Last year, homeownership was further out of reach than it has been in modern recorded history. And that’s going back to and including the housing bubble of the early aughts, said Jeff Tucker, a senior economist at Zillow.
And that’s affecting how Americans are living their lives. Some people who would have their own place right now are renting, moving in with mom and dad, and delaying having kids.
While home prices and mortgage rates may be falling, making the market at least a little more accessible, they’re doing so from historic highs.
“The big picture is that prices rose at an extraordinary rate from mid-2020 until mid-2022,” said Tucker. “The vast majority of that cumulative growth is baked into the price level.” And mortgage rates doubled too during that time — it was a one-two punch, added Tucker.
So yes, returning to homeownership levels for young people, which peaked in the early 2000s, will take a while, to say the least. And people are making other plans in the meantime.
A level of exorbitance not seen since the housing bubble crisis
In October of 2022, the median homeowner spent 46 percent of their income on annual home payments. Houses are more affordable now than, say, last year, but the housing market had priced so many people out that the ones who can afford to buy have higher incomes and stellar credit scores, according to the Federal Reserve Bank of Atlanta’s Home Ownership Affordability Monitor.
For housing to be considered affordable under Housing and Urban Development Department guidelines, annual payments shouldn’t exceed 30 percent of the median salary. October’s figure not only exceeded that threshold but, for the first time in measurable history, surpassed the previous record of 42 percent of median income set in July 2006.
What happened? With the onset of the pandemic, there was a spike in housing demand that far exceeded supply, said Domonic Purviance, a subject matter expert in residential real estate at the Federal Reserve Bank of Atlanta. A lot of people saw an opportunity to buy houses because interest rates were low.
Many people with pent-up equity in their homes in high-cost markets (like New York, New Jersey or California) were able to sell their homes, pull their equity out and buy in lower-cost ones (like Atlanta, Nashville, Charlotte or Boise), Purviance said. “It was sort of this instance for people to get out of dense areas like New York,” he said, in response to the pandemic.
That led to a significant increase of roughly 40 percent in home prices, which peaked in June 2022.
Around the same time, the Fed’s response to inflation was to raise interest rates. This combination of rising mortgage rates and soaring prices last year led to extreme levels of unaffordability, Purviance said.
Since last fall, there has been some relief. The market is cooling down a bit, with median home prices falling since last summer’s peak.
Even by November, annual payments dropped to 44 percent of the median income, Purviance said.
But it’s a long way to go before housing is largely considered affordable.
Mortgage rates are also falling, though it’s unclear for how long that will be the case, Purviance said.
And even though lower mortgage rates sound good, it actually can be a double-edged sword. Lower rates will make homeownership more attainable for some but could also trigger more activity in the housing market, the New York Times reported. That means the cooling market may not last for long. More prospective buyers scrambling to purchase a home because of lower rates could mean higher prices — and ultimately fewer affordable options.
Predicting the housing market future is a bit of a guessing game
And that’s where there’s some debate among economists. Will home prices continue dropping? And if so, for how long? By how much?
“The sort-of bad news for interested first-time buyers that I’m seeing at the moment is that the cool-down process might be nearly wrapping up,” said Tucker. “It may have run its course, which is surprising to me, considering how unaffordable housing still is.”
Of course, it’s possible, Tucker said, that we’ll see regional dispersion, where the unaffordable markets — like those out West — keep cooling down. But, at the moment, it’s a little too early to tell.
It’s especially hard, he said, to predict the future, even with seasonally adjusted data, in the winter months because the housing market activity grinds to a halt.
Another factor is the “tug of war between supply and demand,” said Purviance. Housing supply is measured by how many months it would take to sell a given month’s inventory of houses at the current sales pace. If it takes more than six months to sell, the market is undersupplied (and vice versa).
Last year, existing homes dropped below a two-month supply, which meant there was an undersupply of houses. “We were at a critical low,” said Purviance. “We just didn’t have enough.” That meant people putting in multiple offers and bidding wars and paying above the asking price, he added.
Homeowners who locked in low interest rates, such as back in 2021, on their current homes were also reluctant to sell.
Right now, housing supply is very slowly recovering, said Purviance. But currently, many builders are putting up homes that people can no longer afford for various reasons, like inflation making budgets tighter.
Going into this year, housing affordability really depends on how comfortable consumers are going back to the market, said Purviance.
Who’s buying houses, overall? Millennials with higher incomes.
Part of the reason housing became so unaffordable was because of millennials entering the housing market (sorry, just another thing to add to the blame list) en masse.
“Their movement into homeownership over the last few years played a big role in causing the price increases,” Tucker explained. “They were a lot of those people crowding into open houses and competing in bidding wars to get their first home.”
Who can afford a house mostly comes down to income and credit score, said Purviance. “The people who are buying, the people that have strong credit, higher income — better positioned to be able to buy a house,” he said.
Many of those loan originations are going toward buyers with credit scores of 720 and higher. “That’s observably different from previous cycles,” he said.
Why? “There also aren’t many homes at an affordable price point for many entry-level buyers,” Purviance said. Many investors are coming in and scooping up affordable houses in major markets.
As a result, many younger millennials are getting priced out, aren’t accumulating wealth and are facing barriers (inflation, crushing student debt and the other usual suspects) to placing a down payment at the ideal 20 percent.
“A lot of them have been priced out of the market and then renting,” Purviance said. Because of this, the median buyer skews a little more affluent. The annual median income for 43 percent of people buying houses is $100,000 or more, according to Zillow’s spring 2022 Consumer Housing Trends Report.
Millennials (who are now in their late 20s to early 40s) represent the largest share of homebuyers. The median first-time buyer is also in their 30s, the report shows. Last year, 45 percent of homebuyers landed their first home. That figure, up from a low of 37 percent in 2021, is on par with pre-pandemic levels, the report said.
Even more, homeownership rates for people under 35 increased by 3.4 percentage points to nearly 39 percent between the first quarters of 2019 and 2022, as this generation aged into home buying, according to Current Population Survey/Housing Vacancy Survey data. “The homeownership rate for people under 35 has actually moved up measurably,” said Tucker.
