Buyer’s vs. Seller’s Market: What Do They Mean?

When you’re buying a house, it’s important to know what type of market you’re in: a buyers market or a sellers market. Each type of housing market offers its own set of unique opportunities and drawbacks depending on what side of the equation you’re on.

In a buyers market, the market is more favorable toward buyers due to an abundance of inventory, a low demand for housing or other factors that cause home sales to be slower than normal. This type of market works in the buyer’s favor because they can ask for extra concessions, lowball the offer or generally push the purchase to be more favorable to them. A sellers market, on the other hand, means that you’ll be competing with other buyers for the homes on the market. In this case, the seller calls the shots due to high demand for homes.

Though much of the country would be considered a sellers market right now due to extremely low interest rates on mortgage loans, that could always change in the near future. The pendulum swings constantly, and it’s not always clear where it will stop. So, if you’re considering a new home purchase in the near future, here’s what you need to know about a buyers or sellers market to make the most of the market you happen to be in.

In this article

What is a buyer’s market?

A buyers market is when there are more houses for sale than there are buyers. People aren’t buying at a fast enough rate to keep the market from flooding with inventory — which drives the market to be more friendly to the buyers that do exist.

[Read: Mortgage Rates Hit Another 50-Year Low. Should You Buy?]

In a buyers market, sellers must often lower the asking price on their homes to be competitive. If they don’t, they run the risk of their house sitting on the market for too long, which can cause financial issues or issues with getting a loan for the house they’re moving to. Therefore, not only do homebuyers get to enjoy deflated prices in a buyer’s market, but they also stand a good chance of having their lowball offers being considered.

What is a seller’s market?

A sellers market is the opposite of a buyer’s market, and occurs when there are more buyers than there are sellers. When this happens, sellers obviously have the upper hand. Any reasonably priced house is likely to get multiple offers or even instigate a bidding war in highly desirable neighborhoods or cities.

In this type of market, most homes don’t last long before being snatched up by buyers — especially if mortgage loan interest rates are as low as they are right now. Many homes are sold as is and could even get an offer that’s well above asking price. If you have a home to sell, putting it on the market during a seller’s market will likely get you more than you paid for it and help propel you to your next home.

[Read: How to Negotiate Mortgage Closing Costs]

How to determine if it’s a buyers market or a sellers market

If you want to determine whether you’re in a buyers or sellers market, there are a few tricks you can use to figure it out. These include:

  • Analyze the inventory. Use a listing website and look at the county, neighborhood or area you plan to purchase in. Pay particular attention to information like time on the market and the final sales price. If you see a large number of homes are being sold as soon as they hit the market, you are most likely in a sellers market. If sold homes are few and far between, you’re in a buyers market. It’s possible to get even more precise. You can divide the number of homes on the market by the number of homes sold the last 30 days. If the quotient is over seven, you’re in a buyer’s market. Five sold homes or below equals a sellers market.
  • Determine the amount of time homes are sitting. Homes sell quickly in a sellers market if they are priced right and are in good condition — or in some cases, they may sell even if they need a ton of work and aren’t priced as low as you’d expect. The opposite is true of a buyers market.
  • Determine market trends. Are home prices rising or falling? A downward trend suggests a buyers market while an upwards trend indicates a sellers market. The good news is that you don’t have to do the research yourself. You can easily find market reports online or ask a licensed real estate agent to pull some comps for you.
  • Figure out whether the homes are selling for asking price. If a lot of the offers in the area you’re looking at are selling for more than their asking price, that is obviously good news for sellers and bad news for buyers. If the comps indicate that the homes are selling for well below the list price, then you know you’re in a buyers market. You can also look at current listings to determine whether you’re in a buyers or sellers market. Do you notice a lot of listed homes with price cuts? This suggests that homes in this area have sat on the market for longer than expected and that buyers are in control.

Tips for a buyer’s market

A buyer’s market offers unique perks for would-be homeowners. However, if you’re a seller, you’ll have to both lower your expectations and clear a few hurdles along the way.

[Read: 5 Tips for Navigating the Mortgage Underwriting Process During Covid-19]

Tips for sellers:

  • Don’t ask for too much. If your home is priced in the right range, you could still get a buyer in a reasonable amount of time. However, don’t price your home too low to try and unload it, since buyers will still push the envelope in this type of market, no matter what you list your home at.
  • Tackle needed repairs that won’t break the bank. With so many options to choose from, buyers won’t have a reason to take on a fixer-upper unless you’re selling it at a huge discount. Any decent agent will be able to tell you what your house needs to get attention — so listen to them and make repairs or upgrades when possible.
  • Be prepared for lowball offers. Don’t take lowball offers personally and be prepared for them. Figure out what you’re willing to negotiate on before you list your home. If you aren’t willing to negotiate, your home may sit there for a while.

Tips for buyers:

  • Be aggressive: Don’t be afraid to make an offer that’s well below the asking price — especially if the home has been on the market for a while. All the buyer can do is turn you down — and if you’re in a buyers market, it’s less likely that would happen.
  • Negotiate with the seller. You have nothing to lose by negotiating. There are tons of other options on the market if this offer falls through. So, unless you’re at risk of losing the house of your dreams, you can go back and forth with the seller without worrying that you’ll kill the deal over bad feelings.
  • Ask for repairs and closing costs. The worst thing that might happen is the seller will say no. At the very least, you can expect a reasonable counter offer to come of it — and best case, you’ll end up with some contributions from the seller to make your home purchase cheaper.

Tips for a seller’s market

A seller’s market is a great time to cash in if you’re a seller. If you’re a buyer, be prepared to compete with tons of other buyers and maybe offer more than you originally intended.

Tips for sellers:

  • Don’t worry about cosmetic repairs. As long as your home is in decent condition, it’s very likely to get multiple offers. You don’t need to dump a bunch of money into painting the bathroom a neutral color or upgrading the siding. Buyers will still likely be interested in your home.
  • Test the waters on the price. Believe it or not, you can scare buyers away with an overly ambitious listing price, but that doesn’t mean you shouldn’t test the waters a little bit. Try listing your home for over what you think it’s worth. Even with a high listing price, you may get a bidding war from buyers — especially if you’re in a highly desirable area and also in a sellers market.

Tips for buyers:

  • Check listing sites every day. It’s not uncommon for homes to get offers on the first day of listing in a sellers market. Be prepared to live on sites like Realtor and Zillow — and employ the help of a real estate professional who can send you the new listings as soon as they hit the market.
  • Work with a top notch agent. In a sellers market, you’ll need an aggressive agent who is able and willing to drop to show you a house. If you don’t have an agent like this, you’re going to miss out.
  • Get preapproved. You need to be able to make an offer at any time to be competitive with other buyers. Speak with a lender before you speak with an agent to get preapproved — this will strengthen your offer and make you stand out against others.
  • Know your maximum price. Bidding wars are common in a sellers market. Your emotions can put you in financial ruin if you aren’t careful, so you need to know when to back out. Set a maximum price cap and stick to it. Also keep in mind that you can refinance later on if you need to.
  • Don’t ask for too much. You’re competing with a lot of buyers in this type of market. Asking for too much in closing costs and repairs will likely result in the seller not considering your offer.

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We welcome your feedback on this article. Contact us at inquiries@thesimpledollar.com with comments or questions.

Source: thesimpledollar.com

MBS Day Ahead: Bond Buyers Sitting on Hands; Which MBS Coupon Now?

We talked about momentum indicators being ‘oversold’ yesterday–a possible prelude to a friendly bounce in bonds.  If that narrative is going to play out, it’s running out of time very quickly.  There was some potential for a positive outcome early in the overnight session, but as the trading day progresses, bonds are moving steadily back toward their weakest levels.  Those with the strongest stomachs can still hold out hope that 10yr yields have temporarily topped out somewhere under 1.33%, but all bets are off if that ceiling breaks today (and we’re only 2bps away at 9am).

