2022.
  

• And while rents have risen since the pandemic, the cost of owning property is also rising. One financial planner notes, “If you’re a landlord, it can be difficult to feel like you’re truly retired.”

Read more

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Quick Poll

On Monday, we asked: What's your preferred strategy for entering the housing market?

— A few answers include, “My next house will be downsizing as I go into retirement. Location somewhat flexible.” And: “If you want to buy in a nice area, you need to buy a fixer-upper.”

— Another said, “House hacking. We bought a home with a wing that we walled off and now rent out short-term. It's just outside city limits, so we don't have to worry about permitting or hotel occupancy taxes. ”

See you next time!

That's it for today on We Study Markets!

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