Home prices could keep climbing, as mortgage rates fall and the Fed slashes rates.
The latest release of the Case-Shiller index data showed a 4.8% annual increase in home prices in October.
Mortgage rates have fallen as markets eye Fed easing, driving a new wave of homebuyer demand.
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Home prices surged in October, and they may have room to run further, according to data from S&P Global’s Dow Jones Indices group.
The S&P CoreLogic Case-Shiller home price index, a leading tracker of US home prices, showed a 4.8% annual increase in October, according to a release on Tuesday. In September, the index showed a 4% annual rise in home prices.
And as the Fed is poised to slash rates, sending mortgage rates tumbling lower, lofty prices are expected to stick around.
“Home prices leaned into the highest mortgage rates recorded in this market cycle and continued to push higher,” Brian D. Luke, researcher at S&P Dow Jones Indices said. “With mortgage rates easing and the Federal Reserve guiding toward a slightly more accommodative stance, homeowners may be poised to see more appreciation.”
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According to the release, S&P’s 10-city, 20-city and National Index, are at all-time highs.
“A solid, if unspectacular report, this month’s index reflects a rising tide across nearly all markets,” Luke said.
The sharpest uptick in prices was seen in the Midwest and Northeast regions, Luke said, in cities like Chicago, Boston, Detroit, Cleveland and New York.
As home prices climb, mortgage rates have been falling at their fastest pace since the 2008 crash. That’s because the Fed has been eyeing rate cuts next year, sending benchmark bond yields down and lowering borrowing costs for consumer and corporate debt. Mortgage rates have dipped to 6.67% after touching 8% in October for the first time since 2007.
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But alongside the easing rates, market experts have been warning about a coming upswing in home prices. Last week, a report from Fitch Ratings said that home prices may pick up speed after the Federal Reserve cuts rates next year, with prices edging up by as much as 3%.
And real estate mogul Barbara Corcoran has said that prices would jump higher the minute mortgage rates slide lower by one more percentage point, with buyer demand set to skyrocket as the cost of home loans drops.
Well, another year is nearly in the books, which means it’s time to look ahead to what the next 365 days have in store.
While 2022 felt like it couldn’t get any worse, 2023 surprised all of us by being an even rougher year.
Thanks to the highest mortgage rates in nearly a century, loan origination volume ground to a halt, as did home sales.
The only real bright spot was new home sales, though builders had to make some big concessions to unload their inventory.
So what does 2024 have in store? Well, the good news might just be that the worst is finally behind us.
1. Mortgage rates will drop below 6% (and maybe even 5%)
First things first, mortgage rates. While I (and many others) expected mortgage rates to fall in 2023, they defied expectations.
Rates began the year 2023 on a downward slope, but quickly reversed course and surpassed 7% by spring. Then things got even worse as rates climbed beyond 8% in October.
However, inflation has since cooled and economic reports continue to signal that the worst of it could be over.
The Fed has also gotten on board, with their latest dot plot signaling rate cuts for 2024. After raising rates 11 times in less than two years, there could be three or more cuts next year.
While the Fed doesn’t control mortgage rates, their monetary policy tends to correlate. So if they’re cutting rates due to a cooling economy, mortgage rates should also fall.
We’ve already seen mortgage rates ease in anticipation, and they’re expected to go even lower throughout 2024.
This should be helped on by normalizing mortgage rate spreads, which remain about 100 basis points above typical levels.
In my 2024 mortgage rate predictions post, I made the call for a 30-year fixed below 6% by next December.
The way things are going, it could come sooner. And rates could go even lower, potentially dropping into the high-4% range if paying discount points.
2. Homeowners will refinance their mortgages again
I expect 2023 to go down as one of the worst years for mortgage refinances in history.
Interest rates increased from around 3% in early 2022 to over 7% in about 10 months.
Then continued their ascent higher in 2023, meaning very few homeowners benefited from a refinance.
However, two things are working in homeowners’ favor as we head into 2024.
There were about $1.3 trillion in home purchase loan originations during 2023, despite it being a slow year.
And rates have since come down quite a bit from what could be their cycle highs.
If we consider all those high-rate mortgages that funded over the past year and change, we might have a new pool of refi-eligible borrowers, as seen in the chart above from ICE.
It’s also easier to be in the money when refinancing a high-rate mortgage since the interest savings are larger.
So I expect more rate and term refinances in 2024 as homeowners take advantage of recent mortgage rate improvements.
In addition, we might see homeowners tap equity via a cash out refinance if rates keep coming down and get closer to their existing rate.
Refi volume is forecast to nearly double, from around $250 billion this year to $450 billion in 2024.
3. Mortgage rate lock-in will be less of a thing
With less of a gulf between existing mortgage rate and potential new, more homeowners may opt to list their homes for sale.
One of the big stories of 2023 was the mortgage rate lock-in effect, whereby homeowners were deterred from selling because they’d lose their low mortgage rate in the process.
But if the 30-year fixed gets back to the low-5% range, or even the high-4s, more homeowners will be OK with moving.
This is one part affordability, and another part caring less about their low-rate mortgage.
Very few are willing to give up a 3% mortgage rate when rates are 8%+, but the story will change quickly if and when rates start with a 5.
The chart above from Freddie Mac quantifies the value of a low-rate mortgage.
Aside from allowing people to free themselves of their so-called golden handcuffs, it will also increase existing home sales.
The big question is will it increase available supply, or simply result in more transactions as sellers become buyers?
4. For-sale inventory will remain limited
While I do expect more sellers in 2024, at least when compared to 2023, it might not move the needle on housing supply.
