Uncommon Knowledge
Newsweek is committed to challenging conventional wisdom and finding connections in the search for common ground.
American renters are fearful that their home-owning aspirations are increasingly getting out of reach, according to a recent survey by the real-estate platform Redfin, amid an environment of high home prices and elevated mortgage rates.
Almost 40 percent of the renters polled told surveyors they did not believe they would own a home of their own, up from 27 percent in a similar survey Redfin conducted in May and June. Part of the struggle for these Americans is that homes are beyond what they can afford. Securing a down payment can prove elusive, and high mortgage rates may discourage them from acquiring property.
Read more: How to Get a Mortgage in 2024
The Redfin survey sampled about 3,000 U.S. residents in February, and its analysis of renters’ expectations came from a 1,000 renters in the poll.
Mortgage rates in particular have stayed elevated over the past six months. After hitting a peak of 8 percent—the highest level since the turn of the century—mortgage rates declined to the mid-6 percent range at the end of the year and into 2024. In recent weeks, however, the cost of home loans have ticked up to above 7 percent, depressing activity in the mortgage market.
On April 11, the 30-year fixed rate rose to almost 7.4 percent, Mortgage News Daily reported, the highest levels since November 2023. The rise follows news that suggests borrowing costs may stay elevated for longer than economists initially anticipated.
High mortgage rates now mean that first-time buyers must earn about $76,000 to afford what the industry describes as a starter home, which is an 8 percent increase from a year ago and almost 100 percent higher than it was before the pandemic, Redfin said. It added that home prices have soared more than 40 percent since 2019, as buyers took advantage of low borrowing costs during the pandemic to acquire houses, increasing demand, escalating competition and pushing up prices.
Read more: Compare Top Mortgage Lenders
“Buying a home has become increasingly out of reach for many Americans due to the one-two punch of high home prices and high mortgage rates,” Redfin wrote.
Renters being unable to buy homes has in turn contributed to increased competition and price jumps in the rental market. The median asking rent is at $2,000 in the U.S., close to the record high it reached in 2022, Redfin said. Still, despite the elevated cost of rent, renting may be a more affordable option than homeownership.
“Housing costs are high across the board, but renting is a more affordable and realistic option for many Americans right now—especially those who have never owned a home and aren’t able to tap into equity from a previous sale,” said Daryl Fairweather, Redfin’s chief economist. “While owning a home is usually a sound long-term investment, the barriers to entry and upfront costs of buying are higher than renting.”
To purchase a house, a buyer would need about $60,000 as a down payment for a home loan, an amount that is out of reach for many Americans.
Fairweather added, “The sheer expense of purchasing a home is causing the American Dream of homeownership to lose some of its shine.”
Newsweek is committed to challenging conventional wisdom and finding connections in the search for common ground.
Newsweek is committed to challenging conventional wisdom and finding connections in the search for common ground.
Source: newsweek.com
There is nothing good to report on mortgage rates from last week. The chart below shows that we broke the critical technical level on the 10-year yield (marked with a red line). The CPI data, which the Federal Reserve doesn’t track for its 2% target, came in 0.1% hotter than estimates, but that was good enough to take one mortgage rate cut off the table for now. I talked about this last week on the HousingWire Daily podcast.
Now that this technical level has been broken, 2024 is going to be a lot more interesting, something I discussed in an interview with Yahoo Finance.
Now, with the specter of a wider war in the Middle East as Iran launches strikes against Israel, what will the bond market do? Some will say that bonds rallied ahead of the pending war news on Friday, but we will get a better answer Sunday night with bond market trading.
One positive thing for mortgage rates is that spreads between the 30-year mortgage and the 10-year yield are improving. I believe these spreads became one of the bigger mortgage stories, as the banking crisis sent the spreads to new cycle highs. This data line is improving and for now, it mitigates the damage done by the higher 10-year yield.
Of course, if the spreads get better from here and bond yields fall again, then mortgage rates can act much better on the downside. This is something to watch for in the future.
Things are hapenning fast with mortgage rates, which is why I update HousingWire’s Mortgage Rate Center page with analysis every weekday morning — looking at how the bond market reacts to economic data or an event that can move rates.
Usually, I would jump for joy at last week’s inventory growth. However, last week’s numbers don’t get a passing grade: The rebound impact of Easter boosted last week’s inventory data, just like it caused the inventory data to decline in the previous week.
One item to note for this year is the year-over-year comparisons on active inventory. Inventory bottomed out on April 14 last year, which was the longest time it took for the housing market to find a seasonal bottom ever. From now to the end of the year, the easy comps to show inventory growth are over. It will get more challenging to show more growth unless inventory starts to pick up, especially toward the end of 2024. However, with higher mortgage rates, we should see more inventory growth.
It’s the same story with the new listing data; we got a nice snap-back from Easter. I am a big fan of the inventory growing year over year based on new listing data, and this is a big plus for the housing market. I had anticipated more growth, but as long as we are showing some growth this year, I will take that as a victory. Last year, it was savagely unhealthy that new listings data was trending at the lowest recorded levels.
In an average year, one-third of all homes take a price cut; this is standard housing activity. When mortgage rates increase, demand falls and the price-cut percentage grows. That percentage falls when rates drop and demand improves.
This price-cut data line is critical to track now as inventory growth picks up for spring and mortgage rates have increased since the start of the year. Higher mortgage rates mean higher inventory growth and more price cuts, which keeps the model simple.
Here is the price-cut percentage for last week over the last several years:
Purchase applications dropped last week, down 5% week to week, but they showed a significant 23% decline year over year. The Easter holiday year-over-year comps have played a bit into this data line. We saw an excellent rebound in our pending contracts data last week and the inventory growth data from week to week. Now that Easter is out of the mix, we can move ahead on the week-to-week and year-over-year data with some more clarity.
Since November 2023, when mortgage rates started to fall, we have had 10 positive prints versus seven negative prints and two flat prints week-to-week. Year to date, we have had four positive prints, seven negative prints, and two flat prints.
Do mortgage rates move with war news? Yes, they often do. Some speculate that in a war, money goes into the bond market as a flight to safety, pushing rates lower. However, war can also lead to higher inflation and higher mortgage rates. I discussed the economics of conflicts tied to mortgage rates as a premise for double-digit mortgage rates on this recent HousingWire Daily podcast.
This week, we will see how the bond and stock markets react to the news from the Middle East. We will also get retail sales numbers, which have been holding up better than most had anticipated for some time now. Also, we’ll get a ton of housing data, including the builders confidence, housing starts and existing home sales.
Source: housingwire.com
A cup and handle pattern is something identified by stock traders or investors analyzing data related to certain securities. Traders analyzing stock charts can identify a cup and handle pattern, which comprises a period of falling values followed by a “breakout,” and use it to help inform their trading decisions.
The cup and handle pattern is one of many that investors may identify and use to help make investing decisions.
The cup and handle security trading pattern is a bullish continuation pattern used in technical analysis. When the pattern appears on a stock chart, it shows a period of price consolidation followed by a price breakout. The pattern is called cup and handle because it has two distinct parts: the cup and the handle.
The cup pattern forms after an advance and looks like a bowl with a round bottom. It forms after a price advance. After that pattern forms, a “handle” forms to the right of the cup within a trading range. Finally, there is a breakout above the range of the handle, showing a bullish continuation of the prior advance.
Stock broker William O’Neil identified the cup and handle stock pattern and introduced it in his 1988 book, How to Make Money in Stocks.
💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.
The cup-and-handle candlestick pattern starts with the formation of the “cup,” which looks like a bowl. The two sides of the cup are not always the same height but in a perfect scenario they would be. Once the cup forms, the stock price pulls back, forming a “handle” out to the right of the cup. The handle shows price consolidation happening before a price breakout occurs.
The handle is smaller than the cup and generally doesn’t retrace more than ⅓ of the cup’s advance, staying in the upper part of the cup range. It can also form a triangle shape. If the handle forms at the bottom price range of the cup, the pattern may indicate that this is not a good time to trade. It may take six months or longer for the cup pattern to form, but the handle forms much faster, ideally within four weeks.