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If the pace of bond market weakness has caught you off guard in 2021, you’re not alone.  Many analysts and traders are struggling to justify current levels.  In their defense, it’s very easy to get caught up in a search for obvious, short-term motivations.  After all, that’s what’s usually moving the market.  Interestingly enough, the same analysts and traders (including myself in this list) wouldn’t shut up about the fate of the bond market being tied to covid for most of 2020.  Many of us have kept that correlation too far on the back burner so far in 2021, but it’s quickly making a comeback because it’s a very handy explanation for a sea-change in the bond market.  Case in point: yields leaming quickly higher in 2021?  And what are covid case counts doing?

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Granted, this is far from the only input for rates, but the abrupt drop in case counts so far in 2021 definitely helps explain some of the seemingly inexplicable urgency behind the selling.  If that’s the case, though, why are stocks selling today specifically?

20210218 open.png

Late 2018 provided a good reminder to markets about the power of rising rates to prompt stock market weakness.  Big, abrupt spikes in rates make traders question gravity-defying stock prices.  It’s that simple.  If you want to make it less simple, you could consider that the “stuff” that prompts big, abrupt spikes in rates tends to also decrease the probability of massive, ongoing fiscal and monetary support.  A certain amount of both of those things is currently priced in to future trading levels.  The monetary piece–especially–helps both stocks and bonds.  So when traders see it as incrementally less likely, both stocks and bonds can take a hit.

Last but not least, what’s up with MBS coupons?  Why are some getting hit way harder than others and what should we be watching now?  The short answer (if you’re looking to keep an eye on negative reprice risk throughout the day) is that 2.0 coupons are the best to watch, but 2.5 coupons are very close to taking the reins at current levels.  Either would work.  2.0s will be more sensitive to market movement (good option if you float with jumpy lenders).  

As for why lower coupons have been hit harder recently, this is always the case in a rising rate environment.  Lower coupons have higher durations because they’re less likely to be refi’d.  That makes them perform more like a longer-dated Treasury bond in the eyes of investors, and longer-dated bonds are getting killed recently.  The following 2 charts tell the story perfectly.  One shows the absolute change in price in 4 MBS coupons since the beginning of the year.  The other shows the same for Treasury yields in 2, 5, 10, and 30yr maturities.  The longer the duration (or the lower the MBS coupon), the bigger the sell-off has been.

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Source: mortgagenewsdaily.com

Stock Market Today: Stocks Tread Water, Bitcoin Joins the Trillion-Dollar Club

We’ve discussed this week the idea that the stock market might be running out of gas, and that certainly appeared to be the case Friday, as stocks finished mixed after giving up most of their morning gains.

That wasn’t a problem for the digital currency Bitcoin, however.

Traders found several positive economic indicators to consider. U.S. businesses are expanding at their strongest rate in six years, according to IHS Markit’s flash reading of the purchasing managers index, which rose to 58.8 in February from 58.7 in the month prior. And Deere (DE, +9.6%) provided some optimism after raising its 2021 profit forecast amid expectations for better equipment sales.

However, a pop at the market open lost steam as the day progressed, fitting right in with a week that saw equities struggle up against all-time highs. The Dow Jones Industrial Average, up 154 points at its zenith, finished less than 1 point higher instead, closing at 31,494.

One potential problem remains just how optimistically priced stocks are already.

“Most of our indicators suggest stocks are pricing in a lot of good news,” says Savita Subramanian, equity and quant strategist for BofA Securities. “In fact, over $3T in stimulus may already be priced in on one measure: the ratio of S&P 500 market cap to the M2 money supply. The ratio currently stands at 1.7x, the highest level since Feb 2020, and to get to the post-crisis average of 1.4x, we estimate additional $3.1T of M2 would be needed.”

Other action in the stock market today:

  • The S&P 500 declined 0.2% to 3,906.
  • The Nasdaq Composite finished with a marginal gain to 13,874.
  • The small-cap Russell 2000 rebounded after a dreary Thursday, rising 2.2% to 2,266.
  • U.S. crude oil futures declined 0.8% to settle at $60.05 per barrel.
  • Gold futures gained 0.1% to $1,777.40 per ounce.

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Bitcoin: The Trillion-Dollar Cryptocurrency

If the stock market has lost its momentum this week, Bitcoin has surely found it. The digital currency, which has exploded by more than 1,300% since its 2020 bear-market lows, continues to grab Wall Street’s attention as it reaches new milestones.

On Friday, Bitcoin prices eclipsed the $55,000 mark and finished regular trading hours at $55,397. (Bitcoin trades 24 hours a day; prices reported here are as of 4 p.m. each trading day.) That marks a 6.3% daily climb, and an 18.8% jump higher since Monday morning.

Assets invested in Bitcoin have now surpassed $1 trillion; for perspective, if Bitcoin were a publicly traded company, it would now be worth more than Tesla (TSLA, $749 billion) or Facebook (FB, $745 billion).

Fueling that gain is one of the drivers we cited in our 2021 outlook for Bitcoin: institutional investors, who are quickly pouring huge sums of money into Bitcoin and other digital currencies.

Should you join them?

Bitcoin remains a high-risk investment, and also a difficult-to-access one if you only have a traditional brokerage account – you can’t buy the digital currency without accessing a cryptocurrency exchange. But you can purchase crypto-connected companies such as these eight stocks. And you can also access crypto via a small but growing number of funds, similar to how you’d buy SPDR Gold Shares (GLD) to gain exposure to gold.

Read on as we introduce you to the newest option for crypto investors – a Bitcoin fund that charges less than half the fees of the current market leader – and explain its perks, as well as potential future threats.

Kyle Woodley was long Bitcoin as of this writing.

Source: kiplinger.com

There’s no 2-minute warning for rate shocks, even with Fed at the zero bound

The mortgage industry is notorious for its use of acronyms and even acronyms inside acronyms (TRID, anyone?). However, there is an acronym that is highly relevant to the current rate environment: ZIRP, which stands for “Zero Interest Rate Policy.” As its definition implies, this term describes the Federal Reserve’ s current policy of holding the Fed funds rate at near 0% for the foreseeable future due to the economic challenges presented by the COVID-19 pandemic.

It may be easy for some to assume a locked-down Fed Funds rate means mortgage rates will remain at the historically ultra-low levels the industry has seen throughout the pandemic. Not only does history tells us this is not the case, but the recent uptick in interest rates due to the rise in the Treasury yield and increased economic spending provides even more current proof that rate swings are possible, if not inevitable during ZIRP. As such, lenders and their capital markets executives must be prepared for interest rate swings in either direction despite the current ZIRP.

The last time the Fed instituted ZIRP was following the Global Financial Crisis, which lasted for a span of seven years, from December 2008 to December 2015. In December 2008, the average note rate for 30-year mortgages was 5.14%, when ZIRP ended in December 2015 the par note rate was 3.31%. However, that lengthy seven-year span was not a gentle expressway ramp; it was riddled with both bull and bear markets for mortgage rates despite the continued Fed pledge of “lower for longer.” Despite a Federal Open Markets Committee (FOMC) target on short-term rates of 0.00% – 0.25%, mortgage rates experienced several violent swings.

During what was known as the taper tantrum (remember hearing that talk again earlier this month?), the market was afraid the Fed was going to taper off its purchases of Treasuries and mortgage-backed securities so mortgage rates went up over 100 basis points over 3 short months. During another span of only 9 weeks prices on the lowest-coupon mortgage-backed security declined by a whopping 800 basis points, from 101 all the way down to a 93 handle. All of this activity occurred more than two years before the Fed actually instituted the very tiniest bit of liftoff in their Fed funds rate policy.

