In a rather surprising turn, Zillow has suspended new home purchases via its Zillow Offers unit through the end of 2021.
It’s actually the second time they’ve suspended iBuying this year, the first coming back in March due to “market uncertainty” related to COVID-19.
This time, it’s for reasons more loosely associated with COVID, namely a backlog in renovation and operational capacity.
Similar to many other industries feeling the brunt of supply chain issues, Zillow is apparently having a difficult time finding folks to repair the many homes they buy and flip.
Is this no big deal, or a sign of trouble ahead for the hot housing market?
Why Is Zillow Completely Pausing Home Buying?
In a press release, Zillow chief operating officer Jeremy Wacksman said the company is dealing “within a labor- and supply-constrained economy” during a time when the housing market is ultra-competitive.
He added that Zillow hasn’t been exempt from market/capacity issues that others are experiencing in different sectors, and that they’ve now got “an operational backlog for renovations and closings.”
By pausing new home purchase contracts, they’ll be able to focus attention on home sellers who are already under contract with the company, along with existing housing inventory.
In other words, they own too many homes and don’t have enough contract labor to fix them up and get them back on the market in a reasonable timeframe.
Of course, with the way the housing market is going, what’s the rush to put them on the market over the next few months?
Why not wait until next spring when home prices are even higher and demand likely stronger?
What is somewhat odd, which an analyst pointed out, is why they completely paused the business, as opposed to simply slowing down.
Did Zillow Buy Too Many Homes?
If we look at their 2021 second quarter earnings report, they appeared to buy a ton of homes relative to prior quarters.
At the same time, they didn’t sell a proportionately higher number, which speaks to the backlog mentioned by their COO.
In Q2, they purchased 3,805 homes and sold 2,086 homes. The increase was apparently driven by “strong customer demand for Zillow Offers.”
It was more than double the 1,479 homes purchased in Q1 of 2020, at a time when 2,394 homes were sold.
Zillow Offers gross profit was $71 million in the second quarter, and the average gross profit per home sold was $33,849.
The average home had about $10,000 in renovation costs, $2,200 in holding costs, and $14,000 in selling costs.
The average price of a home was around $325,000, which tells you the target market for the platform.
It could just be a combination of growing pains, compounded by the supply chain and labor issues affecting nearly all industries at the moment.
And as Jefferies analyst Brent Thill pointed out, you can scale via technology and automation, but you still need humans for things like repairs and inspections. At least for now…
What Does It Say About the Current State of the Housing Market?
You would think that with the way things are going, it’d be foolish to stop buying homes, even if you can’t resell them right away.
Why not deploy your capital, especially if inflation is surging and the value of the dollar is rapidly eroding?
When you consider the latest forecast of 2022 home prices rising another 16% by the end of next year, it’d be prudent to just buy, buy, buy.
And even Zillow itself expects home values to rise 4.4% from September through the end of this year, and to increase 13.6% through September 2022.
But they do note that some downside risks are present, including the end of mortgage forbearance, which could increase supply, and higher mortgage rates, driven by inflation.
So maybe Zillow’s pause has nothing to do with the strength of the housing market, and is purely a labor shortage.
After all, other iBuyers such as Opendoor and Offerpad haven’t announced anything similar.
And Offerpad actually bucked the Zillow news by announcing a first quarter 2022 expansion into California, initially focusing on Riverside, Sacramento, and San Bernardino.
It is somewhat odd though to completely halt business, as that usually portends bigger, badder things.
But don’t expect any less competition as a result of their pause – their competitors are likely already taking full advantage.
Read more: Should I use an iBuyer to sell my home?
If you own a second home or hold a high balance loan amount, you may want to refinance sooner rather than later. That’s assuming you were thinking of refinancing.
The same goes for those planning to purchase a second home or take out a mortgage with a high balance, which is a loan amount above the baseline conforming limit.
The conforming limit for 2022 is $647,200, so if your loan amount will be north of that, take note.
Fannie Mae and Freddie Mac are raising loan-level price adjustments (LLPAs) for both types of transactions come April 1st.
Depending on the details of your loan scenario, this could drastically increase your closing costs and/or mortgage rate.
Second Home Mortgages and High Balance Loans Going Up in Price
In an effort to bolster its support for affordable housing and sustain equitable access to homeownership, the Federal Housing Finance Agency (FHFA) will be raising (LLPAs) for certain transactions.
These LLPAs get passed onto consumers in the form of either more expensive closing costs or higher mortgage rates.
As noted, they pertain to the financing of second homes, whether a purchase or refinance, and high-balance loans, those which exceed the conforming limit.
The idea here is that these types of home loans go toward more affluent individuals. And they also create more risk for Fannie Mae and Freddie Mac, which are backed by taxpayers.
After all, large loan amounts and vacation properties are more likely to default and/or create larger losses for the Enterprises.
And that could jeopardize the mission of Fannie and Freddie, which is mainly to provide affordable financing to first-time home buyers, as well as low- and moderate-income borrowers.
Looked at another way, these new fees will subsidize programs like HomeReady, Home Possible, HFA Preferred, and HFA Advantage, which provide cheaper financing to lower-income borrowers.
Speaking of, fees won’t be going up on those programs, or for first time home buyers in high-cost areas with incomes at/below 100 percent of area median income.
How Much More Expensive Will Mortgage Rates Be in April?
Before you get too worried, the cost of these changes may be minimal, depending on the loan scenario in question.
For example, upfront fees for high balance loans will increase anywhere from 0.25% to 0.75%, depending on the loan-to-value (LTV) ratio.
If we’re talking about a loan amount of $750,000 on a primary residence, another .25% in fee is roughly $1,875.
This might move the dial on your 30-year fixed mortgage from 3.25% to 3.375%, or simply increase closing costs.
If that fee is .75% higher due to an LTV of 80%, we’re talking $5,625 in cost, which will more than likely increase your mortgage rate an eighth of a percent or more.
It’s not the end of the world, but it’s yet another thing working against homeowners and home buyers as mortgage rates have started off 2022 higher.
And they tend to peak during spring and early summer, which means financing will be that much more expensive.
The situation is even worse for second home buyers or owners, where pricing adjustments will increase anywhere from 1.125% to a staggering 3.875%.
Using our same loan amount of $750,000, even at a low LTV ratio, the increase in upfront costs could equate to around $10,300.