The entire pattern can also form within minutes or days. Technical analysts watching the cup-and-handle pattern try to buy when the price breaks out from the handle. This is marked by when the price moves above the old resistance level, which is the top of the right side of the cup. The more volume in the breakout the stronger the buy signal.
To estimate the price target the stock might hit after the breakout, a trader would measure the distance from the bottom of the cup to the top of the right side of the cup and then add that number to the buy signal point. If the left and right sides of the cup are different heights, the smaller side would give a more conservative price target, and the taller would be a more aggressive target.
The cup-and-handle is a candlestick pattern that indicates a cup-shaped price consolidation. This involves a downward price movement, a stabilization period, then a price increase of about the same amount as the downward movement.
This is followed by a sideways pullback between the high and low of the cup shape, forming the handle. Then, a price breakout indicates increasing trade volume. However, as with any trading pattern, a cup-and-handle pattern does not guarantee the stock price will continue on a bullish trajectory, it’s just a trading indicator.
The cup and handle is a bullish pattern that can show a continuation or a reversal from a bearish trend into a bullish trend. Either way it indicates that the stock price will likely rise following the pattern.
An example of a cup and handle pattern would be if a cup shape forms between $48 and $50. A handle should then form between $49 and $50, ideally closer to $50. Then the price should break out above the price range of the handle.
💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.
The cup-and-handle pattern is one strategy that traders can use to get a sense of the market and inform their investing decisions. However, it is not a perfect tool.
Like any trading pattern, the cup and handle should be used in conjunction with other trend indicators and signals to make informed trading decisions. Although the cup and handle pattern can be a useful and easy to understand pattern to find entry and exit points, it does have some drawbacks.
The cup-and-handle pattern may form over the course of a day, weeks, months, or even a year. This makes it challenging to figure out exactly when to place a purchase order. Generally it forms over a month to a year, but identifying the exact breakout point is not easy.
Also, the depth of the cup can be a confusing part of the pattern. A shallow or a deep cup might be a false signal. The cup also doesn’t always form a handle at all, and the liquidity of the stock also affects the strength of the trading signal.
Traders wait for the handle pattern to form, which may either be in the shape of a sideways handle or a triangle. When the stock price breaks out above the top of the handle, that indicates completion of the cup-and-handle pattern, and creates a signal that stock price could continue to rise.
Although the cup-and-handle pattern can be a strong buy indicator, it does not guarantee that prices will go up. The stock price may rise, fall again, then continue to rise. Or it might rise and then simply fall.
One way to avoid significant losses when this happens is to set a stop-loss on trades with your broker. Day traders may want to close out the trade before the market closes.
While the cup-and-handle pattern has traditionally been used for stock trading, it can also be used in crypto trading. Cup and handle patterns have formed in Bitcoin and Ethereum charts in recent years. Bitcoin formed a cup and handle pattern in 2019, and Ethereum formed one in 2021. The basic guidelines and indicators are the same for crypto as for stocks.
Recommended: Crypto Technical Analysis: What It Is & How to Do One
Stock patterns are signals that form a certain recognizable shape when charted graphically, making them easy to spot and trade. They can help traders find entry or exit points, estimate price targets and potential risk. The cup-and-handle pattern is a useful and easy to follow trading pattern to help traders spot entry points for bullish trades.
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For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.
Yes, the cup and handle pattern is considered a bullish market signal, and investors may take it as a sign that they should go “long” on an investment or specific market position.
The cup and handle pattern is merely an indicator, and not a promise or sure sign that something is going to happen. As such, investors should be careful not to take it as a sure thing. That said, investors may do well to use it in conjunction with other trading strategies and methods, and along with other trend markers.
The cup and handle pattern doesn’t have “rules” per se, but instead, is a pattern that forms on a stock chart. That form shows a stock price decreasing in price over a short period of time, then stabilizing, forming a “cup,” which is then followed by a rise in value, creating the “handle.”
Cup and handle patterns can emerge on a stock chart over several months, but many times, over a handful of weeks.
Photo credit: iStock/jacoblund
SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below:
Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.
Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.
SOIN0124096
Source: sofi.com
A central counterparty clearing house (CCP), or Central Counterparty, is a financial institution that facilitates trading activities in European equity and derivative markets. Regional banks typically operate CCPs which are an important part of the international financial system.
CCPs maintain stability and efficiency across financial markets and reduce risks including counterparty, default, and market risks. In the United States, CCPs are called Derivatives Clearing Organizations (DCO) and are regulated by the Commodity Futures Trading Commission (CFTC).
The Bank for International Settlements (BIS) defines a CCP as “a clearing house that interposes itself between counterparties to contracts traded in one or more financial markets, becoming the buyer to every seller and the seller to every buyer and thereby ensuring the future performance of open contracts.” The Eurex is a well known CCP.
Central Counterparty Clearing Houses act as intermediaries between buyers and sellers in financial transactions. They handle clearing and settlements in various types of securities and derivatives transactions to reduce credit risk in the markets. Clearinghouses have existed for more than a century, and act as a way to reduce the risk of OTC derivative transactions.
💡 Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, the investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.
Central Counterparty Clearing Houses guarantee trade terms for buyers and sellers. They help reduce risk for investors by taking on credit risk involved in transactions, so even if a buyer or seller defaults on a transaction the other party doesn’t have as much loss as they might have without the CCP.
When buyers and sellers enter into transactions, they each deposit money with the CCP to cover the amount of the transaction. All CCP users must have a margin account.
In a process called “novation,” the CCP enters into two different contracts, one with the buyer and one with the seller. This provides a guarantee to the other party that if one side doesn’t follow through with the agreement the other side will still receive payment. CCPs typically use margin calls to settle trades if one party does not have the funds in their account.
If the trade falls through, the CCP completes the trade at the current market price. CCPs are for-profit businesses that generate revenue from their members and their transactions. They also work with parent exchanges that require them to remain profitable. Just like other types of businesses, CCPs each operate differently and have different business strategies to attract customers and earn revenue.
For instance, there are different types of derivative products that a CCP might choose to offer. One common business model for CCPs is to cross-margin products in a single netting pool. Parent exchanges place obligations on CCPs, so they need to earn enough revenue to meet those.
The specific financial products offered by a CCP, as well as its risk level, fee structure, and other features lead to different types of members, organizational structure, regulations, and rules for margin balances.
CCPs continue to evolve, offer new products, and become more sophisticated over time. Regulations are also evolving for CCPs which may change how they operate in the future.
CCPs maintain the anonymity of investors’ identities to protect their privacy. They also maintain the privacy of trading firms from buyers and sellers by using electronic order books and protect brokerage firms from the risk of buyers and sellers defaulting on their end of options such as calls or puts.
Another use of CCPs is to lower the number of transactions settled in order to move funds efficiently between investors.
💡 Quick Tip: How to manage potential risk factors in a self-directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.
Financial institutions that want to clear trades through a central counterparty can become members of a particular CCP. Membership allows them to reduce credit risk for their customers and themselves. There are CCPs for different types of financial transactions, so financial institutions can choose the appropriate CCP to apply to for their needs.
CCPs want members that have a significant transaction volume, are creditworthy, and have a trading operation that works efficiently with the system run by the CCP. CCPs also want members to contribute funds to their default fund and secure collateral for their transactions. Each CCP has somewhat different criteria and requirements for membership, and membership information is not always publicly available.
There are benefits and drawbacks to CCPs. Here are a few important ones to understand:
CCPs benefit investors in the following ways:
• Reduce counterparty risk
• Maintain stability in financial markets
• Increase efficiency of transactions
• Maintains privacy of customers
There are also some drawbacks to CCPs for investors, including the following:
• Participation fees
• May not be able to process non-standard transactions
• Some CCPs may not have adequate scale
CCPs are now being used with blockchain technology, made popular in cryptocurrency markets, to further reduce risk and costs. An international group of clearing houses launched the Post Trade Distributed Ledger Group launched in 2015. The group studies ways to use blockchain technology for transactions.
Since its formation, the group has expanded to include about 40 global financial institutions collaborating to bring CCPs together with blockchain. The goal of using blockchain technology with CCPs is to reduce margin requirements and risk, reduce operational costs, improve regulatory oversight, and increase the efficiency of trade settlements. Ideally blockchain can help support better settlements, clearing processes, and reporting.