Those people under 35 who are buying houses are more likely, say, to be 33-year-olds and not people in their 20s (i.e., it’s older millennials and not younger ones), Tucker said. Part of that might be because of a small population boom creating a “bump in the snake.” (”The Little Prince,” anyone?)
For adults ages 35 to 44, the homeownership rate moved up by about 2 percentage points over the same period, and for older adults, the rates decreased ever so slightly.
Moving in with mom, dad, grandma, grandpa …
So for those priced out of the market, what’s their housing status?
As you might guess, many of them are renting. More than a third of Americans rented, rather than owned, their home in 2019 (the most recent year with reliable data), according to the Pew Research Center.
But things aren’t going so well for the renters, either. A Moody’s report last month showed the U.S. hit a new rental market milestone: The median renter is spending 30 percent of their income on rent, which puts it right at that affordable housing threshold. Back in 1999, that figure was closer to 23 percent.
The people who can’t afford to buy are also moving into multigenerational households. Younger people are less likely to be their own heads of household now than they were in the past.
“A lot of the time that meant living with a roommate or living with parents and occasionally other family members,” Tucker said.
The share of people living in multigenerational households doubled between 1971 and 2021 (the most recent year of data), reaching 18 percent, according to the latest U.S. census data. Adults between the ages of 25 and 29 are more likely than any other age group to be living in multigenerational households.
They cite a few major reasons, according to the Pew Research Center’s 2021 survey data, including financial ones, caregiving ones (whether for adults or children), and because it’s the arrangement they’ve always had.
No house means no kids for some … at least for now
With challenges for first-time homeowners, anyone wanting to have kids may be waiting a little longer.
One analysis, published in the Journal of Public Economics, of housing market data from the 2000s showed that short-term increases in housing prices led to declining birthrates by 2.4 percent among people who didn’t own their homes. But, it also found that homeowners whose home values went up by $10,000 saw a 5 percent increase in fertility rates.
Part of the reason that peak homeownership fell for young people in the early 2000s was because they were pushed out. Many people, for instance, had to sell their home because they got laid off or foreclosed on, wrecking their credit.
“What makes this difficult is so much stuff happening simultaneously,” he said. That “stuff” includes a Great Recession, the rising cost of college and student debt, graduate education, and so on. These things all worked to increase the debt and delay a period of stable, decent income for some fraction of people, he explained.
“Housing costs were part of a nexus of financial challenges facing today’s young adults that add up to it just being more expensive, more challenging to put together the sort of the secure lifestyle that many view as a prerequisite — or at least sort of as a concurrent requisite — for having kids,” said Tucker.
Thanks to Lillian Barkley for copy editing this article.
The markets and the Fed were previously not aligned on coming rate increases. Over the past week, the markets have shifted to the Fed’s view, expecting another hike in March and likely May as well. This may be in part due to January’s strong jobs numbers reducing recession chances, but it could also reflect certain fears around January Consumer Price Index (CPI) data. There’s a chance that it may not be quite as rosy as some hope.
CPI Announcement
On Valentines Day, February 14 at 8.30am ET we’ll see the CPI report for the month of January 2023.
Recent Trends
To be clear, recent inflation data has been generally good. Inflation has trended lower. That’s been due to easing energy and food costs, and the prices for used cars and various goods have actually fallen in absolute terms in recent months.
The Fed has started to acknowledge these encouraging trends too. However, concerns remain, specifically as shelter costs which carry a large weight in the CPI series continue to rise steeply. There’s good reason to think that might change, but we haven’t seen it in CPI data yet. Also, the Fed worries about wage growth continuing to push services costs higher, and the recent strong jobs report won’t have comforted the Fed on that score.
Looking Forward
There’s a chance coming inflation data is a little less reassuring. Certain energy prices, such as crude oil, are no longer declining. Food and energy have helped bring down headline inflation numbers in recent reports.
The Federal Reserve Bank of Cleveland produces nowcasts of inflation using currently observable prices. As of February 7, 2023 they project January core CPI at 0.46% month-on-month and February CPI at 0.45%. For the past several months, these nowcasts have overstated inflation measures, and that may happen for early 2023 too. However, if these nowcasts hold, then these readings won’t inspire the Fed that inflation is rapidly moving back to the Fed’s 2% target. That rate of monthly inflation, if sustained for a year, would result in annual inflation of around 7%.
Housing
The real wildcard in the CPI report is housing. Redfin data, show house prices have been trending down since May 2022, and are up just 1.4% to December 2022 on an annual basis. That’s a lot lower that the price growth we saw for much of 2022.
However, due to statistical lags, the CPI measure of housing costs, or shelter costs as CPI term it, continues to rise strongly. Assuming shelter costs ease, as many including, Fed Chair Jerome Powell anticipate it will, in coming months, that will make a big change in the CPI readings. That’s because housing costs carry the largest single weighting in the the CPI report.
However, we don’t know exactly when housing will start to moderate in the CPI calculations, assuming things play out as expected. If we see that in the upcoming data, it may offer some reassurance to the Fed and markets, even though the move is broadly expected and it could help headline inflation move lower in 2023.
The Fed’s Reaction
After raising rates 0.25 percentage-points in February, the Fed is firmly expected to make a similar move on March 22. However, the May meeting’s outcome is less certain. After the strong jobs report, the market has shifted to anticipating that the Fed most likely raises rates one final time, but the outcome will likely prove dependent on upcoming economic data such as January’s CPI numbers and upcoming jobs data.
The upcoming CPI reading will be important to the Fed, and markets. The generally accepted narrative is that inflation is trending lower. Still, if CPI data shows prices not moderating as fast as the Fed would like, then that could be further justification for another rate hike in May, which markets view as probable at this point, and there’s even an outside chance of a June hike from the Fed if inflation remains stubbornly higher for longer.
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Inflation and interest rates climbed during 2022 and the possibility of a recession hasn’t been ruled out. In theory, mergers and acquisitions should be slowing. But the opposite happened.
More tire dealership acquisitions (65) were announced during 2022 than were announced the previous year (43).