If we’re talking a high balance loan on a second home at 80% LTV, which isn’t out of the question, it’s an additional cost of about $31,000.
Again, depending on if you let the rate absorb these additional costs, you could be looking at a rate that’s .25% to .50% higher, or more.
Second Home Owners and Those with Large Loan Amounts Should Review Their Mortgages Now
If you believe these changes may affect you, it could be a good time to review your outstanding home loans.
The same goes for prospective home buyers thinking about purchasing an expensive property or a vacation home, which are en vogue due to COVID.
As illustrated above, these higher pricing adjustments have the ability to raise mortgage rates considerably. Or at the very least bump up your closing costs.
With home prices and mortgage rates also seemingly headed higher by spring, it could make sense to accelerate any refinance or home purchase plans to avoid these looming fees.
The FHFA said the new fees won’t go into effect until April 1, 2022 to “minimize market and pipeline disruption,” aka higher pricing for confused customers.
But watch out for mortgage lenders beginning to price in changes earlier on. Simply put, this is yet another reason to make any planned move sooner rather than later.
If you own an investment property, the same types of pricing changes might be on the horizon. So if you’re looking for better terms or cash out, now might be the time.
If you fall behind on several mortgage payments, your lender may begin the foreclosure process, which can lead to months of financial and emotional stress, and even result in the loss of your home.
Key Takeaways
Foreclosures occur when a lender takes control over a property from a borrower for failing to make payments
Foreclosures may occur by court order or not, depending on the state the home is located in
There are several indicators that come before the foreclosure, including notice of default
Foreclosures take 2.5 years to complete on average, but can take up to seven years
Foreclosures can damage your credit score and result in loss of property
What is a foreclosure?
Foreclosure definition
A foreclosure is when a lender takes control of a property after the borrower misses several mortgage payments.
When you purchased your home and took out a mortgage, you agreed to a deal with your bank or lender. They gave you the financing upfront to pay for the home, and in return, you signed a contract agreeing to pay a specific amount each month for a set number of years.
If you start falling behind on your payments, or stop making your mortgage payments completely, the bank or lender can foreclose on the property and sell it as a way to make back the funds that were lost.
When you purchased your home, you signed a mortgage contract that specified the amount of money you borrowed, as well as the interest rate and the details about your monthly payment.
However, simply living in your home does not mean that you legally own it. If you have a mortgage, the bank or lender technically owns the property until you make your final mortgage payment.
Types of foreclosure
After you have several missed mortgage payments, your lender can start the foreclosure process. There are two main ways your home can be foreclosed on:
A judicial foreclosure, meaning the lender needs to get a court order.
A nonjudicial foreclosure, depending on the state where the property is located.
There are several different types of foreclosures, depending on the state and the terms of your mortgage. Some foreclosures involve legal action and others do not. The types of foreclosures include:
Judicial foreclosure: With a judicial foreclosure, the lender files a lawsuit and the borrower is notified of the non-payment. The homeowner has 30 days to make up the missed payments, otherwise the foreclosure process will proceed.
Power of sale: A power of sale foreclosure is allowed in some states if your mortgage has a power of sale clause in the contract. Once the borrower falls behind on their payments, their mortgage provider is allowed to put the house up for auction. A power of sale foreclosure is considered a non-judicial foreclosure because there is no legal action taken.
Strict foreclosure: Strict foreclosures are less common because they are only allowed in a few states. In this case, the mortgage lender files a lawsuit against the homeowner, and if the borrower does not make up their payments within the court-ordered time period, the home can be seized by the mortgage holder.
The foreclosure process in 5 steps
From the time of your first missed mortgage payment to the foreclosure sale of your home, there are several steps in the foreclosure process. These phases can vary by state, but generally follow this timeline. Each state has its own laws pertaining to the process of foreclosure and foreclosure sales. These can govern the borrower’s relief options if already in foreclosure, how to go about posting a Notice of Sale, the sale timeline and other parts of the process.
Step 1: Missed mortgage payments
If your mortgage payment is a few days late, you are probably not at risk of foreclosure. Your lender may have a grace period of up to two weeks for you to make your payment without serious penalties. After the grace period, however, your payment is considered late and you’ll be charged late fees. You might also receive a warning from your lender about a potential foreclosure if you fail to make the payments.
Step 2: Notice of Default
After three to six months of missed mortgage payments, your lender will file a Notice of Default with the local recorder’s office. Your lender will also send one to you via certified mail, and depending on your state, might post the notice on your front door. This notice specifies how much you owe in order to bring your mortgage back into good standing.
A Notice of Default could show up on your credit report and affect your score. This can make it more challenging to obtain other types of credit or refinance your mortgage.
A Notice of Default doesn’t equate to the lender immediately or automatically foreclosing on your home, and it doesn’t mean you don’t have options to prevent the foreclosure from happening. You can put a stop to the proceedings by getting current on your payments.
Step 3: Preforeclosure
Preforeclosure is the time period between the Notice of Default and the auction or sale of your home. During this time, if you can get your hands on the amount specified in the Notice of Default, you’ll be able to stop the foreclosure process from going any further. The exact amount of time you have depends on your state. During preforeclosure, you might also have the option to sell your home and pay back the money owed, in what is called a short sale.
Step 4: Notice of Sale
If you don’t have the money to bring your mortgage into good standing within the allotted time frame, your lender will file a Notice of Sale, and your home will be placed up for auction at a specified time and location.
How the Notice of Sale is published depends on your state. For example, in North Carolina, the notice must be published in a local newspaper and posted on the door of the local courthouse, while in California, it must be posted on the property as well as a public place in the county.
Because the Notice of Sale is public information and has been advertised, several buyers, including investors, might be interested in buying your home. Depending on laws in your state, you might have the ability to exercise right of redemption (meaning you can reclaim your home) up until the foreclosure sale, or even after.
Step 5: Eviction
Following the auction and sale of your home, you’ll generally have a few days to gather your belongings and move to a new residence. If you do not voluntarily move out, law enforcement personnel are legally allowed to remove you and your belongings from the premises.
How long does foreclosure take?
The foreclosure process can take some time, and up to a couple of years. The average foreclosure in the U.S. took 948 days, or about two-and-a-half years, as of the first half of 2022, according to ATTOM Data Solutions. In some states, the foreclosure process took four years, and some took nearly seven years.
However, you are allowed to remain in your home while the foreclosure process plays out. Once the house is sold, you will be asked to vacate the property. If you refuse, you will receive an eviction notice and law enforcement will remove you and your belongings from the home.