Decentralized exchanges already operate similarly to CCPs as a third party that handles transactions.
Central counterparty clearing houses help reduce the risk of trading derivatives and securities. They became more popular after the financial crisis as a way for investors to minimize counterparty risk.
While CCPs may help maintain stability in financial markets and increase efficiency, they may also involve participation fees, or may not be able to process non-standard transactions. Understanding the ins and outs of CCPs can be helpful to investors as they learn to navigate the markets.
Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.
While a CCP acts as a clearing house for transactions, it has an additional step involved before doing so. The two parties involved in a transaction agree upon transaction terms, then the CCP must agree to the terms before they clear the transaction.
CCPs require customers to make collateral deposits, known as margin deposits, before entering into transactions. This provides them with funds they can use to guarantee trades in the event that one party defaults on an agreement. The initial margin required depends on the customer, the type of financial product, and the particular trade agreement.
Central clearing reduces counterparty risk by guaranteeing trades for buyers and sellers. They take on the credit risk involved in transactions by becoming the buyer to every seller and the seller to every buyer.
Photo credit: iStock/vm
SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below:
Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
*Borrow at 10%. Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information.
Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.
SOIN0124099
Source: sofi.com
You likely agree that saving money is a good idea. Putting extra cash aside every month can help you reach your financial goals, whether that’s building an emergency fund, going on vacation, or putting a down payment on a car or home.
But wanting to save money and actually doing it are two very different things. It’s easy to get caught up in day-to-day needs (and wants), and never gain any traction on savings. But don’t give up. We’ve got 33 tricks and tips that can make saving simple and pain-free. The best part — you can get started as soon as today.
While spending less and saving more admittedly sounds painful, it doesn’t have to be that hard. You don’t have to go to the extremes like never shopping or having fun. Just making a few small changes in your day-to-day spending habits can actually add up to a big difference in how much you save each month.
Getting better with money is like any type of behavior modification — the key to lasting change is to make small, incremental changes that stick.
💡 Quick Tip: Help your money earn more money! Opening a bank account online often gets you higher-than-average rates.
What follows are 33 simple money-saving tips you can start working on right now.
One of the best ways to spend less and save more is to take a close look at where your money is currently going. You can track your spending by scanning your checking account and credit card statements over the last few months. But a simpler way is to use a budgeting app that syncs with your accounts and keeps track of what you spend in different categories in real time.
Once you have a big-picture idea of your cash flow, you can make adjustments. Spending a lot more on takeout than you thought? Commit to cooking one or two more nights per week. Is keeping up with fashion killing your budget? You may want to focus on spending less on clothing.
An simple way to earn some extra cash is to periodically sell gently used items you no longer want or need. You might organize a yard sale or resell your items piecemeal via online marketplaces like OfferUp, Facebook Marketplace, or eBay. If you have extra clothes, shoes, or accessories in good condition, consider listing them on Poshmark or thredUP. Selling your unwanted stuff is essentially getting paid for clearing out clutter.
Watching influencers take luxury vacations and promote their favorite products can prompt you to spend more and live beyond your means. In fact, recent research finds that social media can significantly impact your finances — and not in a good way.
Putting a time limit on daily phone scrolling, on the other hand, can automatically lead to less spending and more saving. It also frees up time for activities that can truly enhance your life, like reading, exercising, seeing (real) friends, even taking up side hustle (and earning more money).
When we do things with focus, intention, and a clear goal in mind, we usually have an easier time making it happen. Instead of saving for the sake of saving, consider setting specific savings goals with target dates and amounts. For instance, maybe you want to save $5,000 for a summer vacation or $2,000 for a new computer.
By setting a target date, you can work backward and figure out exactly how much you need to set aside regularly. For example, if you want a new laptop in eight months, and it will cost you about $2,000, you’ll need to save $250 a month or about $60 a week.
Generic brands typically have the same ingredients and offer comparable quality to name brands but for a fraction of the price. For example, generic drugs usually cost 80% to 85% less than their brand-name counterparts. During your next supermarket or drugstore visit, try to go generic whenever it’s offered. Chances are, the only difference you’ll notice is less money draining out of your checking account.
Spending a bit of extra time comparison shopping can help you scoop up the best deals and avoid paying full price. You can do it on your phone while you shop in-store. For online shopping, consider installing a browser extension that helps you find the lowest prices and automatically applies coupons and cash-back options at checkout. Many of these tools will also alert you when the price of an item you intend to purchase drops.
Rather than transfer money to your savings account whenever you think of it, consider putting your savings on autopilot. Simply set up a recurring transfer from your checking account to your savings account for the same day each month (perhaps right after you get paid). It’s fine to start small. Even $50 can add up to a sizable sum over time, since the transfer happens every month without fail.
While it’s not directly putting money into your bank account, making on-time, consistent payments on your debt means you’ll pay it off quicker. Once your debt is paid off, the money you are currently spending on principal/interest can go towards savings. In addition to your monthly minimum payments, try to put extra payments towards high-interest debt each month. You’ll whittle those balances down faster and save on interest.
If you see something you want to buy but don’t actually need, consider putting off the purchase for at least one week (or ideally 30 days). Tell yourself that if you still want the item and can afford it after the waiting period, you can go ahead and buy it. Chances are good that once that waiting period is over, you’ll no longer have a burning need to purchase the item and simply move on.
If it’s 6pm, you’re tired from a full day of work, and have no food in the house, you’ll probably seek out the path of least resistance — getting takeout or eating out. Your best defense against overspending on food is to sit down every Sunday to scan recipes and come up with a meal plan for the week (including breakfast, lunch, dinner, and snacks). You can then make a shopping list and hit the store.
Recommended: Examining the Price of Eating at Home Versus Eating Out
While it’s fine to occasionally splurge on a fancy coffee, getting your daily coffee out can add up, especially if you sometimes throw in a tempting pastry at the last minute. Even cutting back your coffee shop visits to just two or three times a week and brewing at home the other days can help you save a lot on coffee.
While it is easier to replace items than fix them, the latter approach is better for both your wallet and the environment. Depending on the item, a repair could end up costing significantly less expensive than a replacement. Call around for quotes or ask for help from a tech-savvy or handy friend. Also see if there are “repair cafes” in your community. These are volunteer-run events where you can get items mended or fixed for free.
While credit cards are convenient, they make it all too easy to spend money. When you tap or swipe to make a purchase, you don’t really have a sense that you are giving up physical money. Switching to cash-only, even for just a month or so, can help you become more mindful about your spending. You might even try the envelope system. This involves labeling envelopes for each spending category, dividing your available cash for the month into the envelopes, and then only spending what’s in each envelope.
When it comes to cell service, you don’t have to stick with the big names. Mobile virtual network operators (such as Mint Mobile, Consumer Cellular or Republic Wireless) typically offer the same quality of service at a much lower price tag. It’s also a good idea to look at your last cell phone bill to see how much data you actually use. You may be able to get a smaller plan to save even more.
Before you hire someone for a home repair or improvement job, like painting a room, re-caulking your tub or shower, or installing a water filter under your sink, consider whether or not you could do it yourself. Often, the cost of materials and a simple YouTube search will lead to significant savings.
*Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.
There are two major types of coupons: Store coupons, which are issued by a specific retailer and can only be used at those locations (you can find these in the paper and through a retailer’s app or mailer); and manufacturer’s coupons, which are found on manufacturer’s and coupon sites. By stacking them, you get an even deeper discount. Stacking coupons for an item that is on sale is a triple whammy that can bring you back to pre-inflation prices.
Dropping subscriptions that you hardly use or are redundant is a simple money-saving move with a potentially big payoff, since these debits occur monthly. It’s worth scanning your checking account and credit card statements for recurring charges to see if there are any items you can cut. If you primarily watch one streaming service but pay for four, for example, canceling three can save you significant cash.
While keeping bottled water (and seltzers or sodas) on hand is convenient, the cost can add up, especially if you have a family. A simple way to spend less at the grocery store each week is to give each person in your household their own reusable water bottle. You can then take bottled drinks off your shopping list. This will not only save money but also reduce plastic waste.
You might be surprised at how many things you can actually get for free. For example, your library can grant you access to movies, books, activities, and in some cases, passes to state parks and other nearby attractions. You might also join a Buy Nothing group. These are hyper-local virtual communities where neighbors can give and receive essentially anything for free.