While most companies listed below did not reveal financials, the biggest retail deal — from a store count perspective — was Mavis Tire Express Services Corp.’s acquisition of Moosic, Pa.-based Jack Williams Tire Co., which was announced in April.
The transaction included 39 retail stores, plus Jack Williams Tire’s wholesale division.
Tire Discounters Inc. was the most prolific acquirer based on total number of separate deals completed. The Cincinnati, Ohio-based company acquired more than 15 other tire dealerships.
Acquisitions picked up on the commercial tire front. No fewer than five primarily commercial tire dealerships — East Bay Tire Co., McCarthy Tire Service Co. Inc., Pomp’s Tire Service Inc., Purcell Tire & Rubber Co. and Southern Tire Mart LLC — acquired other commercial tire dealerships.
Bridgestone Americas Inc.’s divestment of key GCR Tires & Service locations continued as Southern Tire Mart and Pomp’s Tire Service picked up 26 and 23 GCR locations, respectively.
On the wholesale side, U.S. AutoForce LLC acquired Max Finkelstein Inc. during the first quarter of the year. During the second quarter, Monro Inc. sold its Tires Now wholesale division to American Tire Distributors Inc. (ATD).
Shortly thereafter, ATD sold its Canada-based National Tire Distributors wholesale business to Groupe Touchette Inc., which is based in Quebec.
Kingswood Capital Management LP acquired controlling interest in Turbo Wholesale Tire during the fourth quarter.
Click on the digital edition of MTD’s 2023 Facts Issue to see a full list of tire dealership mergers and acquisitions that were announced during 2022.
The digital edition of MTD’s 2023 Facts Issue can be viewed here!
Inflation is striking homeowners insurance, but if you’re tempted to cut costs by reducing coverage — or, if your mortgage is paid off, even dropping it — think again. A single bad storm could make deep and unwelcome changes to your retirement. Instead, consider shopping around for a new policy, and make sure you take advantage of all the discounts available to you.
The average premium for homeowners insurance rose 12.1 percent from May 2021 to May 2022, according to Policygenius; the average annual increase was $134. Although there’s some evidence that inflation in homeowners insurance is easing in 2023 — Bankrate.com calculates the increase from 2022 to 2023 at just 3 percent — inflation in all things tends to be cumulative: A 12 percent raise one year followed by a 3 percent raise is still a 15 percent hike over two years.
Why homeowners insurance rates are rising
Inflation in all its forms has been a driving force behind rising homeowners premiums, says InsuranceQuotes.com senior writer and analyst Michael Giusti. That includes supply chain problems. It’s not that there are shipping containers filled with policies waiting to be unloaded at the Port of Los Angeles. But homeowners insurance covers home repairs, and many of the things you use to repair a house do, in fact, get shipped in from elsewhere.
In February 2022, for example, the price of lumber soared to $1,337 per thousand square feet. Although later in the year, lumber fell to $429 per thousand square feet, overall home repair costs in 2022 were expensive. Similarly, the cost of asphalt shingles and other roofing materials has risen 51 percent the past five years. Insurers eventually have to recoup those costs in the form of higher premiums.
Other ways inflation has hit homeowners policies:
Labor. You need people to repair a house, and labor costs have been rising as well. “If companies are paying their workers more, that’s been causing them to raise their own prices, and that, in turn, is going to make the cost of repairing a home pricier,” says Cate Deventer, insurance analyst for Bankrate.com. Real — inflation-adjusted — hourly earnings rose 4.6 percent the 12 months ended December, according to the U.S. Bureau of Labor Statistics.
Housing. House prices have also made big gains, meaning that the cost of replacing them has increased too. Home prices, as measured by the S&P CoreLogic Case-Shiller U.S. National Home Price Index, have gained 8.9 percent a year for the past five years.
Interest rates. To combat inflation, the Federal Reserve has been hiking short-term interest rates. Although there’s some indication that the Fed’s plan is working, rising interest rates drive up insurance prices as well, Giusti says. “In the end, insurance companies are financial services companies, and they need to borrow money to do business,” he says.
In the heady days of February 2022, the GTA’s record high home values peaked. For the first time in history, detached houses in the City of Toronto were selling for more than $2 million on average — about $400,000, or 23 per cent more than just a year earlier.
Many Canadians were feeling flush, having banked a few bucks of federal pandemic relief and the savings from the lower cost of working from home.
Borrowing money had never been cheaper. For two years, the Bank of Canada had held rates at an historic 0.25 per cent, fuelling the housing euphoria.
An entire generation had never seen a serious decline in home values. The housing market, particularly in the GTA, felt like the world’s best bet, and authorities did little to discourage that view.
One year and eight interest rate hikes later, and the once fevered financial climate has turned frosty for many households.
New homeowners, having achieved their dream, are plagued by shame and fear because they bought around the market peak that, in retrospect, seems like the worst possible time. Higher borrowing costs have also wiped out any advantage of fallen home prices for those looking to purchase.
Savings accumulated by the pandemic have evaporated; high household debt levels have barely budged; and variable rate mortgages have added hundreds of dollars to some households’ monthly payments.
Meantime, the cost of homeownership, from property taxes to utilities, is rising. Water, fuel and electricity were 12.4 per cent higher in Ontario at the end of December than they were a year earlier, according to the Statistics Canada Consumer Price Index (CPI). Household furnishings were up 6 per cent.
It all adds up to many households starting the new year under financial seige.
The stress is showing in rising numbers of consumer insolvencies, said Laurie Campbell of Bromwich + Smith, a licenced insolvency trustee. Insolvencies were up 10 per cent annually at the end of November, the highest they have been since the start of the pandemic in March 2020.
You don’t need to have a variable mortgage payment to feel the impact of the housing crisis, she said. Even if you don’t own a home, the last year has seen double-digit rent hikes. Then there’s inflation. It has dropped from 8.1 per cent in June to 6.3 per cent at the end of Dec. but “to me that is not a win,” said Campbell.
“I don’t think many employers are giving 6 per cent increases this year. I’m hearing about a lot of wage freezes or 1- to 2-per cent increases. So how are people bridging that gap?”
“People aren’t sleeping well at night and that’s truly the bottom line,” she said.