Looking at the current environment, the Fed has indicated that it will not raise the Fed funds rate until at least 2023. However, as the industry has observed before, this does not mean that mortgage rates are going to languish around the same range they’ve been in for the last 10 months. In fact, it would not be unusual to see changes of even an entire whole percentage point up, or down, for however long this current ZIRP is in place. In fact, Fannie Mae and Freddie Mac have both forecasted moderate increases in interest rates in 2021 in anticipation of this inevitability, though rates could certainly head in the opposite direction given the right market conditions.

In these past few months, I’ve heard people say things like “The market’s not going anywhere for a few years. The Fed said so, and it’s already priced in, right?” While that may be the case for the Interest on Excess Reserves and Fed Funds, which the Fed has pegged at near zero, there will not be an alarm that goes off letting lenders know to lock the doors. Just because the Fed is staying put doesn’t mean that mortgage rates, and prices of MBS, are staying put as well. As history has shown us, shocks can — and do — come when markets least expect them.

Source: nationalmortgagenews.com

How Much Does It Cost to Paint a House?

Painting your house can be the quickest way to dramatically alter its appearance, but how economical is it? Depending on the size of your home, the cost of painting a house will vary based on materials used, whether you hire professional help or do it yourself, and the size and texture of the surface area to be painted.

There are several reasons a homeowner might want to refresh a house via a coat of paint: to change the overall look or aesthetic, to brighten a room and enhance natural light, or to maintain the integrity of the material from weather elements. Plus, keeping your home updated may increase its value.

Here are some factors to take into consideration when trying to figure out how much it will cost to paint your house.

How much does it cost to paint an interior?

Let’s start with the paint job you’ll spend the most of your time looking at: the interior. The cost of painting an interior space varies greatly due to the type of paint materials you choose, what condition the previous surface is in, if you’re planning on doing the doors and trim in addition to walls, if you hire a professional painter, and how many rooms you’d like to paint.

Cost to paint per square footage

You may expect the cost for an average-sized room, approximately 10 feet by 12 feet in size, to be somewhere between $300 to $1,000 for a professional job using $2 to $6 a square foot as a price baseline with $3.50 as an average. If you do it yourself, the cost of the paint and materials might set you back around $200 to $300 .

When looking at material costs, consider that a gallon of paint normally covers around 400 square feet and know that sometimes labels overestimate how much surface area a gallon can cover. If you’re painting a textured wall, you’ll likely require more paint because the texture increases surface area, and if you’re painting a raw material like fresh drywall or bare wood, the absorption into the substrate can quickly increase the amount of paint you’ll need.

When hiring help to paint your home, how quickly you want the job done also may affect the overall cost. An experienced painter might be able to cover a wall faster and therefore cost less, whereas a more methodical painter may need more time. Generally, you can expect a painter to be able to cover about 100 to 120 square feet in an hour.

Cost to paint by paint type

Prices vary based on what type of paint you choose and how much material you need, but you can base estimates off the fact that most paint is priced in the range of $15 to $40 a gallon for higher-end paint, and you’ll probably need between one to two gallons of paint per room.

Primer, which is a necessary first step for most projects, might cost around $10 to $20 a can, but if you’re on a budget or time crunch, you can purchase paint colors that combine primer to save time. If using primer, which is especially necessary when painting a lighter color atop a darker one, you’ll typically use at least two quarts of primer to cover one average-sized wall.

While these prices may fluctuate, here is a breakdown of popular paint brands and the average cost of paint per gallon:

Brand Average cost per gallon
Behr $30-$57
Benjamin Moore $42-$80
Farrow & Ball $80-$120
Sherwin Williams $37-$102
Valspar $13-$55

Prices were accurate at the time of publication.

Professional Painter Costs

On average, professional painters cost $30 to $40 per hour per painter. The overall cost to paint your house can increase based on the prep work needed before painting and any equipment rentals such as scaffolding or a lift that may be required.

If on a set budget, when negotiating cost with a painter, consider proposing a project fee versus an hourly rate, as well as doing any prep work yourself. The added time required for properly preparing a surface for a topcoat of paint may be the highest cost of a project.

Non-Paint Costs

When painting your home, you’ll encounter a variety of costs for the tools required to paint. Some of these supplies like brushes and drop cloths can be used again, so in the long run, purchasing your own tools may save you money. If paying for labor, you may be able to deduct the costs of supplies if you provide your own, though professional painters typically use their own reusable supplies.

Necessary painting supplies may include:

•   Painter’s tape:To protect areas like ceilings and trims from getting paint on them
•   Dropcloth: To cover floors and furniture that could be damaged
•   Ladder: To paint a high wall or harder-to-reach areas
•   Paint tray or bucket: You’ll add a small amount of paint to this tray or bucket to use while painting to efficiently use a roller and to preserve the unused portion of the original gallon of paint
•   Paint rollers and brushes: A roller covers larger areas more evenly while a small brush can be used for touch-ups and corner cut-in

How Much Does It Cost to Paint a House Exterior?

The national average cost of painting a home exterior is $2,928, but a 2,500-square-foot house can range from around $1,250 to more than $8,750 depending on a variety of factors. Painting the exterior of your home could increase your home’s value, potentially improve the structural integrity of the building and give you the chance to make any needed exterior repairs at the same time.

Two of the biggest factors that determine how much it costs to paint your home exterior are square footage and how many stories your home has (hint: the more stories, the higher the price). Additionally, the type of window framing (wood, metal, or vinyl) can increase the amount of time required to complete the work and affect the price.

While costs vary based on factors like location and type of paint, this chart from HomeAdvisor should give you an idea of what it may cost to paint your house. Please note that these estimates include labor costs as the painting of the exterior is a job better suited for a professional.

Home Stories Square Footage Cost Range
Single Story 1,000–1,500 $1,500–$3,500
Two Stories 1,500–2,500 $3,000–$6,200
Three Stories 2,500–3,000+ $4,500–$10,000+

Exterior painting can get complicated due to the variety of materials you can find on the outside of a home. Different materials require different paints and tools in order to prepare them for the outdoor elements.

To budget for how much it might cost to paint the exterior of your house, you have to look at each type of material you’ll have to paint. The following estimates look at the costs of painting a few materials, including the tools, paint, and labor possibly required to complete the paint job.

Concrete Siding

Cost estimate: $500 (app. 250 sq. ft.) to $3,000 (app. 1,000 sq. ft.)

Why: Because concrete walls have to be prepared before painting, you may be required to remove previous finishes to ensure the paint won’t peel or chip off, which can increase labor costs. In order to prime the concrete, you may need special sealants, paints, and primers to help the final coat of paint endure against the elements.

Metal Siding

Cost estimate: $400 to $3,500

Why: Metal siding, generally made of aluminum and galvanized steel, may require cleaning before painting. If any of the metal is rusted or damaged—or there are missing pieces—a professional may have to repair the metal. If the damage is severe, old paint likely will need to be removed from the area around the problem in advance of painting.

Stucco Siding

Cost estimate: $1,400 to $6,000

Why: Depending on the state of the previous paint job, stucco can be one of the easier materials to paint. The smooth and limited variability of the surface might make a stucco project more affordable than painting other types of materials. The process may involve cleaning the stucco, caulking windows, and filling in surface cracks, although if the previous paint has deteriorated to the point of peeling or bubbling, the amount and nature of preparation work can increase.

Vinyl Siding

Cost estimate: $600 to $3,500

Why: Vinyl siding needs to be cleaned and repaired, if necessary, before beginning to paint, and a careful evaluation of the benefits is often the best approach. It can be about the same cost to replace vinyl as it would be to paint the surface, as vinyl is typically installed with the chosen color embedded within the plastic. Additionally, the plastic is often brittle with age and doesn’t always warrant the investment in money for a paint job.