If you’re becoming a stranger to your gym, consider canceling your membership. Even if you got a great deal, gyms debit money out of your bank account every month, whether you go or not. You might look for alternative, low-cost ways to get physically fit, such as walking/jogging/biking around your neighborhood, lifting free weights at home, and taking hikes.
A nickel here and a quarter there might not seem like much, but if you start dropping all your spare change into a jar every day, you’ll be surprised at how much you’ll accumulate. If you rarely carry or pay in cash, consider collecting digital change. Many money-saving apps automatically round up your purchase to the nearest dollar, then transfer the difference into your savings account.
💡 Quick Tip: Want a simple way to save more everyday? When you turn on Roundups, all of your debit card purchases are automatically rounded up to the next dollar and deposited into your online savings account.
Ordering a cocktail or a glass of wine (or three) when out to dinner can significantly inflate your bill. Consider getting water or a non-alcoholic beverage instead, then perhaps having a glass of wine when you get home. If you must drink, local beer, “house wine” options, and happy hour cocktails are usually the cheapest options.
Taking the family to concerts, movies, and immersive art exhibits can add up quickly. Instead, look for free or low-cost community activities. These offerings typically spike during the summer months and around holidays. To stay abreast of upcoming goings-on, you can sign up for newsletters or follow social media accounts of your local community, recreation centers, and libraries.
A simple way to save (potentially hundreds) is to do a no-spend month. This involves spending money only on essentials for 30 days. Before you begin, it’s a good idea to set parameters for what you will and won’t spend money on and then commit to the plan. It’s only a month! By the end of the challenge, you may realize there were certain things you didn’t really miss and rethink your approach to spending.
You may be able to significantly lower your utility bills with just a few tweaks to your habits and home. Try taking shorter showers, fixing any drippy faucets or constantly running toilets, turning off lights whenever you leave a room, and washing your clothes in cold water. Once you see a difference in your monthly bills, you’ll be encouraged to carry on and find more ways to cut energy use.
If you typically get a refund after doing your taxes, you’re essentially giving the government an interest-free loan. That’s money that could be working for you by earning interest in a high-yield savings account. Revisit your withholdings and put that extra money into your own bank account.
It may sound boring, but you’d be surprised how much a staycation can feel like a fun and luxurious getaway. The key is to take a complete break from your daily routine, change up the scenery, and spend time doing things you truly enjoy. This can provide the respite you’ve been longing for — minus the headaches of travel — and for a fraction of the price.
If you focus too hard on saving and never on fun, you might end up feeling deprived and give up on the whole project. Instead, allow yourself to celebrate small money wins and life events on the cheap. For instance, for every X amount you’ve put away into your emergency fund, you might reward yourself with a fancy coffee, a $5 “spree” at the dollar store, or getting a treat at your favorite ice cream shop.
Overdraft fees, ATM fees, and monthly maintenance fees can make your bank account balance move in the wrong direction — down instead of up. To ditch costly overdraft fees, keep regular tabs on your checking account to make sure you have enough to cover your debits and checks. To eliminate other fees, you may want to look for a bank account that doesn’t charge monthly maintenance fees and ATM fees.
Negotiating prices isn’t just for buying cars or houses. You can haggle for just about any product or service — your cable and cell phone bills, things you buy in stores, and even your rent. The key to success is to come to the negotiation prepared (do all the research you may need in advance), speak with confidence, and start off the conversation with the question, “What flexibility do you have?”
Recommended: 15 Creative Ways to Save Money
It can be tempting to go hog wild and spend your windfalls. But next time you get a work bonus, cash gift, or tax refund (which you actually want to avoid, see tip #26), consider spending a small percentage of it on something frivolous and fun, then putting the rest into your savings account. This can help you reach your savings goals significantly faster.
Recommended: The Fastest Ways to Get a Tax Refund
If you want to buy something that you don’t need right away, it’s worth researching the best times of the year for deals and sales. For example, you can often find great deals on cars in May, October, November and December; clothes are typically cheapest at the end of any season; and the end and the very beginning of the year are generally the best times to buy appliances.
If your extra cash is sitting in a traditional savings account, you’re missing out on a free source of extra cash. A high-yield savings account is a type of savings that you can open at many banks and credit unions. But it differs from a traditional savings account in that it offers an annual percentage yield (APY) that’s 10 to 20 times higher. If, for example, you put $25,000 into a savings account with a 4.60% APY, you’ll earn an extra $177.78 by the end of the year — just for letting the money sit in the bank.
Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.
Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall. Enjoy up to 4.60% APY on SoFi Checking and Savings.
Saving money enables you to build an emergency fund that protects you against the unexpected. It also allows you to work towards — and achieve — future goals, such as buying a car or home, sending your kids to college, and being able to one day retire.
To find the motivation to save money, it helps to set specific goals. Think about the things you want to buy or do in the next year or two and how much these things will cost. You can then determine how much you need to set aside each month to reach your goals. Watching your savings account balance go up can also help keep you motivated.
When you don’t have a cushion of savings, any bump in the road (such as a car or home repair, trip to the ER, or loss of income) can force you to run up credit card debt. This can lead to a debt spiral that can take months, if not years, to recover from. Not saving also means you won’t make any progress towards your financial goals and simply continue living paycheck to paycheck.
Photo credit: iStock/Chaninan Boongate
SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.
SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.
Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.
SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2023 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Third-Party Brand Mentions: No brands, products, or companies 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.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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Source: sofi.com
Data experts on the mortgage team at NerdWallet dig into NerdWallet’s survey research, as well as public datasets, to identify trends and provide insights on the ever-changing U.S. housing market. On this page, you’ll find some of NerdWallet’s most-read research and commentaries on home buyers and sellers, mortgage interest rates and homeownership.
For NerdWallet statistics and data on additional topics, including credit cards, banking and student loans, head to our studies and data analysis hub.
Have questions or want to speak with a NerdWallet expert? Reach out to [email protected].
Daily mortgage interest rates
Mortgage interest rates this week
Mortgage interest rates this month
NerdWallet home and mortgages expert Holden Lewis writes a monthly column covering the near-term forecast for mortgage rates.
Every winter, NerdWallet collaborates with The Harris Poll to survey U.S. adults 18 years and older. The results provide a nationally representative snapshot of how Americans perceive the housing market.
2024 Home Buyer Report: Pessimism reigns as home buyers struggle and the goal of homeownership loses some of its luster.
2023 Home Buyer Report: Higher mortgage interest rates and apprehensions about the economy have Americans unsure about their ability to purchase homes.
2021 Home Buyer Report: Pent-up demand from would-be home buyers clashes with a limited supply of homes for sale.
2020 Home Buyer Report: Buying a home is a top priority, especially for younger generations, but some feel locked out of homeownership.
2019 Home Buyer Report: Recent buyers have had to get competitive to close their deals, and many feel stretched by the costs of homeownership.
2018 Home Buyer Report: Homeownership is a widely shared goal, but concerns about costs keep some buyers sidelined.
Each quarter, NerdWallet data analyst Elizabeth Renter analyzes information from sources including the U.S. Census, the Bureau of Labor Statistics and the National Association of Realtors to better understand the challenges facing first-time home buyers.
Q4 2023: A slight bump in inventory isn’t enough to ease affordability challenges.
Q3 2023: Higher mortgage rates outpace slight price declines seen in some metros.
Q2 2023: Seasonality appears to be returning to home prices.
Q1 2023: Banks’ tighter lending standards add to the difficult climate for first-time buyers.
Q4 2022: Higher mortgage interest rates deter buyers, easing inventory woes.
Q3 2022: Price increases slow, but rising mortgage rates eat into potential savings.
Q2 2022: Falling wages and price growth intensify affordability struggles.
Q1 2022: Two years’ worth of data highlights housing market challenges.
Q4 2021: High prices and low inventory are a double whammy in some markets.
Q3 2021: Moderate improvements may be blips, not trends.
Q2 2021: Notable year-over-year decline in affordability.
Q4 2020: Typical winter shifts in the housing market may help home buyers.
Q3 2020: Competition is hot for the limited supply of homes on the market.