That’s particularly true of first-time home buyers who purchased around the market peak in late 2021 or early 2022.
If you bought a $1 million home in January 2022 with 20 per cent down and a five-year variable rate of 1.4 per cent, you would have expected a monthly payment of $3,222, according to Ratehub.ca. With Wednesday’s eighth Bank of Canada increase since March — another .25 points — that payment has grown to $5,049 a month, a 57 per cent jump that would add $21,924 a year to the mortgage cost.
First-time homebuyers have always been stressed but those who purchased around the market peak and chose a variable rate loan are likely feeling the most strain right now, said James Laird, co-CEO of Ratehub.ca.
“We can’t fault them because at the time, our own central bank was telling us that rates are going to stay low for the foreseeable future and home prices are going to go nowhere but up. That was the common thinking,” he said.
The Bank of Canada officially announced in January 2022 that it was ending its “exceptional” low interest policy and it noted inflationary pressures, but it seemed few Canadians were prepared for rates to rise so high so fast.
“At least if you took a fixed rate you got to take advantage of that additional four years from today,” said Laird.
The majority of all Canadian mortgage holders — 69 per cent — had fixed rate loans last year, according to Mortgage Professionals Canada’s (MPC) annual consumer survey. Twenty-five per cent had variable-rate mortgages that rise and fall along with the central bank rate.
But when it came to new mortgages last year, only 56 per cent were fixed rate, compared to 62 per cent in 2021.
MPC spokesperson Cecely Roy said that Canada Mortgage and Housing Corp.’s Fall Residential Mortgage Industry Report showed a shift in the kinds of loans borrowers chose last year. In January, 57 per cent of new mortgages were variable rate plans. By August, when interest rates were already climbing, that had declined to 44 per cent.
John Pasalis, head of real estate brokerage, Realosophy, is active on Twitter and has a YouTube channel where he answers real estate questions. He says social media has been unkind to people who are already stressed by the downturn in housing. It’s not uncommon for peak period buyers to be painted as stupid, greedy or the cause of the market correction.
That’s particularly true of those who bought investment properties, he said.
“These people are just families. They’re not sophisticated. They thought it would be a good investment because everyone says real estate’s a good investment. So they invested and now it’s weighing on their finances and they don’t know what to do. They can’t easily sell because now (the property) is worth less,” he said.
Oakville’s Melody Wong isn’t worried about added costs when her fixed rate mortgage eventually comes up for renewal. She expects that the $600 a month she saves on commuting costs because she now works from home, will help backstop any increase. As the mother of four boys, 6 to 15, she is, nevertheless, acutely aware of rising costs.
She and her husband recently purchased a hybrid van to save on gas and Wong says their grocery bills have doubled. “This is not even about the kids growing and eating more now,” she said. “Literally, it’s the cost of the products.”
She is relying on more canned foods and letting her kids fend for themselves occasionally with the instant ramen noodles they love.
Wong, whose boys are in Scouting and soccer, is a Scout leader herself. She says fundraising activities aren’t as successful for extra-curriculars in the current climate and parents, who themselves are stretched, are being asked to contribute more for camps and activities.
“With the rising cost of groceries and other materials, we’re having to put that on the parents to say, ‘We’ve been fundraising, we’re not getting as much but we need you to pay.’ There are families that are struggling. So that’s the challenge we’re faced with,” she said.
Ricardo Tranjan, an economist and senior researcher with the Canadian Centre for Policy Alternatives, says non-profits and their clients are among the most vulnerable to collective belt-tightening. But he acknowledged that homeowners, faced with rising costs, may also be accessing those services.
He doesn’t blame the City of Toronto for imposing an historic tax increase this year of all years. The problem, he said, is that Toronto taxes have been too low too long. That has left community organizations and their clients in peril.
“At the provincial and federal level there are more things that can be done,” said Tranjan.
“The financial situation of the province is in good shape compared to the city of Toronto,” he said. Yet social assistance rates remain shockingly low.
Ottawa has stepped up with pandemic and daycare funding. The latter has offered some families relief but that is likely being offset by the rising costs of mortgages, rent and food.
The struggle many households are confronting now is also debt driven, says insolvency expert Campbell. In 1990, Canadians owed 90 cents for every dollar they earned. Now they owe about $1.84. People held onto their debt during the pandemic when there wasn’t much collections activity. Now, creditors want their money.
She points out that “tackling mental health and finances, unfortunately, are very closely connected.”
If there is a light at the end of the tunnel, it’s that in the bigger picture, the majority of people still have fixed-rate, five-year loans, said mortgage expert Laird.
“For most households, especially for first-time homebuying households, their income situation usually improves on average quite significantly over that five years.
And most people should be able to renew their fixed-rate mortgages in five years unless there has been a divorce, job loss or serious health issue that would cause a household to be financially strained regardless of the rate environment, said Laird.
“As long as our job market stays OK, that’s probably the key correlating factor with whether defaults dramatically rise or not.”
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TORONTO, Jan. 29, 2023 – On Wednesday, the Bank of Canada raised its benchmark rate by a quarter of a percentage point, bringing the policy rate to 4.5 per cent, the highest level since 2007. A day later, banks raised their prime lending rates to almost seven per cent. Bank of Canada Governor Tiff Macklem has indicated the BOC will take a pause in its hikes but the moves to date have been criticized.
Canadians for Tax Fairness have called for a windfall profits tax – not more rate hikes – as hiking rates won’t slow soaring corporate profits, a key driver for inflation according to C4TF. Unions, meanwhile, say the central bank is waging war on the working class. “Part of rebalancing demand and supply in the economy is rebalancing the labour market,” rebuts Governor Tiff Macklem.
And now, on to the rest of the news from the past week in Canadian accounting.
TVO: Five Things You Should Know About Canadian Tax Policy
It’s a pretty rare occasion when a thoughtful discussion of Canadian tax policy shows up on TV. But TV Ontario (TVO) host Steve Paikin had Bhuvana Rai, a tax lawyer at Mors & Tribute Tax Law, on for a balanced and wry chat about interesting points on Canadian tax policy. We carried a column back in 2020 from Bhuvana so we may be a little biased but we highly recommend watching all sixteen minutes.