The big story for years now has been a lack of available for-sale inventory. Everyone expected home prices to crash when mortgage rates more than doubled.
Instead, home prices went up because of simple supply and demand. There just aren’t enough homes for sale in most markets nationwide.
As such, prices have defied logic despite worsening affordability. Demand is low but so is supply. And I don’t expect things to get much better.
At last glance, months of supply was around 3.5 months, per Redfin, below the 4-5 months considered balanced.
Sure, lower rates and sky-high prices can get stubborn home sellers off the sidelines. But guess who else is waiting? Buyers. Lots of them who may have been priced out due to 8% mortgage rates.
In the end, it might be a zero-sum game, at least in terms of inventory as more sellers are met with more buyers.
Of course, it will be good for real estate agents, loan officers, and mortgage brokers thanks to a greater number of transactions.
5. Home prices may go down despite lower rates
Lately, there’s been a lot more optimism in the real estate market thanks to easing mortgage rates.
In fact, some folks think the boom days are going to return in 2024 if the 30-year fixed continues to trend lower.
While I’ve constantly pointed out that mortgage rates and home prices don’t share an inverse relationship, it doesn’t stop people from believing it.
Sure, the logic of falling rates and rising prices sounds correct, but you’ve got to look at why rates are being cut.
If the economy is headed toward a recession, even a mild one, home prices could also come down, despite lower interest rates.
Similar to how rates and prices rose in tandem, the opposite scenario is just as possible.
However, because rates are only expected to come off their recent highs, and only a small recession is projected, I believe home prices will continue to increase in 2024.
Interestingly, they may not rise as much in 2024 as they did in 2023, and could even fall in many markets nationwide.
Both Redfin and Zillow expect home prices to fall next year, by 0.2% and 1%, respectively. Fannie Mae is also a bit bearish, as seen in the chart above.
I’m a bit more bullish and believe home prices will climb 3-5% nationally. But this still feels like a modest gain given recent appreciation and the lower rates forecast.
6. The bidding wars won’t be back in 2024
Along the same lines as home prices stumbling in 2024, I don’t expect bidding wars to make a grand return either.
The narrative that lower mortgage rates are going to set off a feeding frenzy seems overly optimistic.
And even flat out wrong. Remember, affordability is historically terrible thanks to elevated mortgage rates and high home prices.
Just because rates ease to the 6s or 5s doesn’t mean it’s a seller’s market again. If anything, it might just be a more balanced market that allows for more transactions.
A lack of quality inventory will continue to plague the market and buyers will still be discerning about what they make offers on.
So the idea of getting in now before it’s too late will be misguided as it typically is. If you’re a prospective buyer, remain steadfast and don’t rush in for fear of missing out.
You might even be able to get a deal if you’re patient, including both a lower interest rate and sales price in 2024.
7. Home sales will increase slightly but remain depressed
Similar to mortgage rates peaking in 2023, I believe home sales may have bottomed as well.
NAR reported that November’s pending home sales were flat from last month and down 5.2% from a year ago. But things could begin to turn around in the New Year.
This means we should see home sales tick up in 2024, though not by much thanks to continued inventory constraints.
Remember, mortgage rates will remain at more than double their 2022 lows, despite some improvements from recent levels.
And while home builders have ramped up construction, there are still few homes available in most markets nationwide.
Most forecasts expect existing home sales to barely budge year-over-year, from maybe just below 4 million to just above.
Meanwhile, newly-built home sales may be relatively flat as well, perhaps rising from the high 600,000s to over 700,000 in 2024.
This will hinge on the direction of mortgage rates. The lower they go, the more sales we’ll likely see.
So things could turn out rosier than expected, though still quite low historically until the inventory picture changes.
8. Home equity lines of credit (HELOCs) will get more popular
The Fed doesn’t raise or lower mortgage rates, but its own rate cuts directly impact rates on home equity lines of credit (HELOCs).
With several rate cuts expected between now and the end of 2024, HELOCs are going to become more and more attractive.
In fact, the latest probabilities from the CME have the Fed cutting rates by 1.5 percentage points by December.
So someone holding a HELOC today will see their rate fall by the same amount, as the prime rate moves in lockstep with the fed funds rate.
For example, a HELOC set at 8% will drop to 6.5% if all pans out as expected.
And because most homeowners still hold 30-year fixed mortgages with rates of 4% or less, they’ll opt for a second mortgage like a HELOC or home equity loan.
If the trend continues into 2025, these HELOCs will be a cheap source of funds to pay for home improvements, college tuition, or even a subsequent home purchase.
All while retaining the ultra-low rate on the first mortgage.
9. More buyers and sellers will negotiate real estate agent commissions
You’ve heard about the many real estate agent commission lawsuits. And changes are already on the way as those cases move along.
While both agents will still get paid to represent buyer and seller, there should be greater transparency in how they’re compensated.
And we may see some different methods of remitting payment. For example, a home seller paying the buyer’s agent directly, not on the listing agent’s behalf.
Of course, this could just result in different paperwork and no real change for the buyer or seller.
However, agents will likely be more transparent about the ability to negotiate, and this could be the key to saving some money.
Instead of being told the commission is 2.5% or 3%, they may tell you that’s their rate, but it’s negotiable.
This could result in home buyers and sellers paying less and/or receiving credits for closing costs.
It’s a step in the right direction as many consumers weren’t even aware these fees could be haggled over.
In the end, it should get cheaper to transact but you’ll still need to be assertive and make your case to receive a discount.
10. The housing market won’t crash
Finally, as I’ve predicted in past years, the housing market won’t crash in 2024.