How to avoid foreclosure
Facing home foreclosure can be extremely scary. Fortunately, there are plenty of ways to avoid foreclosure, even if your current financial situation is making it difficult to pay your mortgage on time.
Ultimately, avoiding foreclosure starts by communicating with your mortgage lender or servicer. It is unlikely that your lender will let you off the hook completely, but it can help you take action so you do not lose your home.
Here are some of the best ways to avoid a home foreclosure:
Take advantage of forbearance programs: During the COVID-19 pandemic, the federal government established a mortgage forbearance program that has since expired. However, you can still apply for forbearance if you have a federally-backed loan from Fannie Mae or Freddie Mac.
Adjust your loan terms: If you are struggling to afford your monthly loan payment, ask your lender if they can adjust the terms of your loan. In exchange for a longer amortization schedule, you might be able to lower your monthly payment.
Get a deed-in-lieu of foreclosure: Some states allow homeowners to choose a deed-in-lieu of foreclosure, in which you agree to turn over your home to a lender in order to avoid a foreclosure. With this option, you are not required to pay your mortgage, but you might still be responsible for paying the difference between your home’s value and the mortgage balance.
Set up a repayment plan: If you know that you are unable to make your mortgage payment for a given month, let your lender know as soon as possible. Your lender can probably set up a payment plan that involves more frequent, but lower payments, or deferral for a month or two.
Consequences of foreclosure
There are several financial consequences to foreclosure, and they can be devastating. For one, getting a mortgage after foreclosure can be challenging because of the impact on your credit and the fact that you’ll likely be subject to a waiting period before having a chance at a new loan. The other implications of foreclosure include:
Losing your home, which puts you in the position of having to find a new place to live with a foreclosure on your record
Damage to your credit, since a foreclosure stays on your credit report for seven years
Losing your property and equity, which can have far-reaching impacts on your overall wealth
Owing money on the remaining balance if it’s a judicial foreclosure, and being subject to litigation, wage garnishment and more if you can’t pay
Bottom line
If you’re struggling to make your mortgage payments, your best bets to avoid foreclosure are time and communication. As soon as you realize you can’t pay your mortgage, reach out to your lender or servicer to learn about the options available to you. They might be able to set up a payment plan or allow you to defer the payment for one month if you have a temporary financial hardship.
Tuesday’s housing starts report clearly shows that homebuilders are going to be done with single-family construction until mortgage rates fall. Housing completion data is still struggling to get some traction, but in the coming months, builders should be able to get more housing completions done while housing permits and starts for single-family homes are in decline. If it wasn’t for solid rental demand boosting multifamily construction this year — 18% year to date —this data line would have looked much worse.
From Census:
Privately‐owned housing starts in July were at a seasonally adjusted annual rate of 1,446,000. This is 9.6 percent (±8.6 percent) below the revised June estimate of 1,599,000 and is 8.1 percent (±11.9 percent)* below the July 2021 rate of 1,573,000. Single‐family housing starts in July were at a rate of 916,000; this is 10.1 percent (±10.8 percent)* below the revised June figure of 1,019,000. The July rate for units in buildings with five units or more was 514,000.
Of course, housing starts today aren’t collapsing in the way they did from the peak of 2005 because we haven’t had a sales credit boom in recent years as we did from 2002-2005, which inflated new home sales toward 1.4 million.
Currently, we are in a much different housing recession than what we had from 2005-2011. The credit cycle looks much different now than the build-up from 2002-2005.
Why do I call it a housing recession? A recession is when total activity falls to a point where production reverses and jobs are lost. For now, the homebuilders will keep labor because they need to finish the homes they have in the pipeline. However, as new home sales have fallen, the future growth in construction is done until the builders feel comfortable building more single-family starts.
As we can see below, single-family starts are falling more noticeably than total housing starts, which is still being boosted by rental demand.
Total activity in the existing home sales marketplace is falling, which means less commission transfer in that sector. Loan originations are falling amid less demand from refinancing and purchase loans, which means jobs are lost in the mortgage industry. That aspect differs from the new home sales selector, which drives housing construction, construction jobs, and big-ticket purchases for those new homes. The recent decline in copper prices is very telling; even with a recent rebound in prices, things are slowing down on the housing construction side.
In March I wrote that the new home sales sector was at risk once the 10-year yield broke over 1.94%. Currently, the 10-year yield is at 2.81%, and mortgage rates above 5% have impacted this sector more significantly than the existing home sales market.
Recently I talked about how low rates have to go to get housing back in line. In the past, builders benefitted when mortgage rates fell toward 4% and below. While we have had more than a 1% + move in rates, we are still over 5%. We can see that the builder’s confidence data has collapsed recently, going below 50 for the first time in a while, with the last print being at 49.
NAHB:
I raised the fifth recession red flag tied to housing in June, knowing that the growth rate in construction was done for this cycle until mortgage rates fell again. In 2018, when mortgage rates rose to 5%, the builders paused construction for 30 months; they were mindful of supply in the new home sales sector. We have 9.3 months of supply but of that number, 6.22 months of supply is under construction and 2.24 months of supply hasn’t even been started yet
For sure, it’s a much different housing cycle because housing completion data has been prolonged during the COVID-19 recovery. Now that demand is falling, the builders will take their time finishing these homes to ensure they have buyers ready to move in once the homes are completed.
From Census: Housing Completions Privately‐owned housing completions in July were at a seasonally adjusted annual rate of 1,424,000. This is 1.1 percent (±14.8 percent)* above the revised June estimate of 1,409,000 and 3.5 percent (±15.5 percent)* above the July 2021 rate of 1,376,000. Single‐family housing completions in July were at a rate of 1,009,000; this is 0.8 percent (±12.2 percent)* below the revised June rate of 1,017,000. The July rate for units in buildings with five units or more was 412,000.
During the housing bubble years, housing starts, permits, completions, credit, and prices moved together. That is not the case here, as housing completions still lag, although things are improving on the supply front.
Over time, housing permits will fall more noticeably as long as mortgage rates stay high. When the homebuilders’ confidence turns, housing permits should stimulate growth. We aren’t there yet, but the builder’s confidence data will give us the first clues when things are improving.