Wood Siding

Cost estimate: $700 to $3,000

Why: Similar to painting wood furniture or floors, wood siding that is damaged due to element exposure can be painted or stained. This process may help defend wood siding against sun, humidity, pollen, mold, and other environmental elements like insects. The cost might increase if the wood has holes or other issues, but the painting process should help protect your home’s exterior from needing more repairs later on.

Tips on How to Pay for the Cost of Painting Your House

Because painting supplies and labor costs are often different depending on regional aspects and the large variety of substrates, it can be difficult to know your final cost of painting your house until you research supplies and professionals in your area. In the meantime, you can check out this paint cost calculator for an idea of how much you may spend to paint the inside or outside of your home.

The Takeaway

The cost to paint a house is dependent upon the size and texture of the surface area, the kind of paint used, and whether you hire a professional or tackle the painting yourself. If you don’t have the available cash to pay for the costs of painting, it’s often preferable to find ways to save up for your project.

As an alternative, you can consider applying for a SoFi Personal Loan to help with home improvement projects. Unsecured personal loans can be used for a variety of purposes and can go a long way to help making your home improvement ideas a reality.

With a quick online application process and lower rates than most credit cards, SoFi Personal Loans can help you transform your house into a dream home. Check your rate in just two minutes.

Need a change of color? Find your rate for a SoFi personal loan today.


Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
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Source: sofi.com

Buying a House in Atlanta During Covid-19 – Redfin

The US housing market has been continuously analyzed amidst the COVID-19 outbreak, with many Americans questioning the impact Coronavirus may have on buying a home in their local market. While conditions can change rapidly, Atlanta’s housing market hasn’t seen a drastic negative impact from the virus. 

Many people are still looking to buy a house in Atlanta but less are choosing to sell, creating an inventory shortage. The pandemic has forced everyone involved to be a little more creative in order to tour homes and close deals, so we turned to our Atlanta-based real estate agents to share their experiences and knowledge about the condition of the market and answer some questions below. 

buying a house in Atlanta

buying a house in Atlanta

How are potential homebuyers touring homes right now?

In the age of Coronavirus virtual home touring has been at an all-time high, but does that mean homebuyers are no longer touring homes in person? The city is seeing a fair mix of virtual and in-person tours from those who are looking to buy a house in Atlanta. 

“I’m receiving more virtual tour requests than usual, but I’m actually getting less virtual tours than I thought. I’m seeing about 50/50 split between video and virtual tours and in-person tours” says Redfin agent Shoy Cooper. 

The majority of buyers in Atlanta, GA will tour homes in person before making an offer. When doing in-person tours, agents are very cautious and pay careful attention to the safety of their clients and the homeowners. When touring homes, it is highly recommended that only 2 people tour the home at a time and wear protective gear, including masks and gloves. 

According to Redfin agent Stephanie Beckwith “one thing we see a lot at the entrance of homes is homeowners have hand sanitizer, gloves, and other protective gear. Homeowners often keep all lights on and ask us to not really touch anything.” Even during COVID-19, agents, homeowners, and homebuyers are still able to make the home buying and selling process happen, it’s just a little different now. 

Has competition declined? How competitive are the offers on current homes listed for sale?

The competitiveness of the Atlanta housing market is largely based on the original price point. In the current market, those who are looking to buy a house in Atlanta under the $400,000 range are facing a lot of competition. Homes priced in this range, and in desirable neighborhoods are selling quickly and receiving multiple offers. 

According to Redfin agent Heather Plaisance, “the sellers that are still active in the market definitely are pricing to sell, or they just have a hot commodity and are continuing to go under contract. What I  feel like we’re struggling with is new homes coming available.” 

Because the inventory of new homes for sale is low, homes that are fairly priced, and areas with good school districts and amenities are receiving offers and going under contract very quickly. “There are just not a lot of homes and that’s the problem, there aren’t enough homes in the market for the number of buyers we still have” says Stephanie. 

As for homes in the higher price range, they are not seeing as much competition. These homes tend to stay on the market longer and receive fewer offers. Overall, the current landscape of the Atlanta housing market is still very competitive as the inventory of new homes listed for sale remains low.  

Is there a larger number of offers falling through? 

Some agents aren’t seeing listing cancellations and contract withdrawals, while others have reported cancellations due to lending restrictions on those trying to buy a house in Atlanta. Lenders becoming more strict with their guidelines has caused a few offers to fall through. 

According to Shoy, “prior to COVID-19 multiple lenders were interested in lending to potential homebuyers. These buyers were in a pretty good spot in regards to their credit scores and finances, but because lenders have become stricter with their parameters, certain amounts that they were comfortable lending allowances for before ended up falling through.” 

Other than the complications that come with stricter lending restrictions, agents have not seen many offers fall through due to other circumstances. 

Were closings being postponed due to stay-at-home orders? Can you close remotely? 

Although many things have changed and evolved during this pandemic, many deals are still being finalized on time, or even early. Due to the competitive nature of the market, closings are rarely being pushed back. In addition, closing attorneys have been getting creative and finding new ways to make closings happen safely and on time. Most eClosings have been done by buyers who are moving to Atlanta from another state. 

Shoy says, “curbside closings and eClosings have been the most common. I just had a closing that was a curbside closing. We were able to e-sign most of the documents before we arrived. But for all contracts that had to be signed in person, the closing attorney came out to the car and handed the documents to the buyer to sign as I stood nearby acting as a witness.” 

Closings during the  COVID-19 pandemic are definitely different but the new process isn’t stopping anyone from purchasing their dream home. “It’s a matter of just changing how you do things and adapting,” says Heather. 

Are homes receiving fewer offers? 

As Atlanta continues to have fewer homes listed for sale and more competition, homes are seeing more offers. Popular homes are seeing multiple offers, and some of these homes are going under contract within the same day they are listed. Stephanie found that “for homes in the desired price point, and with the low-interest rates, people are still very interested in touring homes and making offers to try to get a home under contract. We are getting into a lot of multiple offers more so right now then in the past.”

Is the current market in favor of buyers or sellers?  

There’s a general consensus that the current market in Atlanta is in favor of sellers. We are seeing fewer homes on the market, meaning these homes will most likely sell quickly, and sell close to the asking price. “Sellers are in a good position because there’s just not enough on the market, and they’re pretty much selling at the offer price or over the list price, and maybe a little bit more” says Stephanie. 

Although we are seeing a high demand for homes for sale in certain price ranges, we see less competitiveness on homes listed with a higher sell price. According to Shoy, “it’s one of those things where price point makes a difference. The higher you go, the greater your chances are that a seller will be much more flexible to negotiate with you in order to get the home sold.” So for the most part, Atlanta is currently a seller’s market. “Seller’s dictate the market, as long as they have a well priced or reasonably priced home that is marginally appealing it’s going to sell” says Heather. 

Source: redfin.com

The 10 Best Closed-End Funds (CEFs) for 2021

A dreadful 2020 for most of the world is mercifully over. But while investors have plenty of hope for 2021, many still have some trepidation. Fortunately, the market’s best closed-end funds (CEFs) – an often overlooked corner of the market – can provide many of us with a solution.

While the head of steam from late 2020 has many confident about this year, some are worried that a 2021 rally is already fully priced in. Meanwhile, downside risks are prevalent. For instance, the vaccine rollout has been slower than anticipated, and Joe Biden’s 100 million shots in his first 100 days as president might be a moonshot we don’t hit.

Then there are the 7 billion people who live outside of the U.S., many of whom are unlikely to get the shot in the first half of 2021, or even this year at all.