While we are continuing to experience an affordability crisis of epic proportions, the speculative mania isn’t as pervasive as it was in the early 2000s.
And we can continue to thank the Ability-to-Repay/Qualified Mortgage Rule (ATR/QM) for that, as the screenshot from the Urban Institute illustrates.
After the early 2000s mortgage crisis, many types of exotic mortgages were banned, including interest-only home loans, neg-am loans, and even loans with mortgage terms over 30 years.
At the same time, lenders have to ensure a borrower has the ability to repay the loan, meaning no doc loans and stated income are mostly out as well.
While there are non-QM loans that live outside these rules, they represent a small share of total volume. And the minimum down payments are often 20% or more to ensure borrowers have skin in the game.
Interestingly, it is FHA loans and VA loans that are experiencing the biggest uptick in delinquencies, though they remain low overall.
Even if we see an increase in short sales or foreclosures, we’ve got a severe lack of inventory due to demographics and underbuilding for over a decade.
This explains why home prices are unaffordable today, and also why they’ve remained resilient.
A scenario likelier than a crash would be stagnant home price growth for a number of years, with inflation-adjusted prices potentially going negative at times.
But major declines seem unlikely for most metros nationwide. In the meantime, a combination of wage growth and moderating mortgage rates could make homes affordable again.
As we approach Christmas day, we can only hope that the Federal Reserve now realizes their fear of 1970s-style inflation created a rate-hike cycle that disproportionately impacted the U.S. housing market and that they need to be pro-housing again.
Even with all the drama we have dealt with in 2022-2023, the housing market stayed intact and never broke. Let’s look at the tracker for the week before Christmas and see what the forward-looking data looks like before we open presents.
Weekly housing inventory data
We are near the end of the year, which means the seasonal decline in housing inventory will take hold until we find the seasonal bottom in inventory in 2024. However, one thing is sure: from 2020 to 2023 we never saw credit-stressed home sellers. We never saw the Airbnb crash that dominated some of the housing headlines in 2023. While inventory levels are still too low for my taste, it’s good that we are not at 2022 levels when we only had 240,194 total active single-family listings for Americans to buy.
Last year, according to Altos Research, the seasonal peak for housing inventory was Oct. 28. This year’s peak was Nov. 17.
Weekly inventory change: (Dec.15-22): Inventory fell from 538,767 to 528,601
Same week last year (Dec. 16-23): Inventory fell from 522,869 to 508,777
The inventory bottom for 2022 was 240,194
The inventory peak for 2023 so far is 569,898
For context, active listings for this week in 2015 were 1,013,245
One of my concerns with higher mortgage rates was that we could see another new leg lower in new listings data, which wouldn’t be good for housing because most sellers are homebuyers. This got tested in 2023 with 8% mortgage rates; not only did that not happen, but the new listing data was very stable, meaning it was forming a bottom. This is a big Merry Christmas gift for the housing market. Months ago on CNBC, I talked about how we should see some growth in this data in the second half of the year we have!
However, the key to this data line is that we want to see real year-over-year growth in the spring of 2024 — back to levels of 2021 and 2022. Historically speaking, 2021 and early 2022 were the two lowest ever in new listings data. But once rates went above 6%, since July of 2022, we were treading for 17 months at a new low. For us to have a functioning marketplace, we need new listing data to get back to 2021 and 2022 levels, which means more sales can happen in 2024 This will be something I am rooting for in 2024.
New listings data for the last week in the last several years:
2023: 36,897
2022: 31,794
2021: 35,834
Traditionally, one-third of all homes will have price cuts before they sell. When mortgage rates rise and demand decreases, more homes see price cuts. However, even with mortgage rates reaching 8% this year, we trended below 2022 levels the entire time. We are ending the year with almost 1.5% lower mortgage rates and the price cut percentage data below 2022 levels.
Price cut percentages this week over the last few years:
2023: 36%
2022: 40%
2021: 25%
Mortgage rates and the 10-year yield
Considering the fireworks we had two weeks ago, last week was very tame. Not too much movement on the 10-year yield or mortgage rates. Mortgage rates started the week at 6.65% and ended at 6.68%. We had a lot of interesting economic data, especially the PCE inflation data running at roughly 2% growth using the 3- and 6-month averages. However, last week saw little volatility on the 10-year yield. Next we have the final week of trading with some big bond market auctions happening. We might see some decent movement in the bond market next week.
Purchase application data
This will be the last purchase application update for the year as the MBA takes the holiday week off and we will report the holiday period in the new year. Traditionally, I tell people to ignore the last few weeks of the year as most people are getting ready for Christmas and New Years so volume always falls. However, with that said, last week saw a mild decline of 0.6% on a week-to-week basis, making the year-to-date count 23 positive and 24 negative, with two flat prints.
Considering that mortgage rates rose from 5.99% to 8.03% and we might have more positive weekly purchase application prints than negative weekly prints this year speaks volumes. The housing market is working from a low bar in sales, but that roughly 4 million core homebuyers stayed steady in 2023. Total home sales should be near 5 million even with the massive home price gains and higher mortgage rates.
The week ahead: Bond auctions and home prices
It will be a quiet week for economic reports; we will have a few home price index reports and some sizable bond auctions that can potentially move the bond market in a holiday trading week.
I want to wish you a happy holiday and a Merry Christmas. I know it’s been rough for the housing market this year with a deficient volume of existing home sales and loan originations. We should have a better 2024 and my 2024 forecast will come out on Jan. 1, 2024. Until then, enjoy the holidays with your family and remember: the housing market took it on the chin for two years and it bent with the lowest sales levels in history when accounting for the civilian workforce, but it didn’t break, and neither did any of you reading this.