From Census: Building Permits Privately‐owned housing units authorized by building permits in July were at a seasonally adjusted annual rate of 1,674,000. This is 1.3 percent below the revised June rate of 1,696,000, but is 1.1 percent above the July 2021 rate of 1,655,000. Single‐family authorizations in July were at a rate of 928,000; this is 4.3 percent below the revised June figure of 970,000. Authorizations of units in buildings with five units or more were at a rate of 693,000 in July.
The housing construction data looks right to me; the downtrend in activity in permits and starts should still be with us for some time. The homebuilders don’t build for charity — they’re here to make money. Also, they are facing more competitive inventory since the number of existing homes is increasing, and those are cheaper. So, they will take their time to build the homes already under construction and those homes they haven’t started on yet.
When mortgage rates fall, the narrative can change, but we aren’t there yet. Solid rental demand is keeping the multifamily construction going, but the weakness in single-family starts is here to stay; expect single-family starts to have their first decline since 2011.
We’re covering this important topic at our HousingWire Annual event Oct. 3-5 where Logan is a featured speaker. Register here to join us in Scottsdale, Arizona.
Many people have speculated that a recession and rising unemployment could cause more foreclosures which could then cause a housing crash. If there is a recession and more unemployment that cause foreclosures it is important to know how long foreclosures take in order to get an accurate idea of when those foreclosures may hit the market. Many people may be surprised by how long it takes to foreclose on properties in the US. This article will go over the length of time it takes on overage to foreclose on a home, not the absolute fastest it can be done.
What is a foreclosure?
A foreclosure happens when a homeowner takes out a loan on their home or a home they are buying and uses that home as collateral for the loan. If the homeowner stops making payments or violates another part of the loan requirements, the lender (usually a bank or mortgage company) can start the foreclosure process.
The foreclosure process varies state by state and usually involves the local courts or a Public Trustee who oversee the foreclosure. The banks will have a lawyer prepare the paperwork, loan documents, and foreclosure documents. Those documents are sent to the courts or trustees. The courts or trustees will review everything and if in order, they will publish the notice of foreclosure. Once that notice is published, there is a certain amount of time the homeowners are given to cure (bring the loan current) the foreclosure. A sale date is scheduled and if the homeowners do not bring the loan current the house can sell back to the bank or another party at the foreclosure sale which is usually an auction. In some states, after the sale the previous owners still have time to redeem the property or other lien holders may redeem it as well which means the full foreclosure sale price is paid off.
What is the difference between a short sale and a foreclosure or REO sale?
The homeowner can sell the property right up until the foreclosure sale or even sometimes after the foreclosure sale and during the redemption period. They own the home until the foreclosure is complete. If the homeowner has equity, they may be able to sell the home and pay off the loan and any other liens. The amount owed during a foreclosure is usually quite a bit more than the loan balance because the lenders can charge lawyers’ fees and other costs.
If the homeowner owes more than the house is worth they may be able to sell it as a short sale. A short sale is when the bank or other lenders accept less than they are owed in order for the homeowner to sell the house. In some cases, the debt is forgiven and in some cases, the homeowner may still owe some money to the lien holder who allowed the short sale. Some banks even pay homeowners to complete a short sale because they do not want to have to go through the foreclosure process.
An REO sale (real estate owned or sometimes other real estate owned) is when the bank has foreclosed on a property, they bought the property back at the foreclosure sale (in some cases the homeowner just gives it back), and the bank is selling the home.
Why has the time to foreclose increased so much?
The time to foreclose on properties has increased significantly since the last housing crash in 2008. Many people think this is all due to Covid and the foreclosure moratoriums. However, the time to foreclose had increased significantly before anyone had heard of covid.
After the last crash, the US government and banks realized that selling a lot of houses at once was not good for the real estate market. it was not good for the people who owned houses or the people who lost homes to foreclosure. The US government enacted many rules that forced banks to take their time foreclosing and give homeowners many opportunities to prevent foreclosure.
The banks have to make sure they offer loan modifications, and the opportunity to do a short sale, and they have to take their time to make sure the loan and foreclosure are done correctly. You may remember, many banks got in trouble for foreclosing wrong and some people even got their houses back. I actually bought a house at the foreclosure sale where the previous owners thought they were going to get their house back for free, but that did not happen. I will do a video on that story soon but you can see some of my other crazy flip stories in in the video below.
All of these new requirements have made the foreclosure process much longer and many banks do not even want to foreclose unless they have to because of the bad publicity foreclosures bring. A lot of banks will even sell their pre-foreclosure properties in huge bulk packages to other investors so they don’t have to go through the headaches of foreclosing.
How long does it take to foreclose on a house in each state?
As I said the average time to foreclose in the US has risen significantly from less than 200 days in 2007 to more than 900 days in 2022! The time to foreclose decreased some at the end of 2022 to less than 900 days, but increased again in 2023 to 950 days!
The chart below is provided by Attom Data.
States with the longest average foreclosure timelines for homes foreclosed in Q1 2023 were Louisiana (2,770 days); Hawaii (2,486 days); New York (1,963 days); Kentucky (1,881 days); and New Jersey (1,697 days).
States with the shortest average foreclosure timelines for homes foreclosed in Q1 2023 were Wyoming (111 days); Minnesota (141 days); Montana (143 days); Texas (146 days); and Arkansas (157 days).
While many of these states allow a lender to foreclose much faster, in reality, this is how long it is taking. As you can see from the chart covid is not what caused this massive increase in time foreclose since the massive increase occurred before covid.
Will foreclosures cause a housing crash?
Foreclosures were a huge reason for the last housing crash but as you can see the time to foreclosure is extremely long and even if there was a rush of foreclosures, it would take 2 years on average for the foreclosure process to be completed. As far as the number of foreclosures now, there are still much fewer starts and completions than before the pandemic. That previous link to Attom Data provides many of those numbers as well.
This post is an illustrated, pared-down version of my recent “Inflation, Explained” podcast episode.
It was created as a simple, easy-to-digest guide to help you understand the current inflationary environment in the US.
Ready? Let’s dive in!
What is inflation?
Simple definition: too much money chasing too few goods.
– a.k.a. this: –
When Does it Happen?
When the growth of the money supply outpaces the growth of the economy
The money supply grows from…
– Printing & issuance of new money
– The government loaning money into banking system by purchasing government bonds
– The government deciding to legally devalue currency*
(*The U.S. dollar has only been deliberately devalued once, in 1933-1934)
When demand outpaces supply, (aka too much money chasing too few goods) which causes prices to rise.