The interview touches on some fascinating issues, such as the incoporation status given to doctors (but not accountants or lawyers) by the provinces, why so many Canadian businesses try to stay small (and then move to the States), and why you really shouldn’t trust the help line at the CRA.
Globe and Mail: Cut corporate taxes with carbon tax money, Ontario
This past Tuesday, the Globe and Mail published an editorial pointing out two tax-related issues in Ontario, and a proposed solution. Premier Doug Ford promised corporate tax cuts on the campaign trail but has failed to deliver. At the same time, Ontario is collecting revenue from the federally imposed carbon tax, which they have yet to allocate.
The Globe’s solution is to use the carbon tax revenue to cut small business corporate taxes. It’s a conservative solution that would make many Canadian accountants happy. It would also distinguish Ontario from the federal government’s targeted spending on using carbon tax revenue for clean technology investment.
Accounting Dealbook: Consultants jabbed, can Deloitte Canada innoculate itself?
Deloitte Canada announced this past week that it had acquired a Montreal consulting firm called Synergyx. Deloitte wants to become a leader in “health economics,” which, in layman’s terms, is about using technology and other tools when choosing how to spend healthcare dollars. Synergyx specializes in “market access and pharmacoeconomics for the health industry.”
The Deloitte acquisition comes amidst public scrutiny of consulting contracts and a “shadow public service.” Quebec Premier Francois Legault was under fire for lucrative contracts to consulting giant McKinsey and Pierre Poilievre has called for a parliamentary probe into the Trudeau government’s links with McKinsey. Seven cabinet ministers have been called to testify.
Deloitte Canada made over $3 billion in revenue last year, half of which came from consulting, building on the services it provided to governments during the pandemic. With Canadian healthcare in crisis, opportunities will continue provide advisory services to governments and healthcare organizations.
And speaking of Deloitte and Montreal, the Big Four firm launched The Smart Factory @ Montreal, in an industrial park out by the PET Airport. It’s an interesting idea and has caught the attention of manufacturers: “a first-of-its-kind facility showcasing an interconnected ecosystem of more than 20 cutting-edge solutions and technologies and intent on transforming manufacturing and warehousing through digital transformation.”
Quick Hits: Articles of Interest
Canadian
N.W.T. town drops fraud lawsuit against former SAO, mayor (CBC)
Will IFRS 17 make insurers’ results harder to compare? (Canadian Underwriter)
CRA taken to court after denying spousal support payments as tax deductible (Financial Post)
International
Former PwC partner banned for 2 years in Australia for leaking information (Financial Times)
EY Germany to make structural changes in cost-reduction push (Reuters)
KPMG primes shrinking CFO, CPA pipeline (CFO Dive)
U.S. watchdog should step up oversight of crypto auditors, say Democratic senators (Yahoo Finance)
By Canadian Accountant staff.
After a year of historic economic turbulence and sky-high consumer prices, federal officials in Washington are starting to float a new word around: optimism.
The latest government data show that inflation, which has hiked the price of everyday goods and dogged President Joe Biden’s approval numbers, has continued to relent in recent months. That’s prompted a cautious but hopeful attitude among those shaping U.S. monetary policy.
ECONOMY GREW 2.1% IN 2022 AMID BARRAGE OF INTEREST RATE HIKES
“We have made progress,” Christopher Waller, a Federal Reserve governor, said in a recent speech. “Six months ago, when inflation was escalating, and economic output had flattened, I argued that a soft landing was still possible — that it was quite plausible to make progress on inflation without seriously damaging the labor market. So far, we have managed to do so, and I remain optimistic that this progress can continue.”
Biden has cheered the latest inflation figures as well, calling the most recent consumer price index, which measures how much consumers pay for everything from food to cars, “good news.” The CPI was 6.5% for the year ending in December, which despite still being high, was “the smallest 12-month increase since the period ending October 2021,” the Bureau of Labor Statistics reported on Jan. 12.
“We have more work to do, but we’re on the right track,” Biden told reporters that day. “We’re seeing bright spots across the country where great things are happening. Roads and bridges are being built. Factories are coming online. People back to work again. Families breathing a little bit easier.”
“That’s why I can honestly say — and you’ve heard me say this before, and I mean it from the bottom of my heart — I’ve never been more optimistic about America’s future than I am today,” the president said.
But Biden, officials at the Federal Reserve, and financial experts are hedging any economic optimism with warnings that inflation is not fully in the rearview mirror. The Fed, which launched a series of aggressive interest rate hikes last March to tackle soaring prices, is not yet ready to hit the brakes. “Back in 2021, we saw three consecutive months of relatively low readings of core inflation before it jumped back up,” Waller said. “We do not want to be head-faked.”
As it waits for more data showing that prices continue to decline, the Fed is expected to approve two more interest rate hikes at meetings in February and March — albeit smaller, at 0.25% each — then possibly pause the increases if all goes as planned. The U.S. central bank has already started to slow its efforts, approving an increase of 50 basis points in December after several months of historically high 75 basis point hikes, in large part due to consecutively lower inflation readings.
The current state of affairs suggests that as the new year begins, U.S. monetary policy has reached a possible transition point — one that both provides reassurance that consumers will continue to see some relief for their pocketbooks and indicates the likelihood of more pain in the shorter term.
With each interest rate hike, the Fed gets closer to tipping the United States into a recession, which would create major job losses at a time when many people have already depleted their savings or racked up credit card bills to keep up with soaring prices. The risks underline the delicate balance the central bank must strike as it tries to beat back record-high inflation. Already, economic activity has slowed, and it is expected to dip further in 2023.
“The almost 500bp of expected cumulative hikes is already delivering a commensurate tightening of financial conditions, which we believe will tip the economy into a mild recession later next year,” Jay Barry, co-head of U.S. rates strategy at JPMorgan, said in the firm’s 2023 Market Outlook. “With a slowing in aggregate demand, we project the unemployment rate will rise to 4.3% by the end of next year.”
In its economic forecast, the Conference Board predicts “that economic weakness will intensify and spread more widely throughout the U.S. economy over the coming months, leading to a recession starting in early 2023.”