It was late 2022 and Mike was feeling the pressure. Mortgage rates had climbed close to the 7% range and he was determined to remain competitive on pricing with rival loan officers in North Carolina.
But there was a problem: pricing exceptions, in which the lender takes the hit, were becoming scarce at his company. So he did what a lot of retail loan officers in the industry were doing — Mike would reclassify a self-generated lead as a corporate-generated lead, thus slashing his compensation from 125 basis points down to as low as 50 bps, giving him a low enough rate to win the client and eventually close the deal. His manager and company bosses knew that he and other LOs were lying about where the lead source came from, he said.
The lower comp rate stung. After Mike paid his loan officer assistant, he was clearing just 40 bps. Still, it was better than nothing. After all, tens of thousands of loan officers had already exited the industry because they couldn’t generate enough business.
“At this time, I didn’t really think of it as an ethical issue,” Mike, whose last name is being withheld for fear of retaliation, told HousingWire in an interview in late November. “But it started to wear on me to where it was like, okay, I’m getting price-shopped left and right. I’m feeling the pressure to cut my pay, because when I do it, and my agent partners, they see that I do that, and then they’ll tell people they refer to me. ‘Hey, he can dig deeper if he really has to.’”
Mike continued: “Well, doesn’t that smack of bad faith if I’m not offering them my best price from jump? I would get people saying to me, ‘I’m not going to go in with you. I don’t feel comfortable with you, because you tried to get me to go for a higher pricing first, and then only offered a better deal once I told you I had another offer.”
Mike said he left that lender in early 2023 as a result of the ‘bucket game’ and refuses to manipulate where lead sources are coming from at his current shop.
“It’s a race to the bottom,” he said of the practice.
Over the past two months, HousingWire has interviewed more than a dozen loan officers, mortgage executives, attorneys and also reviewed several companies’ loan officer contracts and text messages between recruiters and prospects to shed light on the growing issue of pricing bucket manipulation, which critics say distorts market pricing and could represent a violation of fair lending laws.
It’s unknown how many retail lenders are engaged in the practice of falsifying lead sources to lower loan officer pay, but industry practitioners say it’s widespread, and in most cases, reclassifying leads into different pricing buckets before they lock is not permitted by the Consumer Financial Protection Bureau’s rules under Regulation Z.
It’s also unclear whether the CFPB is policing the practice; HousingWire could find no record of enforcement actions taken, and the agency’s audits are not public record.
Evolution of the LO Comp rule
In the wake of the housing crash in 2008, the CFPB created new rules that reshaped how loan officers were compensated. The architects of the new rules wanted to prevent loan officers from taking advantage of borrowers, which was a common occurrence in the days leading up to the Great Recession.
Under an updated Regulation Z, lenders could no longer pay loan officers differently based on terms of loans other than the amount of credit extended. In theory, this means loan officers provide the same service and pricing on loans, reducing the risk of steering.
“LOs also can’t get paid on proxies, and they define proxies to be pretty straightforward: some factor that correlates to terms over a significant number of transactions, and the LOs have the ability to change that factor,” said Troy Garris, co-managing partner at Garris Horn LLP.
But the CFPB did allow loan officers to be compensated differently based on lead sources, which do not fall under the category of terms or proxies and are neither a right or an obligation.
For example, when an existing customer calls the lender’s call center for a new mortgage or refinance, and the lender redirects the loan to the LO, “the LO gets paid less because it was sourced from the company, and it is less work for the LO,” said Colgate Selden, a founding member of the CFPB and an attorney at SeldenLindeke LLP. When it’s an outside lead, “the LOs generated the lead themselves; they are spending time marketing to new borrowers, so they get paid more.”
Attorneys told HousingWire that in the current marketplace, violations of LO Comp rules can arise when lenders and LOs alter compensation by changing the lead source after the initial contact with the borrower to lower their rate and secure the deals. Regulation Z generally does not allow LOs to change which lead source was used.
But, in today’s competitive market, “I do think there’s an incentive, especially on the LO side, to find ways to do something different – and probably also for companies to decide to take more risk,” said Garris. “We believe this is happening because people are frequently asking if there’s a rule change.”
How the ‘bucket game’ works
LOs who spoke to HousingWire said managers often told them they wouldn’t get pricing exceptions on deals, so if they wanted to gain an edge it would have to come out of their pay. Three loan officers at three different retail lenders described it as a feature of their lender’s business model.
“You feel out a prospective client during the initial conversation, get a sense of whether they know how everything works, if they’ve spoken to another lender, if they’re going to shop you, right? And you quote them the best possible rate you could give them that day, knowing that you’ll put them in a bucket just before lock,” said one Wisconsin-based LO. “It doesn’t really matter what you quote them in the initial conversation as long as you can get it below competitors around lock time…either through a pricing exception or the bucket [manipulation].”
One top-producing California-based loan officer said she was excited when a top 35 mortgage lender tried to recruit her with the promise of multiple pricing buckets. Having the buckets would provide her flexibility that her current lender didn’t offer, she thought at the time.
“What the [recruiting] company told me explicitly was the loan originator, when they go to lock the loan, they check a box – is it self, branch or corp gen? And you only get to check one box, but it’s the loan officer’s choosing, not the branch,” she said. “So the loan originator is choosing, not the branch that says I’m going to give you a lead and this is the comp for it. Not the corporate advertisement or online group that says you’re getting this lead from us and here’s documentation that it occurred and now you’re going to get less comp. It’s the ultimate in legalized fraud. Because it’s not true.”