By the way, what exactly does the post-vaccine world look like? Have consumers changed their habits? If so, how? How many people will go back to Main Street to eat, drink and shop? Are we at the cusp of a new roaring ’20s, or will fear and uncertainty be a drag on growth? Will a bigger financial catastrophe ensue in the coming months, forcing businesses that have struggled for over a year to finally throw in the towel?

Investors consumed by those uncertainties can lean on the stable income provided by some of the market’s best CEFs. You can learn more about how they work in our closed-end funds primer, but in general, while performance might ebb and flow, CEFs can help balance that performance out with a steady flow of typically robust payouts many times higher than the broader market.

Here are 10 of the best CEFs to buy for 2021. In my work as head research analyst and writer for CEF Insider, I constantly scour the market for the best opportunities in closed-end funds. A few of the following CEFs play on the prevailing themes of the coming year, while others are contrarian bets that still bear consideration giving management’s excellent track records. That can make them invaluable tools for income investors looking to make hay of the coming year, no matter what happens.

Data is as of Jan. 27. Distributions can be a combination of dividends, interest income, realized capital gains and return of capital. Distribution rate is an annualized reflection of the most recent payout and is a standard measure for CEFs. Fund expenses and discounts/premiums to net asset value (NAV) provided by CEF Connect.

1 of 10

BlackRock Science and Technology Trust

BlackRock logoBlackRock logo
  • Market value: $1.3 billion
  • Distribution rate: 4.2%
  • Expenses: 0.92%

This list of the best CEFs for 2021 is going to be a little heavy on the technology side. That might seem counterintuitive given the “smart money’s” focus on value for 2021, but these funds should not only be resilient this year, but fruitful for many years to come as technology continues to dominate daily life.

The BlackRock Science and Technology Trust (BST, $54.04) is the first such tech-oriented fund worth considering, in part because of its tremendous track record. The BST has produced a 311% total return (price plus distributions) since inception in late 2014 – that’s not only better than the S&P 500’s 117% return in that time, but better than the 217% return of the tech-heavy Nasdaq, and the 269% return of the Technology Select Sector SPDR ETF (XLK).   

The secret behind that outperformance is management’s aggressive tech selections. While the top holdings include blue chips such as Apple (AAPL) and Microsoft (MSFT) that appear at the top of cap-weighted tech funds, you also get decent weights in still large but more emergent holdings such as Twilio (TWLO), C3.AI (AI) and Square (SQ).

This strategy is likely to be a long-term winner over time. But its prospects could be better than many expect in 2021 if a slow vaccine rollout and mutant COVID-19 strains extends a heavier-than-normal dependence on the companies BST holds.

Learn more about BST at the BlackRock provider site.

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BlackRock Science and Technology Trust II

BlackRock logoBlackRock logo
  • Market value: $2.8 billion
  • Distribution rate: 3.9%
  • Expenses: 1.30%

That said, even if the Joe Biden administration is able to ramp up the vaccine rollout and we go back to something more closely resembling a pre-pandemic world, certain habits – such as working from home and ordering groceries online – aren’t just going to immediately snap back to pre-pandemic levels.

And thus, the internet will continue to be an important place for companies to attract attention and customers.

Technology really is in a “heads I win, tails I win too” situation with regards to the future, which is why BST and the BlackRock Science and Technology Fund II (BSTZ, $35.66) are great CEF options for 2021.

While BST skews more toward traditional, large-cap companies, BSTZ’s average market cap is a bit smaller, and it’s also more internationally focused (about 60% U.S. stocks versus 70% for BST). Top holdings include not just C3.AI, but also Farfetch (FTCH), U.K. electric vehicle company Arrival and social app Snap (SNAP).

This CEF also goes farther than BST with a lot of private equity bets that provide it access to up-and-coming companies that BST is too big to dig into. That has helped BSTZ roughly double in value since late 2018 inception, and helped it hike its distribution by 15% in late 2020.

Learn more about BSTZ at the BlackRock provider site.

3 of 10

AllianzGI Artificial & Technology Opportunities Fund

Allianz GI logoAllianz GI logo
  • Market value: $927.1 million
  • Distribution rate: 5.6%
  • Expenses: 1.34%

Like BST and BSTZ, the AllianzGI Artificial & Technology Opportunities Fund (AIO, $27.00) is a relatively low-yielding tech CEF – though its 5.6% yield is better than both BlackRock offerings. Over the past year, this young fund has outperformed the Nasdaq Composite by more than 3 percentage points.

Importantly, AIO currently trades at 3% discount to its net asset value. A hallmark of CEFs is that their limited number of shares means that at times, they can trade at premiums or discounts to their NAV. So at the moment, you can buy the assets in AIO for, effectively, 97 cents on the dollar.

AIO has a surprisingly diversified and value-driven investment strategy. While highflying tech companies like NXP Semiconductors (NXPI) and Roku (ROKU) are top holdings, the company’s third and fourth biggest positions – Microsoft (MSFT) and Deere (DE) – are much more value-driven. In fact, AIO has mixed a high-tech portfolio with some non-tech companies – UnitedHealth Group (UNH) is another big position – which looks odd, considering its name, but it gives the portfolio a well-rounded flavor that is compelling to an investor who wants strong returns but also a little diversification.

What’s most admirable about AIO’s portfolio is what it says about management and how it views the world. It understands that technological innovations aren’t the exclusive domain of technology companies. Firms such as UNH, who uses artificial intelligence (AI) to optimize its margins by lowering insurance claims, are also beneficiaries of technology and need to be bought accordingly when they’re the most beaten up.

AIO is a unique fund that combines the best of value investing and growth investing at a time when too many people pit the two against each other, and that makes it one of the best CEFs for 2021, and perhaps long after that.

4 of 10

Columbia Seligman Premium Technology Growth Fund

Columbia Threadneedle logoColumbia Threadneedle logo
  • Market value: $458.0 million
  • Distribution rate: 6.4%
  • Expenses: 1.15%

Columbia Seligman Premium Technology Growth Fund (STK, $28.82) is relatively small but it’s hardly overlooked, given a five-year average premium to NAV of about 3%. But fortunately for new money, STK now trades at a small 2% discount to NAV, providing an excellent entry point for someone looking to buy tech assets slightly on the cheap, and with a strong distribution rate.

The portfolio’s focus on large and reliable tech companies has helped it be a strong wealth creator for years: STK’s top holdings in Lam Research (LRCX), Apple (AAPL), and Teradyne (TER) belie a management style focused on well-established long-term growth prospects rather than the more aggressive speculation found at the margins of BST, or more centrally in BSTZ.

That does mean less price upside for investors – performance falls somewhere in between the Nasdaq-100 and the S&P 500 since inception in late 2009. But importantly, it provides a lot of performance in the form of regular distributions. Not only has STK never cut those distributions, but it has even delivered the occasional special distribution.

If you want exposure to the tech sector but prefer a more conservative portfolio, STK might be one of the best CEFs for your consideration.

Learn more about STK at the Columbia Threadneedle provider site.

5 of 10

BlackRock Enhanced Equity Dividend Trust

BlackRock logoBlackRock logo
  • Market value: $1.6 billion
  • Distribution rate: 7.2%
  • Expenses: 0.87%

If you’re looking for CEFs that really start to live up to their high-yield reputations, you’ll want to look toward funds such as the BlackRock Enhanced Equity Dividend Trust (BDJ, $8.31).

BDJ, with a 7%-plus yield on a distribution that actually went up in 2019, has been gaining investor confidence. A discount to NAV that widened all the way to 23% in 2020 has since narrowed down to about 10% – still a nice discount, but proof that investors are starting to rediscover this fund.

BlackRock Enhanced Equity Dividend Trust is certainly not a technology fund – while the sector is third at about 13% of assets, financials (28%) and healthcare (18%) are much larger pieces of the pie. Its larger holdings include the likes of Citigroup (C), Verizon (VZ) and Bank of America (BAC), all above 3% each.