Q2 2020: Real estate booms as the country comes out of quarantine.
Q1 2020: Home prices rise, even as the effects of the pandemic are unclear.
Elevated mortgage rates took a bite out of new home sales in February, as they declined slightly from the previous month. Builders continue to respond to affordability concerns; half of the homes sold in February cost under $400,000, compared with 45% in January.
March 25, 2024
Latest housing market columns from Holden Lewis
Home buyers
Home improvement
2022 study: After a boom in renovations and DIY projects, homeowners may dial back home improvement plans (Nov. 2022).
2020 study: Homeowners prioritize DIY and paying for projects with cash (Oct. 2020).
Home sellers
2023 data analysis: Why homeowners may want to sell despite higher interest rates (March 2023).
2021 study: What to expect listing a home in a seller’s market (April 2021).
2019 study: What sellers should know before listing (May 2019) .
Housing market
Mortgage denials
2022 data analysis: Higher home prices and debt contribute to home loan denials (Nov. 2023).
2021 data analysis: Competition and lack of collateral drive mortgage denials (Oct. 2022).
2020 data analysis: Tighter lending standards make some home loans harder to obtain (Nov. 2021).
2019 data analysis: Debt-to-income ratio most-cited reason for mortgage denials (Oct. 2020).
Source: nerdwallet.com
Portfolio beta refers to a popular metric that investors use to measure a portfolio’s risk, or its sensitivity to price swings in the broader market. While past performance does not indicate future returns, knowing a portfolio’s beta can help investors understand the price variability of their stocks, or how much their holdings may move if there’s stock volatility or big gains in a benchmark index like the S&P 500.
Investors often consider beta a measure of systematic risk, or risk that stems from the entire market and that investors can not diversify away. Macro events such as interest-rate or economic changes often fall into the category of systematic risk, while idiosyncratic, stock-specific risk includes events like a change in company management, new competitors, changed regulation, or product recalls.
Table of Contents
The Beta of a portfolio formula requires relatively simple math, as long as investors know the Beta for each stock that they hold and the portion of your portfolio that each stock comprises.
Here are the steps you’d follow to calculate the Beta of a hypothetical portfolio:
1. Calculate the total value of each stock in the portfolio by multiplying the number of shares that you own of the stock by the price of its shares:
Stock ABB: 500 shares X $20 a share each = $10,000.
2. Figure out what proportion each stock in their portfolio represents by dividing the stock’s total value by the portfolio’s total value:
Stock ABB’s total value of $10,000/Portfolio’s total value of $80,000 = 0.125.
3. Multiply each stock’s fractional share by its Beta. This will calculate the stock’s weighted beta:
Stock ABB’s beta of 1.2 X its fractional portfolio of 0.125 = 0.15.
4. Add up the individual weighted betas.
Here is the whole hypothetical portfolio with a total beta of 1.22, benchmarked to the S&P 500. That means when the index moves 1%, this portfolio as a whole is 22% more risky than the index.
Stock | Value | Portfolio Share | Stock Beta | Weighted Beta |
---|---|---|---|---|
ABB | $10,000 | 0.125 | 1.20 | 0.15 |
CDD | $30,000 | 0.375 | 0.85 | 0.319 |
EFF | $15,000 | 0.1875 | 1.65 | 0.309 |
GHH | $25,000 | 0.3125 | 1.42 | 0.44375 |
Sum | 1.22 |
Investors always measure a portfolio’s beta against a benchmark index, which they give a value of 1. Stocks that have a beta higher than one are more volatile than the overall market, and those with a beta of less than one are less volatile than the overall market.
Understanding beta is part of fundamental stock analysis. Once you know the beta of your portfolio, you can make changes in order to increase or decrease its risk based on your overall investment strategy by changing your asset allocation.
There are four ways to characterize beta:
A high beta stock — one that tends to rise and fall along with the market often — has a value of greater than 1. So if a stock has a beta of 1.2 and is benchmarked to the S&P 500, it is 20% more volatile than the broader measure.
If the S&P 500 rises or falls 10%, then the stock would conversely rise or fall 12%. The same would be true for portfolio beta. While there’s more downside risk with high-beta stocks, they can also generate bigger returns when the market rallies – a principle of Modern Portfolio Theory.
A low beta stock with a beta of 0.5 would be half as volatile as the market. So if the S&P 500 moved 1%, the stock would post a 0.5% swing. Such a stock may have less volatility, but it also may have less potential to post large gains as well.
Still, investors often prefer lower volatility securities. Low beta investment strategies have shown strong risk-adjusted returns over time, too.
Stocks or portfolios with a negative beta value inversely correlate with the rest of the market. So when the S&P 500 rises, shares of these companies would go down or vice versa.
Gold, for instance, often moves in the opposite direction as stocks, since investors tend to turn to the metal as a haven during stock volatility. Therefore, a portfolio of gold-mining companies could have a negative beta.
So-called defensive stocks like utility companies also sometimes have negative beta, as investors buy their shares when seeking assets less tied to the health of the economy. A downside to negative beta is that expected returns on negative beta securities tend to be weak – even less than the risk-free interest rate.
A stock or portfolio can also have a beta of zero, which means it’s uncorrelated with the market. Some hedge funds seek a market-neutral strategy. Being market-neutral means attempting to perform completely indifferent to how an index like the S&P 500 behaves.
💡 Quick Tip: Options can be a cost-efficient way to place certain trades, because you typically purchase options contracts, not the underlying security. That said, options trading can be risky, and best done by those who are not entirely new to investing.
For investors, calculating the beta of all their stock holdings can be time consuming, and typically, financial data or brokerage firms offer beta values for stocks.
But if you wanted to calculate beta for an individual stock, you’d divide a measure of a stock’s returns relative to the broader market over a given time frame by a measure of the market’s return by its mean, also over a specific time frame. Here is the formula:
Beta = covariance/variance
Covariance is a measure of a security’s returns relative to the market’s returns.
Variance is a measure of the market’s return relative to its mean or average.
Recommended: What Is Covariance and How Do You Calculate It?
Beta is one of the Option Greeks, terminology frequently used by traders to refer to characteristics of specific securities or derivatives in the market. Another commonly used Greek term is Alpha. While beta refers to an asset’s volatility relative to the broader market, Alpha is a measure of outperformance relative to the rest of the market.
Beta also comes up a lot in the exchange-traded fund or ETF industry. Smart Beta ETFs are funds that incorporate rules- or factor-based strategies.
A variety of factors impact an asset’s beta. In general, stocks seen as riskier than average typically feature higher betas. Stock-specific factors such as debt levels, aggressive management, bold projects, volatile cash flows, and even ESG factors can influence a stock’s idiosyncratic risk. Higher business risk, while stock-specific, can lead to a more volatile stock price than the overall market, hence a higher beta.
Higher betas often appear in particular sectors. There are even investment fund strategies that play on beta – you can buy funds that exclusively own high beta or low beta stocks. A stock’s sector, industry, geographic location, and market cap size all impact a stock’s volatility and beta.
Cyclical and growth sectors like energy, industrials, information technology, and consumer discretionary often feature high betas. Utilities, consumer staples, real estate, and much of the healthcare sector typically have low beta.
Small caps and stocks domiciled in emerging-market economies also often have a higher beta (compared to the U.S. large-cap S&P 500).
💡 Quick Tip: Are self-directed brokerage accounts cost efficient? They can be, because they offer the convenience of being able to buy stocks online without using a traditional full-service broker (and the typical broker fees).
1. A stock’s beta may change over time. Because beta relies on historical price data, it is subject to change.
2. Beta is not a complete measure of risk. It can be a useful way for investors to estimate short-term risk but it’s less helpful when it comes to considering a long-term investment because the macroeconomic environment and company’s fundamentals may change. In some cases, beta is not the best measure of a stock or a portfolio’s risk.
3. Beta is an input when investors are using the Capital Asset Pricing Model (CAPM) — a way to measure the expected return of assets taking into account systematic risk. It’s a method that also looks at the cost of capital for investors.
4. The estimated beta of a stock will be less helpful for companies that do not trade as frequently. Thin liquidity for a stock may bias its beta value since there is less robust historical price data.
5. Beta does not offer a complete picture of a stock’s risk profile as it’s linked to systematic risk. Investors must also consider stock-specific risk when managing their portfolios.