What this can look like…
– Higher demand for goods that can’t quickly or easily increase in supply. (More on this in a minute.)
– Manufacturers and retailers facing higher production costs due to external factors driving up the cost of raw materials or manufacturing. These higher costs get passed down to the end consumer.
Fun fact!
There’s also something called the “wage price spiral.”
It takes place when…
1. Prices begin to rise,
2. Causing life to get generally more expensive,
3. And so workers ask for higher salaries,
4. Which employers pay,
5. And then the employers have to raise the price of **their own goods and services** to pay those increased labor costs!
6. …Which then cycles back to step 1 and compounds, pushing prices up further.
(If this sounds familiar, it’s because this has been our reality for the past 2 years!)
What the wage price spiral has looked like these past couple years:
Services were unavailable (e.g. concerts, restaurants, travel, etc.) so people turned their attention towards goods.
But at the same time, the supply chain capabilities couldn’t meet all the added demand for goods.
Fun fact!
In many sectors, producers must make large capital expenditures in order to increase production capacity. (For example: lumber millers.) These heavy CapEx investments require a long lead time, often multi-year.
Many producers lack either the capital to invest, or the confidence that the increased demand will persist. They don’t want to invest in CapEx for fear that two years down the line they’ll be overproducing for lower demand.
On top of all this, there are a lot of people opting out of the work force, whether for home schooling, general Covid concerns, caring for a family member, relocation, etc.
This further compounds the wage price spiral.
What are the effects of inflation?
Background info…
1. Some degree of **controlled inflation** is desirable for the economy, because it causes investors to look for investments to outpace inflation.
(📈 Investment activity = ⛽️ Fuel for the economy)
2. Controlled inflation also encourages consumers to spend now since tomorrow’s cash is worth less than today’s.
(💸 Money changing hands = ⛽️ More fuel for the economy)
The takeaway here…
All this is to say that inflation can be a good thing.
But!!! It needs to be managed carefully.
Fun fact!
For developed economies, around 2 percent inflation is the targeted “sweet spot” amount.
For developing economies, the targeted amount is usually higher. For example, India targets 4 percent. (+/- 2%)
With that background info out of the way, let’s move on to…
“How does inflation affect me?”
Who inflation is good for…
1. Borrowers
Once the banking system has money (from the government buying bonds), they’re able to loan it out.
The people who are able to get these loans are poised to benefit *significantly* as inflation picks up, especially the borrowers who were able to get fixed-rate loans.
Why?
If you have a fixed-rate loan with a rate that’s *lower* than inflation, it means that over time you repay that loan with cheaper and cheaper dollars.
2. Exporters
Inflation is good for exporters because they pay lower production costs associated with a weaker USD and sell their products in a stronger currency.
Who inflation is bad for…
1. Savers
Your dollar can buy less stuff, and the value of your cash gets eroded the longer you hold it.
2. Importers
The weaker USD means foreign-made goods are effectively more expensive.
How different assets are affected by inflation
Tangible assets
Tangible assets (that are valued in currency) are strong inflation hedges.
These allow you to store monetary value in something other than currency.
Examples include real estate (residential, commercial, land), commodities (oil, natural gas, precious metals, wheat and corn), art, and jewelry.
As inflation increases, often so could the value of these assets.
How to get a triple win!
If you were to take out a fixed-rate mortgage to buy real estate, you’d have a fantastic setup for an inflationary environment.
Here’s why:
1. You’d own an asset that historically has performed incredibly well in inflationary periods
2. You’d have a locked-in fixed-rate mortgage that you secured before interest rates rise further (the Fed has 7 rate hikes planned for 2022, and more for 2023)
3. You’d repay your mortgage with cheaper dollars over time
(Check out my free “2022 Real Estate Inflation & Recession Guide” for an in-depth overview of real estate investing in our current inflationary environment.)
What about stocks?
Historically, stocks and real estate have been great hedges against inflation.
But not all stocks are equally strong in inflationary periods.
Growth Stocks = 👎
Growth stocks are stocks that look promising for the future but don’t have particularly great numbers right now.
(e.g. Amazon, Facebook, Netflix, etc.)
Growth stocks usually take a hit during high-inflation environments. 💩
Value Stocks = 👍
Value stocks are stocks for companies that are doing well today but that investors believe are underpriced in the market relative to their performance.
Value stocks historically have done well in high-inflation environments. 📈
Fun fact!
Many (but not all) tech stocks are growth stocks, and several tech stocks (the “FAANG” stocks — Meta, Amazon, Apple, Netflix, Alphabet) also represent the largest cap stocks in the index.
This is one reason why we’ve seen such huge swings in the overall stock market lately…
Investors have been reassessing what they’re willing to pay for potential future returns on growth stocks in light of our high inflationary environment.
When the Fed tightens the money supply, there’s a risk of recession, which means battling inflation necessarily holds a degree of recession risk. This makes investors more cautious.
Said another way…
Lots of growth stocks being sold + Those stocks representing a large percentage of the total market cap = Volatility in the stock market
Takeaways and next steps
Hopefully you now have a better foundational understanding of inflation and how it affects you.
Here’s what to do next…
Stay Calm
Don’t get too wrapped up in headlines.
Don’t blow up your entire strategy and portfolio.
Remember that you’re in this for the long game, and that smart investing is about being patient and strategic, NOT trying to time the market.
Evaluate your portfolio
Take a look at your portfolio and ask yourself how your portfolio will fare if this inflationary environment lasts 2, 3, or even 5 years.*
(*Note: Historically in the U.S., it’s taken an average of slightly over two years — 27 months — for inflation to reach its ideal 2 percent target, as measured from the inflation rate at the start of a recession).
Know thyself
Start with the end in mind. Before you make changes to your portfolio, think about your investment goals, timelines, risk tolerance and risk capacity.
Fun fact!
If you’re interested in real estate investing, your next step is to check out my 2022 Real Estate Inflation & Recession Guide.
You’ll get answers to questions like…
– “How do rising interest rates affect real estate investing?”
– “If there’s a recession in 2022, will housing prices tank like they did in 2008?”
– “Can good deals still be found, or have I missed the boat?”
– “How should I set up my portfolio to handle inflation and a recession?”
Just let me know where I should send it…
What NOT to do
Don’t dump all your money into any asset that you’re not ready for.
Don’t panic-buy a house because you’re afraid of getting priced out of the market.