“This outlook is associated with persistent inflation and the Federal Reserve becoming more hawkish,” the group said on Jan. 10. “We forecast that real GDP growth will be 2.0 percent year-over-year in 2022, slow to 0.2 percent in 2023, and then rebound to 1.7 percent in 2024.”
The Conference Board said it expects negative GDP growth in the first three quarters of this year, but that the downturn “will be relatively mild and brief, and growth should rebound in 2024 as inflation ebbs further and the Fed begins to loosen monetary policy.”
“While easing supply-side constraints and a more hawkish monetary policy are cooling inflation, rising interest rates will tip the U.S. economy into a broad-based recession,” the group said. “This contraction will impact extremely tight labor markets and drive the unemployment rate higher. Still we anticipate the jobless rate may peak at 4.5 percent, which by historical standards is quite low.”
Still, the specter of job losses has prompted criticism of the Fed’s plans, particularly from some progressives, who say it threatens to punish workers.
“Fed Chair [Jerome] Powell should remember the Fed’s dual mandate: fight inflation and protect jobs,” Sen. Elizabeth Warren (D-MA) tweeted on Jan. 13. “Inflation is slowing, but millions of Americans are at risk of losing their jobs if the Fed keeps up with its extreme interest rate hikes.”
Powell, however, has warned that the Fed will stay the course, regardless of how unpopular it might be. “Price stability is the bedrock of a healthy economy and provides the public with immeasurable benefits over time,” he said in a speech on Jan. 10. “But restoring price stability when inflation is high can require measures that are not popular in the short term as we raise interest rates to slow the economy. The absence of direct political control over our decisions allows us to take these necessary measures without considering short-term political factors.”
The December consumer price report showed that falling gas prices, which reached record peaks last spring amid supply chain problems and Russia’s invasion of Ukraine, have contributed the most price decreases, “more than offsetting” rental and housing prices, which remain stubbornly elevated despite early signs of a market correction.
“Indexes which increased in December include the shelter, household furnishings and operations, motor vehicle insurance, recreation, and apparel indexes,” the Bureau of Labor Statistics said. “The indexes for used cars and trucks, and airline fares were among those that decreased over the month.”
Lower gas prices also helped bring down the producer price index, which tracks wholesale prices, in December, the BLS said. For the year, headline PPI was at 6.2% — the lowest it’s been since March 2021. Meanwhile, the PPI was down 0.5% on a monthly basis, the biggest drop since April 2020.
“Inflation has declined in recent months from very high levels,” Fed Vice Chairwoman Lael Brainard said in a Jan. 19 speech at the University of Chicago Booth School of Business. “With the consumer price index and producer price index now available, total PCE (personal consumption expenditures) inflation in December is likely to have run at around a 2.3% annualized pace on a 3- and 6-month basis, as compared with 5.1% on a 12-month basis. This deceleration reflects an easing in war-related energy shocks as well as in core goods inflation: Energy and core goods each subtracted nearly three-fourths of 1 percentage point from 3-month annualized total PCE inflation.”
“Core PCE inflation is running at a 3.1% annualized pace on a 3-month basis — below its 3.8% reading on a 6-month basis and 4.5% on a 12-month basis. Within this, recent declines in core goods inflation reflect a reduction in core import prices, an easing of supply chains, a restocking of inventories, and cooling demand,” she added.
Brainard noted that inflation for housing services “remains stubbornly high at 8.8% on a 3-month basis — compared with 7.7% on a 12-month basis.” But she and other experts predict that will soon change. “Market rents and housing prices were soaring in 2021 and early 2022, but the trend has reversed in recent months,” according to Preston Caldwell, chief U.S. economist at Morningstar, who said the most recent CPI report “provides further evidence that inflation is normalizing.”
Brainard said, “The housing sector is highly interest-sensitive, and the most recent reading of one national indicator pointed to house prices having declined 2.5% over the five months ending in November.”
“Similarly, rents based on new leases are decelerating sharply,” she said. “Although it is currently offset by a catch-up in renewing leases, the decline in rent on new leases will show through to average rent over time, and declines in housing services inflation are expected by the third quarter of this year.”
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But like others, Brainard expressed the need for continued caution, despite the positive signs, as “substantial uncertainty remains.” She said additional “shocks” related to the Russian invasion of Ukraine, which resulted in major disruptions to energy markets, and the COVID-19 pandemic could still lie ahead.
“Turning to the implications for policy, my colleagues and I are committed to restoring price stability,” she said. “Even with the recent moderation, inflation remains high, and policy will need to be sufficiently restrictive for some time to make sure inflation returns to 2% on a sustained basis.”
House prices will plummet this year with San Jose, Austin, Phoenix, and San Diego staring down the barrel of 25% boom-to-bust declines, according to Goldman Sachs.
The Fed‘s ongoing inflation battle, which sent mortgage rates soaring from 3% to 7% in 2022, has throttled the housing market and sparked the biggest price correction since the 2008 crash.
Goldman warned investors in a research paper earlier this month titled, ‘Getting worse before getting better’, that housing markets were particularly overheated in the Southwest and Pacific Coast.
While Goldman’s outlook for the national housing market is less dire, with prices seen dropping 6% this year before rising next year, certain cities could see sharp declines in home valuations.
San Jose, Austin, Phoenix, and San Diego are projected to be stung with peak-to-trough declines of 25% that would rival the 2007-08 Global Financial Crisis which saw house prices plunge 27% nationwide.
Goldman Sachs issued its 2023 projections for home valuations, predicting that overheated markets on the West Coast and Southwest will see sharp corrections
In 2023, Goldman is forecasting double-digit home price declines in key markets like Austin (-15.6%), San Francisco (-13.7%), San Diego (-13.4%), Phoenix (-12.9%), Denver (-11.4%), Seattle (-11.2%), Tampa (-11.2%), and Las Vegas (-11.1%).
Austin dropped 10.4% from its 2022 peak house price, meaning its boom-to-bust decline could be north of 25% as the trend continues into this year.
Milder price corrections are anticipated in the Northeast, Southeast, and Midwest.