Its diversification across the economy makes it a compelling CEF bet for 2021, especially if you’d like some contrarian holdings that might accelerate their rebounds this year.

Learn more about BDJ at the BlackRock provider site.

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Pimco Dynamic Income Fund

Pimco logoPimco logo
  • Market value: $3.1 billion
  • Distribution rate: 10.2%
  • Expenses: 3.71%*

Closed-end funds can certainly deliver much more yield than 7%, of course, but you have to get a little more exotic, and take on a bit more risk.

One of the best high-yielding CEFs for 2021 could be the Pimco Dynamic Income Fund (PDI, $21.05). This actively managed fund is overseen by one of the largest bond buyers in the world: Pimco, whose $1.9 trillion in assets makes it a major market mover. That position has helped Pimco (and PDI) gain access to bonds and derivatives that most market players can’t access.

In turn, that edge should ensure Pimco remains one of the bond market’s dominant players.

PDI’s strong yield is generated by more than just its portfolio of mortgage-related instruments, investment-grade corporates, junk bonds, EM debt and other issues, but high leverage. Closed-end funds are allowed to take out debt to invest even more money into their selections – a tactic that can lead to more volatile results, sure, but also higher distribution rates and returns.

Pimco Dynamic Income Fund has put up remarkable returns compared to your average bond fund – a roughly 192% total return since 2012 inception versus 31% for the Bloomberg Barclays US Aggregate Bond Index. That performance hasn’t come in nearly as straight a line, but PDI has made up for it by delivering occasional payout growth and special distributions.

* Includes a 1.99% baseline expense and 1.72% in interest expenses.

Learn more about PDI at the PIMCO provider site.

7 of 10

Cohen & Steers Quality Income Realty Fund

Cohen & Steers logoCohen & Steers logo
  • Market value: $1.7 billion
  • Distribution rate: 7.8%
  • Expenses: 2.00%*

A contrarian play of 2021 is in real estate. While some people expect a rebound as more people get vaccinated and get out of their homes, the pandemic taught the world that a lot of office space is unnecessary, and that some of America’s physical store footage is superfluous.

That has some people wondering what’s going to happen to all those office buildings and strip malls.

Whatever will happen, it seems pretty clear that a lot of real estate holders are set for bankruptcy – which is why real estate investment trusts (REITs) were one of the worst sectors of 2020, and one of the slowest to recovering.

But that makes REITs compelling now – or at least the babies that are being thrown out with the bathwater are. Not all real estate is going to go fallow for years, and really good real estate investors will know which is which.

That makes the Cohen & Steers Quality Income Realty Fund (RQI, $12.30) one of the best CEFs for 2021 – well, if the REIT market rebounds.

The strongest performer of all CEFs in 2019, RQI has a tremendous track record; since its inception in 2002, RQI has returned 426% to beat the SPDR Dow Jones REIT ETF’s (RWR) 372%. Currently, the fund holes a good blend of infrastructure, self-storage, healthcare, industrial and other real estate, led by American Tower (AMT), Public Storage (PSA) and Welltower (WELL).

Better still, it trades at a tidy 5% discount to NAV. Compare that to a premium it fetched through much of the late 2010s because its portfolio kept crushing the real estate market. Credit goes to management’s acumen for that.

* Includes a 1.11% baseline expense and 0.89% in interest expenses.

Learn more about RQI at the Cohen & Steers provider site.

8 of 10

Cohen & Steers REIT and Preferred and Income Fund

Cohen & Steers logoCohen & Steers logo
  • Market value: $1.1 billion
  • Distribution rate: 6.7%
  • Expenses: 1.96%

Similar to RQI, the Cohen & Steers REIT and Preferred and Income Fund (RNP, $22.30) has a strong portfolio of high-performing real estate that’s hand-picked by a management team who knows the industry.

Unlike RQI, RNP is diversified out of REITs by including preferred stocks in other sectors (mostly finance) to help it in thin years for real estate. The CEF’s 6.7% yield isn’t quite what you get from RQI, but it’s a dependable monthly payout stream that has never been cut, not even during the 2007-09 financial crisis nor the 2020 bear market.

Instead of being rewarded with a premium for its historical strength and reliable payouts, RNP trades at a 4% discount to NAV. If real estate recovers quickly, the discount on this CEF should disappear.

Learn more about RNP at the Cohen & Steers provider site.

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BlackRock Muniyield Quality Fund II

BlackRock logoBlackRock logo
  • Market value: $317.8 million
  • Distribution rate: 4.6%
  • Expenses: 2.29%*

Amid 2020’s counterintuitively strong year for stocks, you might be concerned that equities across the board are in for an eventual correction, and you might want to diversify into bonds.

Tax-free municipal bonds are one strong option, and the 4.6%-yielding BlackRock Muniyield Quality Fund II (MQT, $14.09) is one of the better options out there for you.

Importantly, this is a high-quality portfolio; more than 90% of holdings are investment-grade, including nearly 80% in A-rated bonds or better. Instead, its relatively high yield distribution rate (remember that municipal bond yields are lower than most other bonds, but make up for it through tax exemptions) is a result of a high (37%) use of leverage.

Meanwhile, you can get these municipal bonds for roughly 95 cents on the dollar at present.

* Includes a 0.92% baseline expense and 1.37% in interest expenses.

Learn more about MQT at the BlackRock provider site.

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Pimco Municipal Income Fund

Pimco logoPimco logo
  • Market value: $369.7 million
  • Distribution rate: 4.6%
  • Expenses: 1.91%*

The Pimco Municipal Income Fund (PMF, $14.25) yields a similar 4.6%, but it certainly does not trade at a discount at the moment. In fact, it very rarely does. PMF has traded at a premium to NAV for most of its history, and the only consolation is that its current 6% premium is less than its five-year average of about 9%.

For a long while, that premium was in part justified by its long history of stable distributions. But then, PMF cut payouts for the first time in early 2017, then again last year.

The upside? Pimco Municipal Income now offers a much more sustainable payout, and despite those cuts, it has delivered superior total returns to its rivals – it has returned 106% over the past decade, roughly doubling the 54% return of the iShares National Muni Bond ETF (MUB) in that same time.

This is still a Pimco bond product, which alone makes it worthy of a closer look. And again, despite its payout declines, it has delivered solid performance over the long term. That makes PMF one of the best CEFs for income investors not just in 2021, but farther down the road.

* Includes a 1.17% baseline expense and 0.74% in interest expenses.

Learn more about PMF at the Pimco provider site.

Michael Foster is the head research analyst and writer for CEF Insider, a newsletter dedicated to high yielding closed-end funds. For more great income ideas, check out Michael’s latest free special report, Indestructible Income: 5 Bargain Funds with Safe 9.7% Dividends.

Source: kiplinger.com

Priced In: How 50 Million Vaccines Is a Bad Day – The Best Interest

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I love today’s topic—“pricing in” future events. As with many stock market ideas, it combines both rational and irrational thinking. (The stock market, irrational?!) Today’s idea combines math and psychology—two blog favorites. We’ll pull fun analogies from sports betting and beauty contests and the NBA draft. Understanding how future events get “priced in” is vital to properly grasp stock market behavior.

What Does “Priced In” Mean?

Priced in” means that future events are already being considered in determining the price of a stock (or asset).

Expectation and anticipation cause traders to buy and sell stocks before the event they’re expecting or anticipating actually occurs. As the event becomes more likely to come true, the event gets more priced in.

Wonka Suspense - Reaction GIFs

The anticipated event often comes to fruition and the stock market barely reacts. Why? Because the expectation and anticipation have already priced in the event itself.

One of my favorite quotes from Burton Malkiel explains the concept perfectly:

If it were obvious a stock will go up tomorrow, why wouldn’t it go up today?