Don’t blow up your entire portfolio.
Don’t radically change your investing style, asset mix and timeline. Remember to think in decades; invest for the long-term.
Aim for balance and flexibility, and the right amount of liquidity for your lifestyle needs.
Thanks for reading!
If you have a friend or family member who could use some clarity about inflation, I’ll love you forever (as will they!) if you share this post with them.
And if you’re interested in real estate investing, be sure to check out my 2022 Real Estate Inflation & Recession Guide.
For many travelers, trips to large cities had little appeal during the COVID-19 pandemic. Activities like riding public transportation, touring a museum or attending a professional sporting event often took a back seat to less crowded — and less urban — experiences.
In the nation’s 25 largest markets, occupied hotel room nights (a measurement of demand) were down by 32 million in 2022 versus 2019, according to hospitality data and analytics company STR.
Outside the 25 largest markets, though, it was a different story. Hotels saw an increase of 550,000 occupied rooms throughout the rest of the country compared with 2019.
Isaac Collazo, STR’s vice president of analytics, says smaller markets did well during the pandemic while the top 25 markets suffered. He says travelers felt safer in smaller properties at less-crowded destinations.
Now, could it finally be changing?
European and U.S. cities are making a comeback
Mari Hawkins, a travel advisor with New York state-based Gemini Travel, is undoubtedly noticing a shift in her clients’ attitudes when it comes to travel and big cities.
During the pandemic, she was mainly helping clients book villas and vacation homes, where they wouldn’t have to interact with other people.
“We’ve done a complete 180. They’re going back to cities in droves,” she says, citing an increase in bookings to European cities.
“We have hundreds of people heading to Paris, Rome, Florence, Athens this summer,” said travel advisor Lauren Doyle in an email. Her company is called The Travel Mechanic and she’s based in Raleigh, North Carolina.
It’s not just travel to Europe. Collazo said a handful of major U.S. cities saw hotel room sales in the first part of 2023 outpacing pre-pandemic levels, including Houston, Dallas, Miami, Atlanta, Boston, Phoenix, Denver, Nashville, Tennessee, and Tampa, Florida.
The ones that benefitted the most had fewer COVID-19 restrictions or lifted the restrictions earliest. But several other major U.S. cities — including the nation’s largest — are still fighting to fully regain 2019 travel volume.
“New York City’s tourism is back in full swing,” says Vijay Dandapani, president and CEO of the Hotel Association of New York City. But he quickly pivots to a caveat: “The operative word is ‘tourism.’ Business travel is nowhere near where it was.”
The lack of business travel is dragging down New York’s overall hotel occupancy rates. During peak spring break in April 2023, occupancy was down by several percentage points compared with the same month in 2019, according to STR data.
Experts are optimistic
Dandapani isn’t worried. His team predicts New York’s travel landscape won’t fully recover until 2024.
Collazo shares his optimism. Pointing to an increase in conferences and business travel this year, he emphasized the “big city” trip isn’t a thing of the past.
“There’s still appeal to go to New York City. There’s still appeal to go to New Orleans, Los Angeles,” he said.
In fact, Hawkins says her clients are so eager to travel that they are willing to spend more money on accommodations. (And they probably won’t have much choice since hotels cost about 15% more than they did before the pandemic.)
“I’m hearing from travelers that they want to go no matter what,” she says. “They’re spending money for nicer properties.”
Ultimately, that has turned out to be a feather in the cap for many New York hotels’ bottom lines, Dandapani pointed out.
“The luxury market just had bang-up numbers,” he says.
Business travelers are returning more slowly
The return of travel has been uneven since the end of the pandemic. Cities eased restrictions at different times and hotel occupancy rates have dragged, mostly due to the slow return of business travelers.
But if the demand for Europe and smaller markets in the U.S. this summer is any indication, city destinations will eventually rebound to be just as popular as they were before the pandemic.
How to maximize your rewards
You want a travel credit card that prioritizes what’s important to you. Here are our picks for the best travel credit cards of 2023, including those best for:
Bankrate helps thousands of borrowers find mortgage and refinance lenders every day. To determine the top mortgage lenders, we analyzed proprietary data across more than 150 lenders to assess which on our platform received the most inquiries within a three-month period. We then assigned superlatives based on factors such as fees, products offered, convenience and other criteria. These top lenders are updated regularly.
Fairway Independent Mortgage Corporation
Sometimes, the numbers say it all: Fairway Independent Mortgage Corporation funded more than $71 billion in home loans in 2021. While you’ll have to contact a loan officer for information about the lender’s rates and fees, the majority of the experience at Fairway can be done via your screen. The FairwayNOW mobile app helps you get preapproved quickly, upload your documents and monitor the status of your application. If you’re looking for an in-person touch, you’re in luck: The lender also has branch locations in Bay City, Coldwater and Saline.
Strengths: Mobile app makes managing application easy; three locations in Michigan.
Weaknesses: Doesn’t publicly advertise rates or list specific fees; have to contact a loan officer to start the process.
Bethpage Federal Credit Union, based on New York’s Long Island, has 430,000 members. Membership is open to any U.S. citizen who deposits $5 into a share (savings) account. The nonprofit lender offers a variety of fixed-rate and adjustable-rate mortgages, along with FHA loans.
Strengths: Mortgage rates easy to find online.
Weaknesses: No branch locations in Michigan.
Read Bankrate’s Bethpage Federal Credit Union mortgage review.
Garden State Home Loans
This lender is named for New Jersey, but borrowers in The Wolverine State can also take advantage of its competitive rates and quick turn times. Most closings happen within 30 days, and Garden State Home Loans will work with borrowers who have sub-par credit: A few programs require just a 580 credit score.
Strengths: Live chat feature on the lender’s website; instant online loan estimates; low overhead costs translate to lower fees for borrowers.
Weaknesses: Mortgage rates are not advertised online; website experience is not as sophisticated as that of some other lenders.
Read Bankrate’s Garden State Home Loans review.
Sage Mortgage
Sage Mortgage is newer to the game — founded in 2020 — but it’s already gained the wisdom associated with its name by helping several thousand borrowers close mortgages. It’s an especially solid choice if you’re looking to refinance. By working with multiple lenders, Sage can help you find the best terms on a new loan.
Strengths: Specializes in refinancing; convenient ability to text with loan officers; easy online application process.
Weaknesses: Only starting rates available online.