The bank projects house prices to dip slightly in Chicago (-1.8%) and New York (-0.3%) in 2023.
Small increases are expected in Baltimore (+0.5%) and Miami (+0.8%) during the same period.
Overall, Goldman forecasts US house prices to fall by 6.1% this year. This would represent an aggregate peak-to-trough decline of roughly 10% in US home prices through the end of this year from June 2022.
Home prices in Austin (above) are projected to drop 15.6% this year, meaning its total decline from last year’s peak could be north of 25%
A ‘For Sale’ sign outside a home in Phoenix, Arizona is seen in a file photo. Goldman projects Phoenix home prices will fall another 12.9% this year
‘This [national] decline should be small enough as to avoid broad mortgage credit stress, with a sharp increase in foreclosures nationwide seeming unlikely,’ the report says.
This means that the boom-to-bust crash is not expected to be even half as bad as the 2008 meltdown, except perhaps in the Southwest and Pacific Coast.
The investment bank also offers a glimmer of hope as it foresees that the housing market will not experience a long-term downturn as it did in 2008.
Goldman is projecting an overall rise in house prices of around 1% in 2024.
‘Assuming the economy remains on the path to a soft landing, avoiding a recession, and the 30-year fixed mortgage rate falls back to 6.15% by year-end 2024, home price growth will likely shift from depreciation to below-trend appreciation in 2024,’ the bank said.
Mortgage rates remain unpredictable – peaking at 7.37% in November – the average 30-year fixed mortgage has fallen to 6.09% after better-than-expected inflation numbers.
The big rise in mortgage rates during the past year has strangled the housing market, with sales of existing homes falling for 10 straight months to the lowest level in more than a decade.
A graphic showing the change in 30-year mortgage rates across the USA between September 2022 and January 2023
A sale sign stands outside a home in Wyndmoor, Pennsylvania, Wednesday, June 22, 2022
Though home prices have retreated as demand has declined, they are still nearly 11% higher than a year ago.
Higher prices and a doubling of mortgage rates have made homebuying much less affordable for many people, but recent rate declines could give some homebuyers new hope.
At its final meeting of 2022, the Federal Reserve raised its rate 0.50 percentage points, its seventh increase last year. That pushed the central bank’s key rate to a range of 4.25% to 4.5%, its highest level in 15 years.
Though inflation at the consumer level has declined for six straight months, Fed officials have signaled that they may raise the central bank’s main borrowing rate another three-quarters of a point in 2023, which would be in a range of 5% to 5.25%.
Rates for 30-year mortgages usually track the moves in the 10-year Treasury yield, which lenders use as a guide to pricing loans.
Investors’ expectations for future inflation, global demand for U.S. Treasuries and what the Federal Reserve does with interest rates can also influence the cost of borrowing for a home.
The rate for a 15-year mortgage, popular with those refinancing their homes, also declined this week, to 5.28% from 5.52% last week. It was 2.79% one year ago.
In a year that’s lining up to be economically uncertain, putting some safety in your portfolio is a smart move.
You might call 2023 the year of uncertainty in personal finances. There are worries about a potential recession, inflation in the price of goods and services and questions about what the Federal Reserve will do with interest rates. Near-term performance of stocks, exchange-traded funds (ETFs) and fixed-income assets is foggy.
How do you manage your portfolios in response to the uncertainty? Consider dividend stocks. Dividends provide additional cash, and while the extra money doesn’t solve inflation’s impact entirely, it does make it less painful.
“Dividend payers can help beat the market in an inflationary environment in two ways,” says R. Burns McKinney, managing director and senior portfolio manager at NFJ Investment Group. The first is that dividend stocks act like “short-duration financial instruments.” Instead of waiting for someday in the future, like with high-growth tech stocks, you get cash that you can reinvest today.
The second way is that dividend-paying companies can often grow payout faster than inflation, so they can perform better than fixed-income securities like corporate or government bonds.
Which stocks or ETFs are best ultimately depends on the risk tolerance and investment time horizon of a given investor. “In this type of environment, simply targeting companies that currently offer the highest dividend yield is not enough,” says Daniel Dusina, director of investments at Blue Chip Partners. “As inflation and tighter financial conditions hit corporations, investors should look for greater certainty that a company’s profitability, and ultimately their ability to pay an attractive dividend, will not be impaired.”
Some factors to consider are stability of the company, history of dividend payment to show reliability, dividend percentage, trend of financial performance, defensibility of the business’s industry position, valuation of the stock or ETF and risk. Here are some dividend-paying stocks and ETFs that independent financial advisors Forbes has been in touch with suggested as ones they particularly liked. Data and numbers quoted are accurate as of the time of publication.
Even at low levels, inflation destroys wealth, but at current rates it’s downright deadly. Defend yourself with dividend stocks that raise their payouts faster than inflation. Click here to download “Five Dividend Stocks to Beat Inflation,” a special report from Forbes.
Digital Realty (DLR)
Demand for data centers continue to be robust.
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McKinney likes Digital Realty, a real estate investment trust and the “largest owner of data centers.” REITs in general own income-generating real estate properties like office buildings, retail centers, rental housing, medical offices, hotels or self-storage facilities. In this case, the real estate assets are data centers, which are critical to modern business operations. By law, REITs need to pay out a minimum of 90% of taxable income out as shareholder dividends.
Digital Realty, like most REITs, trades on the New York Stock Exchange, and average daily volume over the last 12 months has been about 1.8 million shares, according to data from S&P Global Market Intelligence. With this much trading activity, liquidity is not a concern.
Digital Realty currently has a 4.5% dividend yield, and according to McKinney, has “size and scale that give it cost advantages” and trades at a “steep discount to similar names.”
Advance Auto Parts (AAP)
With hundreds of millions of vehicles in the U.S., the country is car crazed and someone has to sell the parts to keep all those autos on the road, a market worth about $300 billion annually. Robert Kalman, cofounder and senior portfolio manager at Miramar Capital, thinks Advance Auto Parts is in a good position. The current dividend yield is more than 4%, he notes, and the company also has $1.3 billion left in its stock repurchase plan, which should help bolster share prices.