Burton Malkiel

Doesn’t that make sense?

If everyone knew that Apple stock was going up to $200 tomorrow, people would buy it today. As long as you buy today under $200, it’s a smart move.

But the act of buying—a.k.a. increased demand—would push the price up. The price would settle at $200. Why? Because there would be no demand to buy the stock at $201. Buying at $201 would be dumb if we know it’s only worth $200.

The prophecy has fulfilled itself, albeit a day earlier than expected. The price didn’t go up to $200 tomorrow. It went up to $200 today. The news of tomorrow’s increase got priced in before tomorrow acutally occurred.

This is a simple example of future events getting priced in to a stock price. The real world is more complex than Malkiel’s quip. It’s never that obvious. But news gets priced in to asset prices every day.

News Is Priced In To Tesla’s Stock

Let’s take a real-world look at Tesla. Why is Tesla up 800% since the beginning of 2020?

Tesla delivered 500,000 cars in 2020. They delivered 367,000 cars in 2019. But that’s not 800% more cars!

Nor did Tesla build 800% more manufacturing facilities. Their 2020 revenue stats aren’t reported yet, but their third-quarter revenue was only 39% more than their Q3 2019 revenue. That’s not 800%!

So how can we explain Tesla’s 800% stock growth? You guessed it. Future expectations are being priced in to the stock. Some people call this “pulling forward” future profits. Analysts believe that Tesla will eventually justify its high stock price.

If I expect that Tesla is going to produce 5 million cars a year by 2025, then that should be priced in to their stock today. If Tesla will have $200 billion in annual revenue by 2030, then that revenue should be priced in to the stock today.

The market is already leaning forward on Tesla, and now Elon Musk’s feet (wheels?) need to play catch-up.

Top 30 Cybertruck Glass GIFs | Find the best GIF on Gfycat
The shatter-proof Cybertruck windows. Oops!

Is “pricing in” always accurate? Of course not. I’m sure some optimism around Tesla is misplaced. It’s psychological. It’s irrational. …We’ll get into that later.

Good News, Bad Results

Pfizer is one of the leading developers of the COVID-19 vaccines. Surely their stock would be a smart purchase…right?

If that’s the case, then we need to examine why Pfizer’s stock price is down ~15% since mid-December 2020. And the problem involves too much good news being priced in.

Let’s go back to March 2020, when COVID-19 first shocked the Western world. If I had predicted, “A company will develop a vaccine and ship 50 million units by the end of the year,” I would have been called crazy! No vaccine had ever been developed in that kind of timeline.

So why did Pfizer’s stock price drop so much when they announced in December that they’d ship 50 million units by the end of the 2020?

It’s because they had earlier promised 100 million units, and that promise had been priced in to their stock. “Good news” is all relative. “50 million units” is phenomenal compared to our March 2020 assumptions. But “50 million units” is disappointing compared to the promise of 100 million units.

We frequently see this pattern in the stock market. “Good news” can make stocks go down. “Bad news” can make stocks go up. “No news” gets interpreted a million different ways. It’s all relative, and all depends on what news has already been priced in.

The Keynesian Beauty Contest

Up to this point, we’ve only thought about fundamentals getting priced in to an asset price. Future revenue, future profits, future production, etc. These are all metrics that affect a company’s intrinsic value and their potential dividends. And those metrics get reflected in the stock’s price.

But there’s also a psychological component to the stock market. It’s game theory. Specifically, it’s the thought process, “Screw my opinion. How will everyone else react to this news? How will ‘Mr. Marketreact?”

To explain this idea, famous economist John Maynard Keynes created (in 1936) the “Keynesian Beauty Contest,” a game theory/psychological metaphor that remains useful in describing markets today.

Alive in the long run - The enduring legacy of John Maynard Keynes | Books & arts | The Economist
John Maynard “The Mustache” Keynes

Keynes asks you to imagine a newspaper beauty contest with 100 contestants. You can act as a judge by writing to the paper and picking your top six most attractive faces. If you pick the most attractive faces, you win a prize.

At first blush, your job is easy. Who do you find attractive? Pick your six and your job is done. Maybe you’ll win the prize.

Keynesian Inception

But then you pause. You really want that prize. Does your strategy make sense?

No, your strategy doesn’t make sense. Instead, you realize, you’d be better off thinking, “How do others judge beauty? Who would they pick as their six most attractive faces?”

You should pick a new set of six faces based on your views of the group’s judgment.

But then you pause again. Perhaps everyone else has already priced in the group’s judgment into their choices!

Individual opinion was Level One. And your views of the group’s judgment was Level Two. Instead, you should now ask, “What does everyone else think about how everyone else thinks?” That’s Level 3.

It quickly gets confusing, a layered onion of opinions about opinions.

This is how Keynes described the stock market, and he’s largely been proven correct. Some people buy stocks not because of fundamentals, but instead because they think other people want the stocks.

Human psychology gets priced in.

Sports Betting, Sports Drafting

There are two terrific analogies of the “priced in” phenomenon from the world of sports.

Sports Betting

Let’s say everyone’s favorite Buffalo Bills just beat the evil New England Patriots by a score of 31 to 20. And yet, in this hypothetical, people who bet on the Buffalo Bills lost their bets? (Trust me, it’s my hypothetical!) How can this be?!

Buffalo Bills GIF by NFL - Find & Share on GIPHY

A betting line is a form of gambling where the bookmakers set a handicap that changes a contest’s probability to approximately 50/50.

In my hypothetical scenario, the bookmakers handicapped the Buffalo Bills by 15 points. That’s how good they think the Bills team is. Via this betting line, the Bills’ skill has already been priced in to their performance.

So when the Bills win by “only” 11 points, it’s disappointing news relative to how good the bookmakers thought they were. They were supposed to be 15 points better. The Bills team is happy, the Bills fans are happy, but Bills bettors might be unhappy. The Bills weren’t quite as good as they had hoped.

This is parallel to news being priced in on the stock market.

Sports Drafting

I remember being so confused as a 12-year old basketball fan. Why do NBA teams draft untested high school players ahead of seasoned, proven, talented 22-year old college seniors? The 22-year old is clearly the better player, I thought.

But I was wrong. The 22-year old is the better player right now. And focusing only on present talent is an important distinction between 12-year old basketball fans and professional basketball scouts.

When NBA teams draft an 18-year old high schooler, they have priced in his future growth. By the time he is 22, they believe he’ll be better than the 22-year old college player is right now (and potentially better than the 22-year old will be when he’s 26). The college player has a better past performance than the 18-year old. But the NBA cares about predicting future performance.

It’s easy to confuse past performance with future performance. Let’s look at Apple. Their stock is high because they’ve been leading consumer computing hardware for 15 years—right?

Wrong. Sure, the past 15 years of performance give us confidence that Apple can maintain their leading position into the future. But Apple’s price is based on predictions about their future, not on results from their past. The future gets priced in. The past is only useful insofar as it informs that future.

Why is the Stock Doing X?!

I hope the concept of future events getting “priced in” helps you better understand the stock market. Many exasperated questions—why is the stock market going up?! down?! sideways?!—are answered through this lens.

If you enjoyed this article and want to read more, I’d suggest checking out my Archive or Subscribing to get future articles emailed to your inbox.

This article—just like every other—is supported by readers like you.

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Tagged beauty contest, betting, keynes, nba draft, priced in

Source: bestinterest.blog

Priced In: How 50 Million Vaccines Is a Bad Day

Table of Contents show

Share This Post:

I love today’s topic—“pricing in” future events. As with many stock market ideas, it combines both rational and irrational thinking. (The stock market, irrational?!) Today’s idea combines math and psychology—two blog favorites. We’ll pull fun analogies from sports betting and beauty contests and the NBA draft. Understanding how future events get “priced in” is vital to properly grasp stock market behavior.

