Income Levels and Consumer Spending

Investors and Colleagues,

Are you confident about your prospects over the next six months? Do you expect your income to remain stable or even increase? Are you willing to splurge on a totally discretionary big-ticket purchase (like a vacation or a new vehicle?)

Chances are, your answer depends on your income bracket. Of course it makes sense that individuals with good jobs and a healthy income level are more willing to spend money. But one of the more interesting issues in today’s economy is the broad gap in confidence between different income levels.

Last week, the Wall Street Journal had an interesting article regarding the rebound in optimism by those earning more than $50,000 per year:

When massive job losses hit in early 2009, all income groups turned equally pessimistic about the economy, as shown by confidence indexes constructed from the Conference Board’s indexes divided by income groups, along with Census Bureau household income data.

Confidence among households earning less than $50,000 a year improved in 2009, but has stayed weak over the past two years, while consumers earning more than $50,000 have registered a large increase in confidence.

This confidence is showing up in numerous areas of the economy and is especially evident when looking at different retailers.

Retail companies catering to the “average consumer” – companies like Sears Holdings (SHLD), Target Corp. (TGT) and Kroger Co. (KR), have been struggling to recover. As consumers below the $50k income line pinch pennies, profit margins are difficult to maintain.

On the other hand, companies like Harley Davidson (HOG) and Polaris Industries (PII) – maker of ATV’s and snowmobiles – have been killing it (in a good way …) Demand has been robust and profits keep growing quarter after quarter.

The Real Estate Market Mirrors Retail
When looking at investments in residential real estate, the income gap applies just the same. Consumers with incomes over $50,000 are more likely to invest in a house.

This is not true just because of the price issues (there are plenty of cheap houses that are within reach of a 50k income). The real issue is one of confidence – whether buyers actually believe they will still have a job six or 12 months down the road.

As a general rule, buyers with incomes above $50k are generally in more stable positions, more willing to make a long-term financial commitment, and they are driving demand for higher-quality housing.

This means that when we are looking through developments for Ashford Capital to purchase, we are primarily focusing on lots that are high-end, will feature more expensive homes, and will be the first area to begin selling as builders begin rolling out new developments.

Speaking of builders, the housing start data out last week was very encouraging. For the month of June, US home starts were up 14.6% over the May period. As high-income buyers re-emerge, the demand for quality housing is increasing. This means more new homes are being built, and home builders are willing to engage in new projects to meet the demand.

At Ashford Capital, we are one step ahead of this surge. Over the past several years, we’ve been buying distressed properties from the banks and the FDIC at pennies on the dollar. Our investors now hold attractive properties that represent great opportunities for builders.

As the builders look for new real estate for their projects, we will be able to offer them attractive deals while still locking in a tremendous return for our investors. It’s a truly exciting time to be invested in Atlanta residential real estate.

Are you one of our current investors, looking for another property to allocate capital to? Are you a new investor, ready to make that first purchase? Or maybe you’re just interested in learning a bit more about how our real estate opportunities are structured.

Regardless of your situation, I would appreciate the opportunity to chat with you. Ashford Capital may or may not have the right investment for your situation. But it doesn’t hurt to explore the opportunities and decide for yourself. Please give me a call this week so that we can discuss your options.

Wishing you every success,