Highlights of the Spring 2009 Affluent Market Tracking Study #15

As an inexpensive way to conduct research among the affluent, proprietary questions can be purchased in these tracking studies for your exclusive use.

Overview

This report is based on the responses from 640 men and women in households with an average annual income of $290,000, an average net worth of $3.1 million, average investable assets of $1.4 million, and an average primary residence value of $1.2 million. This is the 15th in a continuing series of twice-yearly surveys of the wealthiest 10% of U.S. households, based on net worth, as determined by Federal Reserve Board research.

The top line results of the new survey reveal a substantial drop to record lows for the evaluation of current business conditions and the 12 month outlook for the economy and their personal income and spending plans.

With this new report, you will learn:

The record number of over 800 responses (about 17%), shows the importance of this survey and topic to the respondents, who have been a leading indicator of economic conditions, as when they called the recession in our March 2008 survey (well ahead of everyone else).  

Unlike other affluent and luxury market research that is based on online surveys of panels of people who are compensated for participating in regular and frequent surveys, our unique direct mail surveys are based on samples drawn at random to be representative of the precisely defined population of affluent households, consistent with the research of the Federal Reserve Board. Confident of their anonymity, the respondents to our surveys are typically more affluent and more open in providing confidential information.  

Index values shown in this report can range from 0 (negative) to 200 (positive), with an index of 100 being a neutral reading.

Major Findings

The index of 11 for current business conditions represents a significant drop of 36 points (77%) from the Fall 2008 survey, which had already dropped steeply from the Fall 2007 survey. The current index is at an historic low for this series of surveys, as are the indexes for future household income and savings.

Surprisingly, all demographic groups indicate an expectation that business conditions will be about the same (index of 100) in 12 months. There is also an expectation that personal income will be lower (index below 100) in 12 months.  These indexes, plus the indication of reduced savings, suggest there is no expectation of a real economic recovery over the next 12 months. This is a particularly gloomy outlook among the affluent respondents who are often a leading indicator of economic conditions, as when they called the recession in our Spring 2008 survey, well ahead of others.

The composite Affluent Consumer Expectations (ACE) 12-Month Economic Outlook Index of 90 is the first time this index (which averages the 12 month outlook for business conditions, the stock market, and household income) has been below 100 since this study’s inception. A slightly positive outlook for the stock market is offset by the outlook for future business conditions (which is divided in thirds for better, same, and worse as shown in Table 4) and personal household income (index of 66). This concern about future business conditions and personal income (and the ability to save) is likely to have influenced the future spending plans that are presented in this report.

The stock market outlook index at 108 may be indicating anticipation that the market will rise in advance of an economy that may be bottoming out and where some improvement, though at a slow pace, is expected

Reflecting losses in their home value (Table 28) and investable assets/savings (Table 29), preservation of capital is now the primary investment objective of the majority of respondents. This is a major reversal from previous surveys, where capital appreciation/growth was the dominant objective of most. The current study provides a stark contrast to the Spring 2007 survey.

The absence of plans for any of 8 major expenditures in the next 12 months had been relatively stable (43%-46%) prior to the Spring 2008 survey. The Spring and Fall 2008 studies broke that pattern with just over half of the respondents indicating no plans to make any of the 8 major purchases in the next 12 months. In the current survey, more than two-thirds of the respondents have no plans to make any of the major expenditures in the next 12 months. Acquisition plans for all 8 of the major purchase items are equal to or at historic lows.

The strength of future purchase plans for major items lies within the highest ($6M+) net worth group. Table 20 shows the differences between those who say they are not reducing expenditures generally and those who say they are.

Vehicle purchase plans are down 30% from the Fall and Spring 2008 levels that had been the previous lows. Remodeling plans are less than half what they were a year ago. Boat purchase plans are a fraction of what they have been in prior studies. Plans to acquire either a primary residence or a vacation home have declined further from Fall 2008 to record lows.

None of the 17 spending categories are in positive territory (i.e., index over 100); a first for this study. Further, all 17 indexes are down (most by a substantial amount) from the Fall 2008 survey. The Future Spending Index Average of 63.1 fell 23 points from its previous historic low of 86.4 in the Fall 2008 survey.

In 6 of the 17 categories, 50% or more of the respondents plan to spend less during the next 12 months. In all of the remaining categories, over 25% plan to spend less in the coming 12 months. On the positive side, in 7 of the 17 categories, about two-thirds or more of the respondents plan to spend the same or more as during the prior 12 months.

All 17 categories established historic lows, and by a very substantial margin in most cases. Thirteen (13) of the 17 categories had decreases of 20 points or more from the Fall 2008 survey, and three (3) categories had declines of 30 points or more.

For many of the 17 categories, there are sizeable differences between demographic segments.  For example, the indexes are generally higher among those age 50 and over. The largest differences are between those who say they are not reducing expenditures generally and those who say they are, as shown in Table 21.

Over 80% of the respondents indicated they had reduced or deferred expenditures in the past 12 months, would make a conscious effort to do so in the next 12 months, or had both done so in the past and would continue to do so in the future. Efforts to reduce expenditures in the past 12 months have been consistent across all demographic segments. A similar pattern exists for expenditures in the next 12 months.

In contrast to those who are reducing expenditures, those who have not and will not reduce expenditures have income and net worth about 45% higher, have double the investable assets, and are much more positive about the future (business conditions, the stock market, and personal household income).

