Three Takeaways from the New KKR Consumer Report

The report examines consumer behavior at this point in the economic cycle

KKR has posted a new report titled The New Consumer.

Paula Campbell Roberts, the Director of Global Macro and Asset Allocation Team, lead the KKR research. The report examines the condition and behavior of the consumer at this stage of the economic and credit cycle.

The KKR report can help us better understand the role of the consumer and how it may impact the economy and markets in the future.

Here are the top three takeaways from the KKR Consumer Report.

1) KKR Report – Consumer Condition

While we are late in the cycle, consumers are actually in solid condition. Consumer loan delinquencies have not begun to rise. Spending on things like housing as well as durable goods that usually weaken near the end of the cycle has shown recent improvement, and motor vehicle spending remains solid. We are near or at full employment, and wages are rising. Low-interest rates are also helping strengthen the balance sheet of the American consumer.

However, we are starting to see some headwinds. Banks and other lenders are starting to tighten their lending standards once again, and that could shrink the amount of credit available for larger purchases.

Consumers have taken the lessons of the credit crisis to hear and are much leveraged than they have been in year past. The Consumer Obligations ratio remains at historic lows. Savings rates have increased, as well, so consumers have a nice cushion to protect against an economic downturn.

Roberts and her team conclude that “In sum, we expect the consumer sector to continue to grow, albeit at a decelerating pace given slowing growth in the ability to spend and peaking income expectations. In the event of a downturn, given low leverage levels, high savings, and solid net worth, we do not foresee a severe contraction in consumer spending in the aggregate.”

2) Homeowners Are In Much Better Shape Than Renters

The number of renters in the United States had grown by more than 5 million people since 2005. Low- to moderate-income renters have very little in the way of assets and are not going to fare well when we do see a downturn in the economy. Their expenses are growing faster than their incomes, and most spend more each year that they take in, so they are at a deficit when the economy is growing. A recession would have a devastating impact on this section of the consumer market.

There are some structural constraints in place that may keep the number of renters growing. A limited supply of affordable homes and much tighter mortgage lending standards than existed a decade ago make it difficult for many renters to become buyers. Also, rents in most metropolitan areas are growing faster than wages so we could rent delinquencies from lower-income, asset lite renters in a downturn.

On the higher end of the income strata, we find that many millennials, especially in urban markets, will continue to drive multifamily housing demand. The KKR team found that “as urbanization accelerated and demand for new construction apartments with amenities increased, luxury condominium rentals enabled customers to experience a certain lifestyle without directly owning the asset.”

3) What are the Driving Forces Behind the Rise in Renting?

The KKR team finds that the low level of economic growth, student debt burdens, and the sharing economy are among the primary drivers of the trend towards renting instead of owning. Housing affordability and a lack of single-family investor also plays a significant role as well. Among millennials witnessing the decline in home values in the great crisis also creates a mindset of preferring renting over buying. As the number of people living in cities around the world has surpassed the number living in suburban and rural areas for the first time, urbanization is also playing a significant role in creating renters instead of buyers.

Ms. Roberst finds in her conclusion: “The rentership and sharing economy proliferated post the financial crisis in the absence of traditionally secure jobs or strong income growth opportunities. However, despite the improvement in the employment and income picture, renting and sharing remain prevalent. For one, the absence of savings for many renters limits their ability to afford the down payment on a house or car. Second, structural constraints such as high levels of student debt or mortgage lending standards continue to pose challenges for ownership. Third, the flexibility and convenience offered by sharing economy models remain attractive to consumers. Consumers enjoy the benefits of access without the responsibilities of direct ownership. Consequently, while we expect ownership rates to improve, the sharing and rentership models that have penetrated many sectors, including housing, autos, and apparel, are likely to proliferate.”

Her team offers some areas of interest for investors that are thought to provoke at the end of the report. You can access the full KKR report, right here.

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