“A slowing economy and higher [interest rates on car purchases] means people will keep their cars longer,” Kalman says. “The acquisition of the Die-Hard battery brand [in 2019]” helped the company see annual sales rise above $1 billion “as they move to cash in on electric and hybrid vehicles.” According to a Wall Street Journal analysis, that’s a good place to be as fully electric vehicles moved from 3.2% of all car sales in 2021 to 5.8% in 2022, so the business is on a high-growth trajectory.
Snap-on (SNA)
Another company with automotive roots to consider is Snap-on. You may have seen the company’s trucks as they drive from one facility to another, offering direct sales of tools and diagnostic equipment for professional use in the automotive, heavy equipment, marine, aviation and railway industries. With more used vehicles on the road and renewed activity in supply chains involving the last three categories, there is support for ongoing growth.
“The financial fundamentals of the business are strong with EBITDA margins over 27% leading to strong and sustainable free cash flow,” says Matt Dmytryszyn, chief investment officer at Telemus. “Free cash flow has typically been double that of dividends paid, which leaves us comfortable in Snap-On’s ability to cover and grow its current dividend, which currently equates to a 2.6% yield.”
Cisco Systems (CSCO)
Technology in 2022 was one of the worst places to invest, but bargain-hunting has helped the sector stage a respectable comeback in the first three weeks of January. Networking and communications behemoth Cisco Systems is a dominant name in technology, and it has some attractive features as a dividend-paying stock.
“The company currently offers a 3.1% dividend yield, stronger operating profitability than industry peers, and a free cash flow yield greater than 83% of the large-cap U.S. market,” says Dusina. It has more cash than debt on its balance sheet, giving it a “sound financial positioning” and, on average in each of the last 10 years, the company has increased its annual dividend by more than 10%.
Aside from being positioned for work-from-home trends, its “recently initiated transition toward a greater mix of software and subscription sales will increase customer switching costs, which results in greater higher customer retention and recurring revenue and that is not currently appreciated by the market.”
Even at low levels, inflation destroys wealth, but at current rates it’s downright deadly. Defend yourself with dividend stocks that raise their payouts faster than inflation. Click here to download “Five Dividend Stocks to Beat Inflation,” a special report from Forbes.
MiX Telematics (MIXT)
Speaking of tech, MiX Telematics is unlikely to be the first name that comes to mind, but it has an important spot in how tech supports the global supply chain as one of the biggest players in tracking vehicle fleets. The industries it serves include oil and gas, construction, utilities, supply chain, mining, public transportation and agriculture.
“Core Ebitda margins are in excess of 30%,” says Randy Baron, lead portfolio manager at Pinnacle Associates. “Subscribers are growing in the double-digit range, the company has a robust backlog and interestingly, MIXT has repurchased over one-third of its outstanding shares since going public,” so management is trying to keep share prices high. An activist investment group in the fall of 2022 suggested that in an auction situation, shares could be worth double current market levels.
Pinnacle Associates has held a position for five years in the South African company via American depositary receipts that trade in the United States. The dividend yield is 3.1%.
ExxonMobil (XOM)
Marion, NC, USA-5/31/19: An Exxon gas station
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ExxonMobil, one of the largest companies in the U.S., with a market capitalization of $471 billion, can also help buffer against the ill effects of inflation.
“It’s one of the few stocks to have paid a dividend for more than 100 years,” says Kimberly Birn, owner of Birn Financial, so chances are good that the descendant of John D. Rockefeller’s Standard Oil will continue to be a cash gusher for shareholders. Exxon has also raised its dividend each year for more than 40 years, making it one of the few oil companies that qualify as a dividend aristocrat.
The company’s return on equity is 30%, “significantly higher than the industry average,” and it has increased its dividend every year for the past three decades. Exxon also has a diversified portfolio of oil, gas, and other energy products, including significant investment in renewable energy sources.
Sysco (SYY)
Like companies that provide goods and services fundamental to human needs for warmth, energy and shelter, those that provide food will always have a ready market for their wares. Sysco is the “largest global distributor of food and related products to the foodservice and food-away-from-home industry,” according to Ryan P. Johnson, managing director for investments at Buckingham Advisors.
About 71% of Sysco’s revenue comes from domestic food service operations, with 17% from international and another 11% from its ownership of Sygma Network, which services chain restaurants. Its 190 U.S. distribution centers provide it a competitive advantage in getting the right food to the right place at the right time. Management has plans to grow operations faster than the overall industry during the next few years by increasing ordering and delivery flexibility.
“Valuation is relatively attractive across several metrics, trading at a slight discount to its sector whereas it has more often traded at a premium,” Johnson says, and the dividend yield of about 2.4% may be increased in February.
iShares International Select Dividend ETF (IDV)
Dr. Richard Michaud, president and CEO of Frontier Advisors, tells investors to focus on dividend ETFs rather than individual stocks. There is exposure to a broader market, so greater diversity and more stability. His says the “best advice for sustainably high income is managing your entire portfolio for that goal using an optimized multi-asset portfolio of ETFs.”
One he suggests is the iShares International Select Dividend ETF (IDV), with its current 7.3% yield, which “contains approximately 100 high dividend paying stocks from 20 different countries that would be difficult for most investors to get access to individually.”
Schwab U.S. Dividend Equity ETF (SCHD)
One other ETF worth consideration is Schwab U.S. Dividend Equity, which is designed to track as much as possible, before fees and expenses, the total return of the Dow Jones U.S. Dividend 100 Index.
“We use it in most of our managed portfolios as it’s a large cap, value stock ETF. It currently has a very nice 3.4% dividend yield,” says Sean Burke, vice president of Kirsner Wealth Management. “It currently has a very nice 3.39% dividend payout. It has extremely low expenses of 0.06% per year.”
Did you know…?
Since 1930, dividends have provided 40% of the stock markets total returns. What’s even more impressive (and lesser known) is its outsized impact is even greater during inflationary years, an impressive 54% of shareholder gains. If you’re looking to add high quality dividend stocks to hedge against inflation, Forbes’ investment team has found 5 companies with strong fundamentals to keep growing when prices are surging. Download the report here.