As discussed, beta is a popular metric that investors use to measure a portfolio’s risk, or its sensitivity to price swings in the broader market. Knowing stock holdings’ betas can be important information when you’re building your portfolios.
You can calculate their portfolio beta using simple math as long as you’re able to obtain the individual betas for your stock holdings. While beta is a helpful tool to try to gauge potential volatility in a portfolio, its reliance on historical data makes it limited in measuring the complete risk profile of an asset or portfolio.
Qualified investors who are ready to try their hand at options trading, despite the risks involved, might consider checking out SoFi’s options trading platform. The platform’s user-friendly design allows investors to trade through the mobile app or web platform, and get important metrics like breakeven percentage, maximum profit/loss, and more with the click of a button.
Plus, SoFi offers educational resources — including a step-by-step in-app guide — to help you learn more about options trading. Trading options involves high-risk strategies, and should be undertaken by experienced investors.
For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.
In a general sense, a good beta for a portfolio would be 1. That’s only a general guideline or rule of thumb, however, as it means that a portfolio’s value is roughly as volatile as the market overall.
A beta of 1.3 means that a portfolio’s value is 30% more volatile than the overall market, which means its value will swing more wildly than the market.
Beta measures a portfolio or asset’s sensitivity relative to the overall market. If a portfolio’s beta is 1, it is equally as volatile as the market, not more or less so.
Perhaps the simplest way to reduce your overall portfolio’s beta is to replace higher-beta assets within the portfolio with assets that have lower associated beta.
It is possible, and would amount to a zero-beta portfolio, which means the portfolio itself has no systemic risk whatsoever. In other words, this portfolio would have no relationship to the overall movements of the market, and likely have low returns.
A stock beta is a measure of an individual stock’s volatility, while portfolio beta is a measure of an overall investment portfolio’s volatility.
SoFi Invest®
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SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below:
Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
[cd_ETFs]
Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.
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Source: sofi.com
Special margin requirements refer to higher-than-normal requirements for margin traders. That typically means requirements that are above 25%.
According to the Securities and Exchange Commission (SEC), many brokers keep even higher maintenance margin requirements, typically between 30% and 40% — and sometimes higher depending on the type of securities purchased. These special margin requirements may vary.
Special margin requirements are higher than standard margin requirements — above a maintenance margin rate of 25%. Higher margin rate requirements mean you must maintain a higher equity amount in your account when trading on margin.
Margin trading refers to using cash and securities in your account as collateral to purchase more assets. In doing so, you can use leverage to amplify returns — but you must also pay interest on borrowed funds. For anyone interested in trading on margin, it’s important to know the rules of margin accounts and also which stocks feature special margin requirements.
When it comes to trading stocks on margin, there are plenty of blanket rules and regulations in place. For instance, the Federal Reserve requires a 50% initial margin and a 25% maintenance margin.
The Financial Industry Regulatory Authority (FINRA) and the New York Stock Exchange (NYSE) also require at least $2,000 of cash or securities to be deposited before someone can trade in a margin account.
Special margin requirements are often found on highly volatile stocks, so just a small drop in the price of these stocks can trigger a margin call. Brokers might also issue special margin requirements on concentrated positions in your account. Leveraged positions and other factors might also trigger special margin requirements.
Leverage and margin are related — but not the same.
Brokers do not just haphazardly issue special margin requirements. An analysis of historical volatility is used along with the use of SPAN margin. SPAN margin is calculated by standardized portfolio analysis of risk — a system used by exchanges around the world to control risk. SPAN margin determines margin requirements based on an assessment of one-day risk for a trader’s account. It is used primarily in options and futures markets. The SPAN system allows an exchange to know what a “worst-case” one-day move could be for any open futures position.
Special Margin Requirement | Standard Margin Requirements |
---|---|
Brokers can determine special margin rates | Initial margin set at 50% |
A special margin requirement might exist for a concentrated position | Some securities cannot be purchased on margin |
💡 Quick Tip: Are self-directed brokerage accounts cost efficient? They can be, because they offer the convenience of being able to buy stocks online without using a traditional full-service broker (and the typical broker fees).
Special margin requirements work by enforcing stricter equity deposits in your account when trading volatile stocks. The broker wants to protect itself in the event the securities in your account rapidly drop in value. Another way a broker protects itself is by issuing margin calls when special margin requirement percentages are breached.
With a margin call, you must deposit more cash or securities into your account to meet the call. You can also liquidate your holdings to generate cash and increase your equity percentage. If you fail to meet the call on time, the broker might liquidate your positions for you.
For a broker, it’s important to have safeguards like special margin requirements in place in case financial markets turn volatile. If many investors face margin calls all at once, the broker could face credit risk if those investors are unable to repay loans used in margin trading.
💡 Quick Tip: When you trade using a margin account, you’re using leverage — i.e. borrowed funds that increase your purchasing power. Remember that whatever you borrow you must repay, with interest.
In terms of benefits and drawbacks, the upside is that special margin requirements help to control risk when investors engage in day trading — and the downside is more restrictions on your margin trading account.
Here’s a deeper dive into positives and negatives for the broker and for the investor.
Pros | Cons |
---|---|
Reduces risk when markets turn volatile | More restrictive trading could turn away customers |
Allows for tighter margin calls on risky positions | Individuals might seek looser requirements from other brokers |
Historical data provides a guide as to which stocks are most volatile | Uncertainty exists when trying to predict what the most volatile securities will be going forward |
Pros | Cons |
---|---|
Highly volatile stocks are easier to identify | Higher equity is required to trade certain stocks |
Provides a guardrail when trading stocks | Margin calls can trigger more quickly |
Can be a tool to identify highly volatile stocks for options trading | Margin percentages can change without notice |
While many stocks and ETFs have initial margin amounts of 50% and maintenance margin levels at 25%, some volatile stocks have higher special margin requirements. These requirements help protect both brokers and investors in the event that the stock tanks.
Margin trading is typically riskier than trading with a cash account. Investing with borrowed funds amplifies returns — positive and negative. It is important to be aware of the risks involved with this strategy.
If you’re an experienced trader and have the risk tolerance to try out trading on margin, consider enabling a SoFi margin account. With a SoFi margin account, experienced investors can take advantage of more investment opportunities, and potentially increase returns. That said, margin trading is a high-risk endeavor, and using margin loans can amplify losses as well as gains.
Get one of the most competitive margin loan rates with SoFi, 10%*
A margin account is a type of brokerage account in which your broker lends you cash, using the account’s equity as collateral, to purchase securities. These securities are known as marginable securities. Margin increases your purchasing power but also exposes you to the potential for larger losses.
Margin requirements are percentages of equity you must maintain in your margin trading account. According to Regulation T of the Federal Reserve Board, the initial margin for equities is 50% and maintenance margin is 25%. There are higher special margin requirements for highly volatile stocks. In addition, if you have a concentrated position, you might face a special higher margin requirement.
The NYSE and FINRA require a deposit of $2,000 or cash or securities with your broker before trading on margin. Some firms may require larger deposits.
Photo credit: iStock/akinbostanci
SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below:
Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
*Borrow at 10%. Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information.
Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.
SOIN0124080
Source: sofi.com
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Fri, Apr 5 2024, 11:47 AM
I head to Central Texas today (A53 on Southwest; something about maybe seeing an eclipse); statewide Texas home ownership rate is about 64 percent. This is a shade lower than the 66 percent nationwide. (Home ownership & operational challenges facing lenders are a couple of the topics Mike Metz with Arizona’s V.I.P. Mortgage will discuss today at 2PM CT.) And a huge percentage of those homeowners have low fixed rates. People can be “locked-in” or constrained in their ability to make appropriate financial changes, such as being unable to move homes or sell assets due to tax burdens. In the U.S., nearly all 50 million active mortgages have fixed rates, and most have interest rates far below prevailing market rates, creating a disincentive to sell. These frictions, whether institutional, legislative, personal, or market-driven, are a real problem. The FHFA, Fannie & Freddie’s conservator, has a research piece on this since residential real estate exemplifies this challenge with its physical immobility, high transaction costs, and concentrated wealth. (Found here, this week’s podcasts are sponsored by Loan Vision. With Loan Vision, the mortgage banking industry’s premier mortgage accounting solution, you can take your accounting department from “cost center” to “revenue generator,” operating more efficiently and profitably. Hear an interview with HireAHelper’s Miranda Marquit on a new study that shows that as Millennials age, they’re moving less than ever.)