These days, many lenders have pricing buckets for corporate-generated leads, branch leads, builder leads, marketing service agreement (MSAs) leads, internet leads from aggregators and more. In and of itself, it’s legal, provided the lead really did come from the source and it’s diligently tracked by the lender.
Loan officers and mortgage executives interviewed by HousingWire said some lenders justify the practice of manipulating the buckets by telling LOs it’s legal and they’ve been audited by the CFPB, which has not found any wrongdoing. Several executives accused of the practice declined to comment on the record about pricing bucket manipulation, though they all said they track leads as required and are in full compliance with the law.
Selden, the former CFPB attorney, said that LOs are telling borrowers who complain about high mortgage rates that companies are “running a special offer.” Borrowers are directed to the company’s website, where, by indicating the LO name, they supposedly qualify for a special deal with a lower rate. In reality, at lenders without adequate controls to prevent lead source manipulation, this shifts the source from self-generated to an in-house lead.
LOs interviewed by HousingWire said that in some cases they would be able to change the lead referral source themselves, and in other cases they’d need a manager to alter the lead source in the loan origination system.
While many instances of price bucket manipulation were directed by managers, LOs would also self-select, said Mike.
“Most of the time you don’t have a loan estimate from a competitor, you’re just afraid that you’re going to lose it because you’re so embarrassed about the rate. And that’s why a lot of my comrades… were going to the corporate-generated lead bucket before they even confirmed that they had to. Partly because you wanted to lead with your best price.”
Steve vonBerg, an attorney at law firm Orrick in Washington, D.C., worked as a loan officer and underwriter for seven years. He emphasized the potential trouble for lenders and LOs inaccurately classifying the lead source.
“Often, a [CFPB] examiner would see if the lead channel changed later in the process. That could be legitimate: the borrower starts working with an LO, and it’s a self-sourced lead for that LO, but then decides to buy a home in a different state in the middle of the process; the second LO that it has to be transferred to has now an internal-company referral, and so the lead source would legitimately change,” vonBerg said. “But, if there isn’t a legitimate reason for the lead source changing midstream, that would be fairly easy for an examiner to identify.”
“It’s wrong”
Victor Ciardelli is frustrated by the bucket game. Deeply frustrated. The Guaranteed Rate founder and CEO says he is losing money and loan officers to rivals because of a business practice that he says is flagrantly illegal, pervasive, and does not appear to be slowing down anytime soon.
Some rival retail lenders, he says, are creating up to a dozen pricing buckets for their loan officers. The tiered nature of the bucket comp structure in many cases — self generated being the highest at up to 150 bps, 100 bps for another ‘bucket,’ 80 bps for another, down to 60 bps, 40 bps and sometimes all the way to zero — proves that it is a deliberate business strategy, he said.
“It wasn’t intended that the loan officer at the time that they’re talking to the consumer and quoting them a rate, that the loan officer can put the consumer in any bucket they want,” he said in an interview with HousingWire. “But that is exactly what’s happening. What’s exactly happening is the fact that there’s all these different pricing buckets for a lot of these different companies out there. And that the loan officer is allowed to go in and offer the consumer whatever rate based on what the loan officer wants.”
He argued that LOs are maximizing their personal income per borrower.
“It’s no different than what happened prior to Dodd-Frank, where it was the wild, wild West and people were playing games with customers on rates and fees,” said Ciardelli. “It’s the same thing today. There’s no difference except the fact that there’s a law in place that tells the mortgage company and the individual loan officer. And the loan officers know that they’re violating the law. It’s greed.”
Ciardelli says the rival CEOs — he declined to name individuals and said it’s an industry-wide problem — are establishing these buckets and know “full well that the bucket is put in place in order to lie about where the lead source is coming from.”
They have an obligation to know where the leads are coming from, that the loan officers are putting them in the appropriate bucket and that they are being tracked, he said.
“The loan officer may take a hit on that loan, and may make less on that loan, but the company themselves doesn’t take the hit, their margin stays the same. So the company CEO is happy, because they’re like, ‘I’m giving my loan officers all this flexibility to go out and be competitive and win deals. And they’re going to win more deals than anybody else out there, because they’re going to be able to slot the individual borrower into these different lead channels. So the individual CEO is making all the money. They’re the ones killing it.”
Ciardelli says he asked about the bucket pricing game and attorneys all told him no, it’s not legal, he said.
“I’ll play by whatever the law is…But when the rules are set up to be a certain way and people are not following the rules, then that’s a problem.”
Two other executives at large retail lenders also said they’ve lost loan officers to competitors who are sanctioning, if not directing, the manipulation of pricing buckets.
“The LOs get told this is legal, it’s just pricing flexibility so they can compete, and they have a compliance team that monitors it,” said one executive at a regional lender in the South. “Obviously that’s not true… What’s happening is they [the lenders] are pricing high and basically forcing the LOs to cut from say 150 [basis points down to 50 [basis points] on some loans because otherwise they just won’t do enough business. It’s a feature, not a bug, as they say. We asked our attorneys if we could do this and they told us absolutely not.”
The Mortgage Bankers Association (MBA) is aware of the issue. The organization asked an outside attorney from Orrick Herrington & Sutcliffe LLP to study the permissibility of the practice. In a letter sent to members in February 2023, Orrick advised MBA members that changing the lead source of a loan after beginning work on the application in order to make a competitive pricing concession “is not permissible.”
The letter has had little meaningful impact, sources told HousingWire. If anything, the practice has increased over the last year.
Fair lending concerns
Another repercussion in the market is that savvy borrowers gain access to lower rates when lead sources are manipulated. Less educated applicants could be quoted higher rates for the same loan, raising concerns about fair lending practices.