Read Bankrate’s Sage Mortgage review.
Rocket Mortgage
The nation’s largest lender does business everywhere, and it’s the biggest lender by volume in Michigan (where Rocket is headquartered) and in many other major U.S. states.
Strengths: Offers a broad selection of purchase and refinance options.
As an Amazon Associate I earn from qualifying purchases. Guest Post Yoga studios and gyms, even fitness centers found in the average apartment complex, have been closed as a response to the spread of COVID-19. As a result, people are left needing to find alternative ways to stay active in order to meet their fitness … [Read more…]
I started the Best Interest on December 16, 2018. It’s been two years! And this also marks two years since I’ve been tracking every single expense in my budget. E-v-e-r-y-t-h-i-n-g. Today’s post will be a year-in-review for both the blog and for my personal finances. There will be lots of fun numbers. And I’ll show you how my preaching works in practice.
To get your bearings, here’s the Year 1 Review.
Thank you!
Thank you. Yes, you. Thank you for reading, and thank you to my generous patrons.
I don’t write here because of financial gain (see the Sankey diagram in the Budgeting section). I write here because you’re reading. And because it’s incredibly fun and you readers make it rewarding.
I was recently asked about my mission statement. It’s just in draft, but:
I value helping and teaching. At my core, I want to help people improve their lives by teaching them valuable skills & knowledge. I think personal finance is a tangible, vital, and universal skill set.
Improving personal finance == improving lives.
Sharing with you is my mission. And you sharing your attention with me is a privilege that I don’t take for granted.
Every small compliment you’ve given me is extremely meaningful. I love answering your questions, your Tweets, and your Reddit comments. So again, thank you for being here.
Some Stats
Who doesn’t like statistics? Here’s what 2020 looked like on the Best Interest.
Back in 2019, about 19,000 people visited the blog. I was ecstatic.
In 2020, over 160,000 readers visited. I’m over the moon. In 2021, I’d like to hit 500,000.
As of this publication, about 210,000 words over 82 articles have been published in 2020. About 70% of those are my own, and the other 30% I can attribute to the wonderful bloggers I work with at the Money Mix.
The Money Mix is a group of like-minded writers, bloggers, and internet nerds. We share lessons learned, tips & tricks, and even share one another’s best written work. I’ve learned a ton since joining in April and attribute much of the Best Interest’s growth to learning from TMM.
The blog’s subscriber base grew by about 400% this year. If you haven’t joined, I send out a quick newsletter every week and include all new Best Interest articles.
Never miss another Best Interest post—subscribe here.
And lastly, the blog cost ~$2800 to operate and improve (notice the sweet logo?!), plus the hundreds of hours of writing and site maintenance. The mission makes it worthwhile. But if you’d like to support the cause, please join the patronage. I truly appreciate it. The more this site pays for itself, the more time I can devote to the mission.
Budgeting
Another year, another streak of tracking every single dollar using YNAB. If you’re looking for a smart Christmas present, YNAB is a great idea.
Note: you and I both get a free month of YNAB if you end up signing yourself (or someone else) up with the link above. No extra cost to anyone involved. You get a 34-day trial, and then an additional free month. That’s two months to figure out if you like it!
Below, you can see a snapshot of my YNAB journey from November 2018 until now. During this 2+ year period, I’ve used YNAB to budget and track every dollar that I earn and spend.
Is it overkill? Yes, tracking every dollar is overkill for most people. But I highly recommend that you run a budget, and I even interviewed some other experts for alternative budgeting ideas. Find the right budget for you.
Where the Money Goes
As for where my money actually goes, the Sankey diagram below is a terrific visualization.
I’ve normalized this diagram against 100% of my salary. Why? Because it helps visualize what percentage of my income goes where.
For example, 23.4% of my income went to taxes before I ever saw it. Only 59.42% of my income ever came to my bank account via paychecks and, therefore, was budgeted. Of that 59.4%, I spent about half and saved/invested the other half.
The bottom of the Sankey diagram shows how previous years’ investments grew, and shows the free money that comes from my employer’s 401(k) matching. If the stock market had gone down, the “Investment Interest” section could have been negative.
But as it sits, 2020 stock market returns added the equivalent of 25.44% of my salary to my portfolio. And my employer’s 401(k) match was equivalent to 6% of my salary (that’s free money, by the way). The Investments section below has more detail on those individual investments.
Between budgeted savings (Roth IRA, taxable brokerage account, emergency fund) and pre-tax savings (401k, HSA), about 45% of my salary went towards savings and investments. Add in the “extra” savings (investment returns, 401k match), and the equivalent of 76% of my salary went towards savings and investments.
Your results may vary. But this is how my preaching looks in practice.
Enjoying this article? Subscribe below to get new articles emailed straight to your inbox
Investing
After plenty of questioning, I wrote an article in October that provided every detail of how I invest.
One of the nice things—for both you and I—is that it’s fairly easy to track my portfolio over time. There are four assets:
Large U.S. stock index fund (ex: Fidelity’s S&P 500 index fund, FXIAX)
Mid and small U.S. stock index fund (ex: Fidelity’s Russell 2000 index fund, FSSNX)
Bond index fund (ex: Fidelity’s Total Bond Fund, FTBFX)
International stocks fund (ex: Fidelity’s Total International Stock Fund, FTIHX)
As of 12/16/20, these assets have performed as follows in 2020:
S&P 500 Index = +13.3%
Russell 2000 Index = +17.6%
Bond Index = +3.6%
International Stock Index = +6.2%
For the 2019 year, these indices’ performances were:
S&P 500 Index = +28.9%
Russell 2000 Index = +23.72%
Bond Index = +9.9%
International Stock Index = +21.5%
What are the takeaways? 2019 performance was blistering, and 2020 performance feels oddly optimistic given current events. I don’t expect every year to be as “good” as the past two.
Nevertheless, I’m trying to leave my emotion at the door and stick with my plan. Specifically, I invest the same dollar amount every month, whether the market is up or down. If you want to learn why I’m confident in that plan (despite current events), I wrote all about it this past autumn:
Even if the markets are at all-time highs and it feels like a crash is coming, my outlook is long-term. I have faith the the long-term (10, 20, 30+ years) economic outlook is good.
Favorite Blogs Posts
I’m proud that my writing is highly regarded. I was featured this year on MSN, Grow/CNBC, the Ladders, the Good Men Project, SoFi, Budgets are $exy, the Plutus Awards Showcase, and elsewhere. Woohoo!