What Does “Priced In” Mean?

Priced in” means that future events are already being considered in determining the price of a stock (or asset).

Expectation and anticipation cause traders to buy and sell stocks before the event they’re expecting or anticipating actually occurs. As the event becomes more likely to come true, the event gets more priced in.

Wonka Suspense - Reaction GIFs

The anticipated event often comes to fruition and the stock market barely reacts. Why? Because the expectation and anticipation have already priced in the event itself.

One of my favorite quotes from Burton Malkiel explains the concept perfectly:

If it were obvious a stock will go up tomorrow, why wouldn’t it go up today?

Burton Malkiel

Doesn’t that make sense?

If everyone knew that Apple stock was going up to $200 tomorrow, people would buy it today. As long as you buy today under $200, it’s a smart move.

But the act of buying—a.k.a. increased demand—would push the price up. The price would settle at $200. Why? Because there would be no demand to buy the stock at $201. Buying at $201 would be dumb if we know it’s only worth $200.

The prophecy has fulfilled itself, albeit a day earlier than expected. The price didn’t go up to $200 tomorrow. It went up to $200 today. The news of tomorrow’s increase got priced in before tomorrow acutally occurred.

This is a simple example of future events getting priced in to a stock price. The real world is more complex than Malkiel’s quip. It’s never that obvious. But news gets priced in to asset prices every day.

News Is Priced In To Tesla’s Stock

Let’s take a real-world look at Tesla. Why is Tesla up 800% since the beginning of 2020?

Tesla delivered 500,000 cars in 2020. They delivered 367,000 cars in 2019. But that’s not 800% more cars!

Nor did Tesla build 800% more manufacturing facilities. Their 2020 revenue stats aren’t reported yet, but their third-quarter revenue was only 39% more than their Q3 2019 revenue. That’s not 800%!

So how can we explain Tesla’s 800% stock growth? You guessed it. Future expectations are being priced in to the stock. Some people call this “pulling forward” future profits. Analysts believe that Tesla will eventually justify its high stock price.

If I expect that Tesla is going to produce 5 million cars a year by 2025, then that should be priced in to their stock today. If Tesla will have $200 billion in annual revenue by 2030, then that revenue should be priced in to the stock today.

The market is already leaning forward on Tesla, and now Elon Musk’s feet (wheels?) need to play catch-up.

Top 30 Cybertruck Glass GIFs | Find the best GIF on Gfycat
The shatter-proof Cybertruck windows. Oops!

Is “pricing in” always accurate? Of course not. I’m sure some optimism around Tesla is misplaced. It’s psychological. It’s irrational. …We’ll get into that later.

Good News, Bad Results

Pfizer is one of the leading developers of the COVID-19 vaccines. Surely their stock would be a smart purchase…right?

If that’s the case, then we need to examine why Pfizer’s stock price is down ~15% since mid-December 2020. And the problem involves too much good news being priced in.

Let’s go back to March 2020, when COVID-19 first shocked the Western world. If I had predicted, “A company will develop a vaccine and ship 50 million units by the end of the year,” I would have been called crazy! No vaccine had ever been developed in that kind of timeline.

So why did Pfizer’s stock price drop so much when they announced in December that they’d ship 50 million units by the end of the 2020?

It’s because they had earlier promised 100 million units, and that promise had been priced in to their stock. “Good news” is all relative. “50 million units” is phenomenal compared to our March 2020 assumptions. But “50 million units” is disappointing compared to the promise of 100 million units.

We frequently see this pattern in the stock market. “Good news” can make stocks go down. “Bad news” can make stocks go up. “No news” gets interpreted a million different ways. It’s all relative, and all depends on what news has already been priced in.

The Keynesian Beauty Contest

Up to this point, we’ve only thought about fundamentals getting priced in to an asset price. Future revenue, future profits, future production, etc. These are all metrics that affect a company’s intrinsic value and their potential dividends. And those metrics get reflected in the stock’s price.

But there’s also a psychological component to the stock market. It’s game theory. Specifically, it’s the thought process, “Screw my opinion. How will everyone else react to this news? How will ‘Mr. Marketreact?”

To explain this idea, famous economist John Maynard Keynes created (in 1936) the “Keynesian Beauty Contest,” a game theory/psychological metaphor that remains useful in describing markets today.

Alive in the long run - The enduring legacy of John Maynard Keynes | Books & arts | The Economist
John Maynard “The Mustache” Keynes

Keynes asks you to imagine a newspaper beauty contest with 100 contestants. You can act as a judge by writing to the paper and picking your top six most attractive faces. If you pick the most attractive faces, you win a prize.

At first blush, your job is easy. Who do you find attractive? Pick your six and your job is done. Maybe you’ll win the prize.

Keynesian Inception

But then you pause. You really want that prize. Does your strategy make sense?

No, your strategy doesn’t make sense. Instead, you realize, you’d be better off thinking, “How do others judge beauty? Who would they pick as their six most attractive faces?”

You should pick a new set of six faces based on your views of the group’s judgment.

But then you pause again. Perhaps everyone else has already priced in the group’s judgment into their choices!

Individual opinion was Level One. And your views of the group’s judgment was Level Two. Instead, you should now ask, “What does everyone else think about how everyone else thinks?” That’s Level 3.

It quickly gets confusing, a layered onion of opinions about opinions.

This is how Keynes described the stock market, and he’s largely been proven correct. Some people buy stocks not because of fundamentals, but instead because they think other people want the stocks.

Human psychology gets priced in.

Sports Betting, Sports Drafting

There are two terrific analogies of the “priced in” phenomenon from the world of sports.

Sports Betting

Let’s say everyone’s favorite Buffalo Bills just beat the evil New England Patriots by a score of 31 to 20. And yet, in this hypothetical, people who bet on the Buffalo Bills lost their bets? (Trust me, it’s my hypothetical!) How can this be?!

Buffalo Bills GIF by NFL - Find & Share on GIPHY

A betting line is a form of gambling where the bookmakers set a handicap that changes a contest’s probability to approximately 50/50.

In my hypothetical scenario, the bookmakers handicapped the Buffalo Bills by 15 points. That’s how good they think the Bills team is. Via this betting line, the Bills’ skill has already been priced in to their performance.

So when the Bills win by “only” 11 points, it’s disappointing news relative to how good the bookmakers thought they were. They were supposed to be 15 points better. The Bills team is happy, the Bills fans are happy, but Bills bettors might be unhappy. The Bills weren’t quite as good as they had hoped.

This is parallel to news being priced in on the stock market.

Sports Drafting

I remember being so confused as a 12-year old basketball fan. Why do NBA teams draft untested high school players ahead of seasoned, proven, talented 22-year old college seniors? The 22-year old is clearly the better player, I thought.

But I was wrong. The 22-year old is the better player right now. And focusing only on present talent is an important distinction between 12-year old basketball fans and professional basketball scouts.

When NBA teams draft an 18-year old high schooler, they have priced in his future growth. By the time he is 22, they believe he’ll be better than the 22-year old college player is right now (and potentially better than the 22-year old will be when he’s 26). The college player has a better past performance than the 18-year old. But the NBA cares about predicting future performance.

It’s easy to confuse past performance with future performance. Let’s look at Apple. Their stock is high because they’ve been leading consumer computing hardware for 15 years—right?

Wrong. Sure, the past 15 years of performance give us confidence that Apple can maintain their leading position into the future. But Apple’s price is based on predictions about their future, not on results from their past. The future gets priced in. The past is only useful insofar as it informs that future.

Why is the Stock Doing X?!

I hope the concept of future events getting “priced in” helps you better understand the stock market. Many exasperated questions—why is the stock market going up?! down?! sideways?!—are answered through this lens.

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