But this argument prompts a broader discussion on the efficacy of the LO comp rule, with divergent opinions on the matter.
“I used to be an MLO for seven years. I was in the industry in the 2000s until it melted down, and then I ended up going to law school because I had lost my job. I originated hundreds of loans myself, and personally, I think overall the rule is a good rule,” vonBerg said.
vonBerg elaborated: “Under the old regime, LOs were not incentivized to offer their consumers the best loan and best pricing for them. They were incentivized to give them the loans and pricing where they would make more money. Although it has some issues that should be corrected, I think the LO comp rule makes a lot of sense, in that it removes a gigantic conflict of interest.”
Not everyone shares this viewpoint.
“The LO comp rulewas designed to prevent steering to high-cost loans. And really, those things don’t exist anymore. We can’t put borrowers in homes that they can’t afford,” said Brian Levy, Of Counsel at Katten and Temple, LLP.
According to Levy, the rule creates “a tremendous amount of anxiety for the mortgage lending industry that doesn’t benefit consumers in any meaningful way.”
“The industry is frustrated. They’re unable to easily reduce prices. For example, in the past, before the rule was around, LOs were able to take less as a commission, just like any other salesperson – a car salesperson – to make the deal work. That’s illegal now for loan officers. The mortgage company can make that decision [of lowering their margins and reducing rate], but the loan officer cannot.”
Levy noted that some consider the LO comp rule to be a de facto fair lending rule.
“But we already have fair lending rules. The idea that if the loan officer is discounting their fees, they would end up discounting on a discriminatory basis would already be problematic under existing law, so you don’t need the LO comp rule to make that illegal. It’s already illegal to discriminate in pricing. That said, it’s not illegal for people to negotiate just like you can negotiate a car price.”
The CFPB has also taken issue with other forms of pricing concessions over the last year. In the summer of 2022, the agency reported that pricing exceptions, in which the lender offers a discount, had harmed protected classes, who were less likely to be offered discounts.
Where’s the CFPB?
Multiple sources said the CFPB audits about 20% of mortgage lenders per year, and because of the prevalence of this practice, would undoubtedly have come across lead bucket pricing manipulation by now.
Why there hasn’t been any enforcement to date or whether there’s a future enforcement action is just on the horizon is hard to know.
The CFPB, which is undertaking a broad review of the LO Comp rule, declined to make anyone available to speak on the issue.
“We cannot comment on any ongoing enforcement or supervision matters,” said Raul Cisneros, a Bureau spokesperson. “Those who witness potential industry misconduct should consider reporting it by going here. Additionally, we always welcome stakeholder feedback on any of our rules, including the loan officer compensation rules.”
In early 2023, the CFPB initiated a review of Regulation Z‘s mortgage loan originator rules, which include certain provisions regarding compensation. However, industry experts do not foresee substantial changes or anticipate the CFPB addressing the issue of lead source manipulation.
“In fact, there haven’t been a lot of public enforcement actions by the CFPB in several years [on the LO comp rule]. But having said that, we used to complain that the CFPB was participating in regulation by enforcement, and now they seem to be regulating by supervisory highlights,” Kris Kully, a law firm Mayer Brown partner, said.
The CFPB’s latest move regarding the LO Comp Rule was to issue a supervisory highlight in the summer stating that compensating an LO differently based on whether a loan product was originated in-house or brokered to an outside lender is prohibited.
Industry practitioners said the lack of enforcement from regulators has allowed the pricing bucket manipulation practice to flourish, creating an uneven playing field.
“You have all these companies that all of a sudden are starting to get a free pass,” Ciardelli said. “They’re like, ‘I’m not having any audits. I’m not having anybody come and say anything to me. I mean, nothing’s really happening. I’m pretty much unscathed here.’ And year after year goes by, there’s no auditors, there’s no issues. And then they start to move the needle on how they’re running their business and decisions they’re making. And they have less fear of the government, less fear of the existing rules that are in place, because the rules that were set up are not being enforced.”
Another mortgage executive speculated that the pricing bucket games will come to an end not because of CFPB enforcement, but because loan officers and executives will battle it out in court.
“I’ve got calls from loan officers who feel like they’ve been pushed into a lower commission scale than they thought they were going to get to start with,” he said. “I hired somebody from a well-known lender. When they hired her, they told her, ‘Hey, these are what the rates are and this is what the commission is.’ When she got over there, the rates they were quoting were the lead-based rates, not the hundred-based points they were promising her… I don’t think the enforcement will come from the CFPB. I think it’ll come from some type of lawsuit like that.”
The lasting impact of LOs cutting their comp to win clients and close deals won’t be clear until mortgage rates meaningfully fall for a sustained period.
But many fear that the genie can’t be put back in the bottle.
“We’ve done this so much that they’ve built it into their pricing,” said Mike, the loan officer in North Carolina. “They are pricing things higher, assuming that we’re going to cut our pay, and protect their margins. So to me that’s the bigger issue for us selfishly, is we start doing that, and it’s going to become the norm. The pricing system and everything is going to assume that we’ll do that.”
He mused that RESPA guidelines prohibit an LO from buying a Realtor partner a Big Mac after a closing but lying about a lead source is not policed.
“Personally being an LO, the biggest issue to me is, they’re screwing with us and just… That’s how all these shops are finding a lifeline to keep their doors open. ‘We don’t have to pay them 100 bps, we can just pay them 50, and they’ll take it on the chin.’ And it’s like, yeah, we’ll take it on the chin. Many of us are using the heck out of our credit cards right now to survive. It’s not cool.”