If you think my writing is worthy of someone else’s attention, I’d love for you to share it with them. Post a link on Facebook, Reddit, Twitter, etc. Send your Uncle Dave the article I wrote about him. If you found a post particularly useful, let your tribe know about it. Simple grassroots sharing.
Here are some of the best posts from 2020:
January—The 2010’s Will Happen Again—If you’re worried that the 2010’s were a “once in a lifetime” investing decade, this article will show you how that’s not quite true.
February—Index Fund Bubble: Arguments For and Against—I invest solely in index funds. So when well-known investors warned of a bubble, I wanted to understand for myself.
March—Viral Stock Market Strategies—Lots of Twitter experts discussed their personal investing techniques during the early days of COVID-19. So I wrote a MATLAB script to back-test all their best laid plans. Spoiler—the simplest approaches always fare best.
April—The Biggest Lesson from COVID-19—Slack. Safety net. Margin. Out of the many lessons from COVID-19, this article discusses the biggest one: how building slack in our systems—personal finance, business, hospitals, even hiking—is a life-and-death issue.
May—Jeff Bezos and the Meritocracy Kings—Jeff Bezos, resource allocation, Vonnegut, meritocracy, survivorship bias, systemic flaws, and quarantine kings.
June—Simple Financial Goals—a two-minute punch-list to start you down the path to better personal finances.
July—Do you know Dave?—a funny story about a man you know, and the perilous personal finance circumstances he finds himself in.
August—Long Term Investing Takes Faith—I returned from a camping trip rejuvenated. But memories of the rolling waves reminded me of slow, steady, long-term investing.
September—Amazing People Everywhere—inspired by Tim Ferriss’s Tools of Titans, I interviewed some amazing people in my own life, and asked them what lessons they’ve learned in their unique journeys.
October—The True Cost of Car Ownership—a detailed analysis of car costs, answering the important questions like:
How should I compare time owned vs. miles driven?
What’s the full-life true cost of owning a car?
How much does a car’s value depreciate over time?
How do I place value on the utility of my car (e.g. a work truck vs. a compact sedan)?
When is a used car purchase smarter than a new car?
How does leasing compare to owning?
Should I sink more money into an old beater? Or just get a new car?
November—Your Retirement Savings Goal for 2021—my first dabble into coding my own calculators. If you’re looking for an easy 2021 resolution, start by calculating your 2021 savings goal.
December—Curses, Miracles, and the Best Interest Student Loan Solution—The status quo is a haunting curse. The proposed solution is a divine miracle. I propose a middle-ground solution. And the math backs me up.
2020: Year of the Dog
We fostered nine sweet dogs in 2020. No dog goals for 2021, other than to keep fostering. There are lots of great dogs that just need a home. If you’re looking for a dog, consider adopting through a shelter or foster organization.
But because it’s fun and funny, here are the 2020 dog power rankings.
Starting at #9: Josie. She was one of Sadie’s puppies. And man, was she mean. Clearly, Josie learned that the meanest puppy always gets fed, and she would absolutely torment poor Oscar. If you’ve ever seen Tasmanian devils fighting on the National Geographic channel, that’s how Josie was at feeding time. Bad girl! But she’s a sweetheart now as a young adult 🙂
Next at #8, Ranger. While Ranger was a good boy, he chewed on too many things. Most dogs are athletes. Not Ranger. He was a happy, dopey, skittish, and unathletic dog.
Louis a.k.a. Mr. Bones a.k.a. Louie Long Legs comes in at #7. Not the cutest pup, and one of the only dogs that legitimately drew blood from his playful bites and claws. But he was just a pup, so you can’t hold it against him!
Jules is our current foster, and she comes in at #6. She’s a little whiny and took a poop behind the Christmas tree. Is she super cute? Sure. But a cute face only gets you so far on the Best Interest.
#5 is Raven, a solid puppy. The most athletic of Sadie’s puppies, there was nothing to dislike about Raven. If she has stayed around longer, she could have competed for the top 3. But she got adopted quickly and didn’t have much time to rise to the top of the heap.
Esther—coming in at #4—was one of two recent moms to come through our home. And poor Esther definitely missed her puppies, making multiple escape attempts over our fence. She was a sweetie. Not much is cuter than hearing a 25-pound part-Huskie give out a “big” wolf howl.
Sadie’s third-and-final puppy, Oscar, comes in at #3. This little guy was everyone’s favorite of Sadie’s three puppies. While we figured, “Ahh. Dad must have been a Blue Heeler,” we actually found out that Sadie is 55% Blue Heeler. Her recessive traits are expressed in her more slender physique and black color. Oscar’s phenotype, however, is very much the stocky, mottled grey Blue Heeler.
Scooby, the cutest bloodhound puppy around, is #2. Not only did Scooby have stellar looks, but he had the personality to match. He was playful, mostly potty-trained, and slept through the night from Day 1. He was wise beyond his weeks. The “Doobie Brother” was a very good boy.
Coming in at numero uno, it’s got to be Sadie. I’m a big softie for Sadie. She was our first foster and probably the only one who arrived at our door significantly unhealthy. She had been homeless in Houston, scrounging for nutrition to support herself and her three puppies (Josie, Raven, and Oscar). Sadie was only 27 pounds when she showed up. But we nourished her, fell for her, and adopted her ourselves! She’s now a sturdy 42 pounds and has been a great friend to all the other fosters to come through our house. She’s also kinda famous in the blogging world.
2021 and Beyond
In 2021, I’d love to help half-a-million (or more!) readers.
Monetization of the blog is something I’ve considered before. Right now, a few generous Patrons donate to the blog, and I don’t run ads (here’s why). But if the income from running ads allowed me to further the blog’s mission without interfering with that mission…would that be worthwhile? I’m interested in what you think about that idea. Do ads bother you?
Content-wise, I’m always looking for useful questions to answer. My own confusion inspired my Explaining the “Big Short” post. The many new parents in my life inspired this guide to 529 plans. If you want to learn something, let me know.
I’m excited for 2021! And I hope you are too.
Thank you for reading! If you enjoyed this article, join 6000+ subscribers who read my 2-minute weekly email, where I send you links to the smartest financial content I find online every week.
-Jesse
Want to learn more about The Best Interest’s back story? Read here.
If you prefer to listen, check out The Best Interest Podcast.