During the past year the group who has made and/or will make expenditure reductions has risen from 55% to 81% of all respondents. While this year’s study shows that the highest net worth group ($6M+) will be “least” affected, with just under one-third (31%) stating they have not and will not be making reductions, the figure for this net worth group last year was more than double at two-thirds (66%).

Conscious efforts to reduce or defer expenditures in general, either past or future, may have limited affect on plans for certain major purchases. For example, the percentage of respondents who said they will make a conscious effort to reduce expenditures in the future are still planning, in relatively substantial numbers, to take a cruise, have major remodeling done to their homes, or make motor vehicle acquisitions.

Among the 81% of the respondents that indicated a conscious past and/or future effort to reduce expenditures, there was an average of 4.1 reasons for these actions. The most frequently cited reasons were “uncertain when the economy will recover” mentioned by over 8 in 10 followed very closely by “decline in the value of our investments/savings.”  Just over half mentioned “want to spend less and save more.” A number of reasons were also mentioned by 30% to 45% of the respondents: increased taxes, uncertainty about job security and compensation, increased cost of everyday goods and services, and decline in the value of the primary residence.

In the current survey, uncertainty about when the economy will recover and a decline in the value of investments/savings were the most frequently mentioned reasons (about 80% for each) for reducing expenditures. For the latter, this is almost double the response in 2008. In the March 2008 survey, before the start of the recession was recognized/acknowledged by others, concern about the possibility of a recession was cited by just over half. The cost of everyday goods/services dropped by almost half from 64% last year (when gas and oil prices were high) to 34% in the current study.

About 3 in 10 respondents (all of which have and/or will reduce/defer expenditures as a general practice) do not plan to reduce domestic vacation travel expenditures during the next 12 months. Over half of the respondents plan to take fewer or no domestic vacation trips during the next 12 months. Almost 3 in 10 respondents will stay in less expensive accommodations.

Three-quarters of the respondents (all of which have and/or will reduce/defer expenditures as a general practice) plan to take fewer or no international vacations in the next 12 months. Conversely, 20% of those responding do not plan to reduce international vacation expenses at all.

Only 15% of the respondents (all of which have and/or will reduce/defer expenditures as a general practice) do not plan to reduce expenditures for dining out. Seven in 10 respondents stated they plan to dine out less frequently. Those under age 50 showed the greatest likelihood of dining out less frequently (and spending less for wine and liquor). About 4 in 10 will dine at less expensive upscale restaurants. One-third will dine more often at casual family restaurants.

Given the depressed housing market, a somewhat surprising 13% of the respondents reported an increase (averaging about 8% with a median of 5%) in the value of their primary residence. A total of 87% reported a decline averaging about 17% (with a median of 12%). Overall, the value of primary residences was estimated to have decreased by 14% on average (with a median of 18%). 

Given the decline in the stock market since 2007, a somewhat surprising 6% of the respondents reported increases (averaging 10% with a median of 7%) in the value of their investable assets/savings. Over 9 in 10 reported declines averaging 33% (with a median of 29%). Overall, investable assets/savings declined by 31% on average (with a median of 38%) over the past two years.

About 6 in 10 of the affluent market indicate no familiarity with either the private residence or destination club concepts, despite the growth in the numbers, the marketing expenditures, and the media exposure of companies offering these concepts. This represents little or no change in the level of concept familiarity since our Spring 2007 survey. Just over one- third indicated familiarity with the private residence club concept, with 3 in 10 indicating familiarity with the destination club concept. This represents some modest improvement from the 2007 study for both.

Among those indicating familiarity with the private residence club concept, 72% did not name a brand or company with which they are familiar. Among those indicating familiarity with the destination club concept, 82% did not name a brand with which they are familiar. For both concepts, some brands/companies not participating in the business were incorrectly named, thus indicating some confusion about the concept.

Among those indicating familiarity with the private residence club concept in the current survey, 12% did not check any of the listed brands (compared to one in five in 2007) as ones they had heard of. Those checking one or more brands averaged 2.9 brands, with 4 of the hotel-affiliated brands checked most frequently.

Among those indicating familiarity with the destination club concept, over half did check at least one of the listed brands as one they had heard of. This was a slight improvement over the 2007 survey. Those checking one or more brands averaged 1.6 brands.

Over 28% of the sample reported full ownership of a second home with just over half (56%) of the homes used throughout the year and just under half (44%) used primarily on a seasonal basis. An additional total of 15% reported partial access to a vacation home, primarily through a time share, but also through private residence and destination clubs.

As might be expected, the ownership for wholly-owned second homes was most prevalent among the $6M+ net worth group (64%) and the $1.5M to $6M segment (34%). Time share ownership was most prevalent among those with an income of $200K+ and those with a net worth of $1M to $1.5M.

The value of the second home generally increased with increases in income, net worth, and the value of the primary residence. The second home at an average value of $781,000 is typically valued at about two-thirds that of the primary residence ($1.2 million).

Second homes used year-round apparently fell by “only”11% in average value, compared to the values reported in the 2007 survey, while those used seasonally declined by 35% in average value.

Only 4.1% of the respondents indicated serious consideration of the acquisition of a wholly-owned second home versus 9.8% in 2007. Intent to consider a time share or a private residence or destination club totals less than 1% and is essentially unchanged from 2007.

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