Chances are, you’ve come across information on Bitcoin or other cryptocurrencies in the news lately. It’s no wonder the digital currency is such a hot topic – after crashing in value, the Bitcoin market seems to be recovering quickly with an increase in value of over 120% since the beginning of the year. With more players in the cryptocurrency game than ever, many landlords are debating getting involved themselves, or are even considering accepting rent payments in Bitcoin.
In 2013, a New York-based property management company became the first on the market to accept rent and maintenance payments in Bitcoin. In the following years, many other landlords and property managers have jumped on board the Bitcoin train as well. So, is it time for you to follow suit? Here are some of the pros and cons of accepting Bitcoin as payment as a landlord.
Pro: Faster and Cheaper Than Traditional Banking
Bitcoin is an open financial system, meaning payments using Bitcoin can be made anytime, anywhere, even if there is no traditional banking system. Bitcoins can be spent in the same manner digital money systems such as credit cards and PayPal operate – from your mobile phone, computer, or tablet. While still experimental, Bitcoin is even slated to become transferable through satellite and radio waves, meaning Bitcoin users can literally make payments from almost anywhere on the planet. Offering this payment option to your tenants could prove to be beneficial for renters who travel frequently or who are planning a trip to an isolated destination. Compared to other digital payment methods, Bitcoin tends to have lower transaction fees and no foreign transaction fees.
Con: Lack of Regulation
There is currently no government body or other organization monitoring the Bitcoin market and ensuring it retains its value. Unlike cash, silver, gold, or any other tangible commodity, Bitcoin is made up of digital information that has little to no regulatory oversight. This can cause significant and unpredictable shifts in value – in both directions.
According to a report from Bloomberg, a mere 1,000 people own 40 percent of the Bitcoin market. All it would take is a handful of these 1,000 people to decide to cash out, potentially causing a ripple effect where others decide to sell, in turn causing the value of Bitcoin to come crashing down. In fact, this is exactly what occurred in January 2018 during the most recent crypto market crash. Technically, these stakeholders could manipulate the market by bulk selling their Bitcoin, causing a value crash, and buying back the same Bitcoin at a much lower price. This is called collusion and is forbidden in traditional money markets, but because of the lack of regulation, there’s not much that would prevent this from happening in the cryptocurrency market.
Pro: Added Security for Payment Makers
Bitcoin can protect the identity and money of your tenants, which may be appealing to some potential renters. Because Bitcoin uses anonymous addresses that change during each transaction, payments do not require any personal information and do not require consumers to provide credit card or account numbers that could be stolen.
For landlords using software designed for property management, you likely accept ACH (electronic check) and credit cards for rental payments. These transactions are traceable, legal and backed by major banking institutions, but each account is clearly associated with a specific tenant. Renters who prioritize privacy when it comes to their finances will appreciate the option to make payments using Bitcoin.
Con: Taxes Could Be Tricky
Paying taxes as a landlord and understanding the related filing obligations is already a stressful process. Throwing cryptocurrencies into the mix won’t make tax season any easier on landlords. The IRS doesn’t treat Bitcoin and other cryptocurrencies as money; instead they are treated as assets, which introduces additional tax consequences. Assets may require reports not just on your income, but also on the product you received, what it’s value was when you obtained it, and what it’s value was when/if you turned it back into cash. This entails three IRS reporting transactions as opposed to one for accepting cash. You’ll also have to keep detailed records of the exact value of any Bitcoin you received at the time you receive it and again at the time you convert it to cash.
Pro: Increasing Acceptance in the Marketplace
As much as the cryptocurrency market has its ups and downs, it’s not going to disappear. Bitcoin is becoming increasingly accepted in mainstream markets and many merchants are beginning to accept Bitcoin as payment. Major outlets like Overstock, Microsoft, Expedia and Shopify have all started accepting cryptocurrencies and this list is expected to continue to grow as things progress. Cryptocurrency started as a niche market and has expanded into an immense industry, though there’s still some work to do before it becomes a financial norm. Those who want to remain at the front end of the trend curve, and are forward-thinking and tech-savvy, may want to consider being early adopters.
Con: Courts Don’t Have a Perfect Understanding
A cryptic Bitcoin receipt can be difficult for average people to understand and trace, despite the fact that the technology is inherently transparent. There are programs that allow people to track down transactions on blockchain (the protocol that underlies Bitcoin), but it is quite different than normal banking transactions to which most are accustomed. This can add a layer of complexity to any legal proceedings, and extra hoops to jump through when providing proof of payment (or not), ultimately prolonging things like an eviction process.
As you can see, there are pros and cons to accepting Bitcoin as a rental payment method if you are a landlord. Providing a new method of payment can be appealing to some tenants, and if you are looking for a new market to engage with expendable money, Bitcoin may be a good option for you. However, the market doesn’t come without its risks, so it really has to do with how adventurous and progressive you are in your role as landlord.
The path to the top ranks wasn’t always smooth, Cavanaugh suggested during a telephone interview. A company she worked with in the early years succumbed to the Great Recession of 2008, yielding some hard lessons along the way. “In my earlier years it was all about the stability and the comfort zone,” she acknowledged. “When … [Read more…]
We will start with the price cut data percentage because it deserves a detailed explanation. 2022 was a historic year for housing as we had the most significant home sales crash ever, and mortgage rates went from 3% to 7% in the same year. That type of move is very abnormal and home sales simply collapsed, especially in the second half of 2022.
Naturally, some people thought home prices would crash in 2023 as many market players said prices always follow volume. But not only did that not happen, home prices quickly got back to all-time highs. Then something even crazier happened: mortgage rates shot to to 8% but the number of homes taking price cuts never went above 2022 levels during this time.