Customer Relationship Management
Discover Velma CRM, a plug-n-play, simple CRM solution geared especially for small to mid-size lenders, brokers, credit unions, and banks. With all the features you need and not a bunch that you don’t, Velma CRM by KensieMae offers an extremely cost-effective solution with zero implementation fees, a quick setup, and budget-friendly pre-seat pricing, yet provides powerful and trusted features, marketing engagement, and tools to drive and enhance borrower communication and engagement. Don’t wait, get Velma CRM today and start saving!
STRATMOR’s Consumer Direct Workshop
The Fed has indicated that it plans to cut rates later in the year, but even though the timing remains unclear, to remain competitive, Consumer Direct lenders will have to stay on their toes and prepare for the effect it will have on mortgage rates. The time to develop a strategy for attracting, nurturing, converting, and closing purchase business to hold or grow your market share is now. STRATMOR Group will host its semiannual virtual Consumer Direct Workshop on May 7, 8 and 9. STRATMOR experts and peer lenders will discuss how to better understand the needs of purchase borrowers, craft marketing messages that will appeal to them, tweak your processes for purchases and train LOs to close this business. Register up to three executives from your organization today.
Events, Training, and Webinars
Lending marketing, sales, and operations leaders! This is what your teams need to hear right now to increase volume and run a more efficient business. Greg Sher, Managing Director, NFM Lending, Steve Majerus, CEO, Synergy One Lending, Brian Vieaux, CEO, Finlocker, and Richard Grieser, VP of Marketing, Truv are going to share strategies and real examples of how you can fill the top of your funnel with a more informed and prepared borrower BEFORE loan application, during the application, and after closing. You’ll also hear firsthand how your technology can work with you to improve the borrower experience, as opposed to against you! Come join us on April 10 at 1 pm CT and invited your teams!
Loan officers are the lifeblood of any successful lender. Lenders who can recruit and retain talented producers will be able to ensure an active pipeline and exceed their revenue goals. Competition and compliance challenges in the current market demand that you set up a scalable recruiting function to target the right talent that aligns with your business. Join Total Expert on Wednesday, April 17 as we sit down with InGenius CEO Jeff Walton to discuss strategies for identifying, engaging, and converting loan officers who are the right fit for your business. Save your digital seat.
(A good place for longer term conference planning is to start is here, and click on “Conference List” for in-person events in the future.)
Today is the next episode of The Mortgage Collaborative’s Rundown covering current events in the mortgage market for 30-45 minutes starting at noon PT, 3PM ET, in “The Rundown”. This Friday’s is co-hosted by VIP’s Mike Metz!
Angel Oak’s Non-QM webinar series will provide information on industry trends, strategies for finding non-QM borrowers, and actionable tips for growing your mortgage origination business. Join the panel of Non-QM experts on Tuesday, April 9th and take a detailed look at innovative solutions for self-employed borrowers, real estate investors, and other underserved borrowers. Non-QM Second Mortgage Options.
Join FHA Home Equity Conversion Mortgage (HECM) Policy Update Virtual Webinar sessions:
Session I will begin with an overview of the HECM section’s style and structure, followed by origination processing and credit policy. April 10th, 2-4:00 PM (Eastern).
FHA is offering In-Person, Free Underwriting Training in Denver, CO., April 10, 9:00 AM – 12:00 PM MST. Training will provide an overview of FHA underwriting procedures as outlined in FHA’s Single Family Housing Policy Handbook 4000.1 and addresses several industry-related frequently asked questions (FAQs). This training will also take an in-depth look at a variety of topics including credit, income, and asset (CIA) documentation; manual underwriting; automated underwriting systems (AUS); closing; and more.
FHA is offering In-Person, Free FHA Appraisal Training in Denver, CO., April 10, 1– 4 PM MST. Training will provide an overview of FHA appraisal protocol and updates to FHA appraisal policy as outlined in FHA’s Single Family Housing Policy Handbook 4000.1. This training will also take an in-depth look at a variety of appraisal-related topics including property acceptability criteria; minimum property requirements; property defects; appraiser responsibilities and requirements; and more.
Attend ICE’s complimentary webinar to learn all about the world of automated valuation models (AVMs). You’ll find out why AVMs are considered a credible, objective option for collateral risk management, how they can help your business (from lead generation and portfolio management to cost reduction and more), and when to use an AVM to address challenges in the current valuation landscape. The webinar hosted by ICE is “When, Why and How AVMs Drive Business Performance” and will be on Wednesday, April 10, at 2 p.m. ET. Register today.
Looking for more in-depth commentary on weekly mortgage news? Register here for “Mortgage Matters: The Weekly Roundup” presented by Lenders One. Every Wednesday at 2:00 PM EST/11:00 AM PT join Robbie Chrisman and Justin Demola for a dive into a range of mortgage-related topics, including market trends, interest rate fluctuations, innovative mortgage products, and industry advancements. Next Wednesday features Kathy Kraninger, former director of the Consumer Financial Protection Bureau from 2018 to 2021, now CEO of the Florida Bankers Association.
Check out National MI’s upcoming April 2024 webinar sessions: Mastering LinkedIn for Mortgage Professionals – Session Four with Brynne Tillman, April 9th at 3pm E.T. P&L and Balance Sheet Analysis for Self-Employed Borrowers with Marianne Collins, April 11th at 1pm E.T. Conquering Call Reluctance for Loan Originators with Rebecca Lorenz, April 16th at 1pm E.T. Navigating Today’s Appraisal Process with Luke Tomaszewski, April 18th at 1pm E.T.
Join the MBA of NJ, in partnership with HUD for the 2024 HUD Housing Counseling Session, April 11th, 2-4PM at the Federal Reserve Bank of NY., Keys to Homeownership: Building Strategic Partnerships. Session II will cover policies for underwriting the property, closing, and endorsement requirements. April 11th, 2-4:00 PM ET.
Acquire a greater perspective from industry experts at American Mortgage Conference from April 15 – 17. Held in a new location this year at the Marriott Savannah Riverfront in Georgia. Co-hosted by ABA and the North Carolina Bankers Association, this premier conference is the only mortgage event that blends business and regulation to assure you are fully up to date and fully connected to crucial professional networks.
Capital Markets
After a quiet opening three days to the trading week, Thursday brought a couple of headlines that put some uncertainty into markets. There were geopolitical headlines pointing to ramping tensions in the Middle East with Iran warning Israel that retaliation was coming soon, and there were Fed headlines from Minneapolis Fed President Kashkari delivering hawkish remarks by saying that interest rate cuts may not be needed this year if progress on fighting inflation stalls, especially if the economy remains robust.
Both headlines triggered a flight to safety, rising bond prices and lowering yields. Traders increasingly see the Fed lagging behind other central banks when it comes to rate cuts. The latest weekly jobless claims report, up 221k for the week, showed a larger than expected number of claims.
Today brings the all-important March payrolls report. Headline payrolls (303) versus 170k expectations and 223k previously. The unemployment rate (3.8 percent) when it was seen ticking down 0.1 percent to 3.8 percent. Average hourly earnings (+.3) versus expectations of increases of 0.3 percent month-over-month and 4.1 percent year-over-year, and 0.1 percent and 4.3 percent in February. Later today brings February consumer credit and more scheduled Fed speakers. After the employment news Agency MBS prices are worse .125-.250 than Thursday’s close and the 10-year yielding 4.39 after closing yesterday at 4.31 percent; the 2-year is up to 4.71.
Jobs and Transitions
Highlands Residential Mortgage is thrilled to announce the hiring of Josh Moody as VP-Production Manager, and his team across various locations in Texas. Josh joins Highlands with an incredible reputation for driving strong production volume over the course of his 20+ year career having closed in excess of a billion dollars in mortgage loans during that time span. He has been recognized amongst the nation’s very best annually by the Scotsman Guide, Mortgage Executive Magazine, and National Mortgage News. Josh brings his extensive experience, innovative strategies, and a track record of success that aligns perfectly with Highlands’ commitment to excellence and our continued expansion efforts across the country. “Josh is a proven leader in our industry and an outstanding addition to our growing team at Highlands.” said, Brian Bennett, President. “I feel the experienced and trustworthy executive team at Highlands will enable us to offer a broader and more comprehensive product suite for our customers and allow our team to adapt rapidly to a constantly shifting mortgage environment,” said Josh Moody.
“At Evergreen Home Loans, we recognize the evolving needs of homeowners and strive to equip our Loan Officers with advanced tools and products to meet these demands.
A highlight of our offerings includes our specialized focus on innovative products and debt consolidation solutions, enabling our team to provide comprehensive financial strategies that benefit our clients. Joining Evergreen Home Loans means aligning with a team that values innovation, support, and a deep commitment to making a difference. If you are a Loan Officer or run a Branch looking to elevate your career, we invite you to explore the opportunities at Evergreen Home Loans. Visit our Careers page to learn more about how you can be part of a team that’s setting new standards in lending while fostering community growth and resilience.”
“Merchants Bank, a financial institution with $16 billion in assets and a top 5 warehouse lender, is seeking a Product Development Manager for its residential mortgage division. This position will play an instrumental role in expanding Merchants’ product offerings across the retail, wholesale, and correspondent channels. The ideal candidate has experience in developing and implementing non-Agency underwriting guidelines with an emphasis on Prime Jumbo and the Private Label Securitization market. Preferred candidates will have knowledge of the non-Agency market in areas such as underwriting guidelines, pricing, rating agency, third party review process, exception handling and credit. The candidate will be a key member of their Capital Markets team and will take the lead on building out their non-Agency prime jumbo product guidelines. This is an excellent opportunity for a self-starter with a committed and financially strong financial institution. For consideration, please send us your resume.”
Ready to scale your builder volume? Planet Home Lending lays the foundation for MLOs’ success with cutting-edge tools, exclusive offerings, and unique products tailored to new home builders and buyers. If your focus is on private builders crafting 20-300 homes annually, seize this opportunity. Reach out to SVP Doug Long at (407) 399-5505 and discover how Planet’s innovations can drive your career growth.
“AFR Wholesale® is on an exhilarating growth trajectory, and on the lookout for forward thinking Sales and Operations Leaders. Are you a modern mortgage leader with a knack for crafting strategies that turn customers into raving fans and elevate the experience beyond expectations? Then you’re exactly who we need to steer our expanding team towards unparalleled success. At AFR, we value leaders who are leveraging technology to battle the complexities of the industry but are also passionate about making homeownership dreams a reality. As an equal opportunity employer, we’re dedicated to fostering an inclusive and supportive work environment. Joining AFR means being part of a dynamic team that’s dedicated to helping families achieve their dream of homeownership. Don’t miss this exciting opportunity to be part of AFR’s growth journey and make a meaningful difference in the lives of others. Want to have a confidential discussion about your career? Email us.”
Cornerstone Home Lending, a division of Cornerstone Capital Bank (“Cornerstone”), announced the appointment of 25-year industry vet Michael A. Iorio as SVP of Strategic Partnerships where he will “spearhead the expansion of Cornerstone’s Homebuilder Partnership business across targeted builder accounts nationwide, with a focus on cultivating new relationships and enhancing service offerings.” Congratulations!
Download our mobile app to get alerts for Rob Chrisman’s Commentary.
Source: mortgagenewsdaily.com
To paraphrase Mark Twain, history may not repeat itself, but it does rhyme. The U.S. mortgage industry recently had to remind itself of this fact when a CNN analysis found that the nation’s largest credit union, Navy Federal, has the widest disparity in mortgage approval rates between white and black borrowers of any major lender. The report, released back in December, noted that Navy Federal Credit Union approved more than 75% of white borrowers who applied for a new conventional home purchase mortgage in 2022 vs. less than 50% of black borrowers.
As ever, redlining — the intentional, systematic effort by American banks and government to refuse mortgages to African Americans and segregate U.S. cities — looms in the background. The practice wasn’t outlawed until 1968, and ongoing research at the University of California, Berkeley, School of Public Health finds that redlining affects non-white communities to this day in the form of air pollution, reproductive health disorders, and fewer urban amenities.
The report suggests that the mortgage industry may be neglecting its duty to offer all applicants fair access to loans. With civil rights bills like the Fair Housing Act (FHAct) and Equal Credit Opportunity Act (ECOA) now the law of the land, most lenders will note that they rely on supposedly objective borrower screening algorithms to make lending decisions. But the results tell a different story.
The Federal Reserve’s Consumer Compliance Handbook observes that “evidence of discriminatory intent is not necessary to establish that a lender’s adoption or implementation of a policy or practice is in violation of the FHAct or ECOA.” If a lender has a supposedly neutral policy that results in them denying loans to people of a protected class (i.e., racial, religious, or gender minority) at a greater rate, that policy may constitute lending discrimination. To prove the policy is not discriminatory, the lender must show that the policy is justified by “business necessity.”
Meanwhile, repeated, heavily publicized evidence has dispelled the myth that algorithms are inherently neutral actors. Those in the data analytics field have long been aware that algorithms can not only encode but amplify bias. For example, Amazon had to stop testing an automated hiring algorithm in 2015 when it became obvious that the algorithm was systematically discriminating against women for technical jobs. Trained on the resumes of existing employees, most of whom were male, the algorithm reproduced that same bias when evaluating candidates.
Algorithmic bias in mortgage lending is just another example of the phenomenon that data analysts call “garbage in, garbage out.” Institutions that feed their lending algorithm data that encodes structural racism should not be surprised when the ending algorithm results in a disparate impact.
Lenders rapidly expanded their use of computerized credit scores in the 1970s and 80s, ironically, to protect themselves against discrimination lawsuits. Experts point out that the supposedly objective credit scoring system still bakes in intentional discrimination from decades ago. Leaning too heavily on credit scores actually biases lenders against a large swath of potential homebuyers, including foreign buyers, younger buyers, and buyers from families with low financial literacy, who often lack robust U.S. credit histories.
To avoid discriminating against these groups, lenders need to scrap the credit score and start looking at cashflow. Cashflow underwriting is a transparent, data-driven approach that looks at an individual’s core financial behavior metrics. The main factors that cashflow underwriting looks at are the applicant’s balances, cashflow trends, and their ratio of discretionary-to-core spending. Cashflow underwriting puts income verification where it belongs: at the front of the process. By looking at an applicant’s behavioral metrics based on real-time financials from their bank data, cashflow underwriting is blind to racial and age discrimination. People qualify based on their ability to pay, not their placement in some opaque scoring system.
Cashflow underwriting also addresses another problem with traditional screening approaches, which is the overreliance on paystubs. According to the Bureau of Labor Statistics, over 10% of Americans are self-employed. With the growth of the gig and sharing economies, as well as the rise of social media influencers, an increasing number of Americans are getting their income from nontraditional sources. A cashflow-first approach acknowledges applicant income from all sources, based on their bank deposit history, rather than just payroll alone, making it easier for applicants to demonstrate their ability to pay.
With today’s artificial intelligence (AI) and machine learning technologies, lenders can make the switch to cashflow underwriting a lot more easily than they think. Innovative, AI-powered verification algorithms on the market right now can evaluate an applicant’s income, assets, employment history, and cashflow without invading anyone’s privacy. The applicant’s race, creed, sexual or gender orientation, current neighborhood, or place of origin never enters the picture.
Navy Federal may have received the bulk of the bad press this time around, but these problems — overreliance on credit scores, outdated expectations about employment — are industry wide. To avoid becoming the next Navy Federal, lenders must evaluate the whole picture. Following a cashflow underwriting approach and backed by AI, lenders can make safe bets, free from prejudice or the appearance of bias, to help people attain home ownership.
Tim Ray is co-founder and CEO of VeriFast, an identity and financial verification platform that reduces underwriting and costs while eliminating fraud. A serial entrepreneur and angel investor, Tim is an influential voice in the real estate and property management sectors.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
To contact the authors of this story:
Tim Ray at [email protected]
To contact the editor responsible for this story:
Tracey Velt at [email protected]
Source: housingwire.com