In fact the price cut percentage consistently stayed 4% below 2022 levels. I believe this is due to the fact that home sales aren’t crashing anymore like they were in 2022. What happened between June 2022 to June 2023 can be confusing, so if you need more clarity I suggest listening to this podcast.
Here is the price cut percentage data for the same week in other years:
2023 38%
2022 42%
2021 27%
As you can see, affordability is an issue, and the price cut percentage is higher now than in any period from 2015-2021, but still below 2022 levels.
Now lets take a look at the weekly inventory data. Last year, according to Altos Research, the seasonal peak for housing inventory was Oct. 28. the seasonal peak this year was on Nov. 17.
Weekly inventory change (Dec. 1-Dec 8): Inventory fell from 555,717 to 546,424
Same week last year (Dec. 2-Dec. 9): Inventory fell from 550,302 to 536,409
The inventory bottom for 2022 was 240,194
The inventory peak for 2023 so far is 569,898
For context, active listings for this week in 2015 were 1,050,971
The new listing data has been trending at the lowest levels ever for 17 months now. What 2023 data has shown me is that even with mortgage rates heading toward 8%, new listings data didn’t take a new leg lower — it stayed remarkably consistent all year long. This is a positive, and something I discussed on CNBC months ago, that we should see some flat-to-year-over-year growth data in the second half. Since most sellers are also buyers, getting growth in this data line will be a positive for home sales in 2024.
New listings data last week
2023 43,188
2022: 39,149
2021: 46,881
In 2024, what we want to see is new listings data grow back to 2021 and 2022 levels in the spring. This will bring more inventory to the marketplace and get more sellers, who will also be buyers.
Mortgage rates and the 10-year yield
Last week was another interesting week for bond yields and mortgage rates. We almost broke under 7% mortgage rates for the first time in a while, getting as low as 7.04%. We ended the week at 7.09%, and this was during jobs week where had two weaker-than-anticipated labor reports and two better-than-anticipated reports. Regarding jobs Friday, I wrote this article on why the Federal Reserve was wrong about inflation and jobs.
We have a big week ahead of us. For now I would focus on the 4.10% level on the 10-year yield since we bounced on that level twice last week. We have two inflation data points this week and if both come in lighter than anticipated and the Fed gives a dovish outlook, that is the best case for the 10-year yield to fall below 4% and get us mortgage rates below 7%.
Purchase application data
There was some confusion over the purchase application data this last week: The unadjusted data showed 35% week-to-week growth and the seasonal adjusted data showed a slight decline of 0.03%. We always take the seasonal adjusted numbers no matter what. Just be mindful of purchase apps around the holidays.
Since Mortgage rates have fallen from 8% and are now near 7%, purchase apps have had four positive and one flat weekly print. This makes the year to date count 22 positive prints, 23 negative prints and 2 flat prints. Clearly we have a positive trend here in purchase apps which is typically the normal with a 1% move in rates. But again, we are working from a low bar here in this data line and we will need at least 12-14 weeks of positive growth trends to have it been something material.
The week ahead: Fed and inflation week
Ok, here we are heading into Christmas and the question is: will the Fed be the good Grinch going into Christmas or the Grinch we see for 93% of the movie? There is no rate hike coming of course, but what the Fed says matters a lot, especially what Chairman Powell says in the Q&A portion of the press conference. Inflation data is key as always, because we wouldn’t be talking about rate cuts in 2024 if the growth rate of inflation was at 5%-8% year over year. We also have retail sales coming up this week so we will be keeping a close eye on all of these reports.
All investments carry some risk, but the difference between speculating and investing is the amount of risk involved. Speculative investments are typically short-term, and far riskier than traditional investing products and strategies, and may involve the risk of total loss.
Investing typically indicates a more long-term approach to making a profit, with an eye toward managing risk.
Defining Investing and Speculation
Speculating often describes scenarios when there’s a high chance the investment will deliver losses, but also when the investment could result in a high profit. High-risk, high-reward investments include commodities, crypto, derivatives, futures, and more.
In contrast, investing generally refers to transactions where an individual has researched an asset, and puts money into it with the hope that prices will rise over time. There are no guarantees, of course, and all types of investing include some form of risk.
Examples of Investments and Speculative Investments
Assets that are thought of as more traditional types of investments include publicly traded stocks, mutual funds, exchange-traded funds (ETFs), bonds (e.g. U.S. Treasury bonds, municipal bonds, high-grade corporate bonds), and real estate.
Even some so-called alternative investments would be considered more long-term and less speculative: e.g., jewelry, art, collectibles.
Assets that are almost always considered speculative are junk bonds, options, futures, cryptocurrency, forex and foreign currencies, and investments in startup companies.
Sometimes it isn’t as simple as saying that all investments in the stock market or in exchange-traded funds or in mutual funds hold the same amount of risk, or are “definitely” classified as investments. Even within certain asset classes, there can be large variations across the speculation spectrum. 💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.
The Traditional Approach to Investing
When it comes to the more traditional approach to investing, individuals typically buy and hold assets in their investment portfolios or retirement accounts, with the aim of seeing reasonable, long-term gains.
Traditional forms of investing focus on the performance of the underlying business or organization, not on the day-to-day or hour-by-hour price movements of an asset.
For this reason, more traditional investors tend to rely on various forms of analysis (e.g. fundamental analysis of stocks) and analytical tools and metrics to gauge the health of a company, asset, or market sector.
Speculation: A High-Risk, High-Reward Game
The difference between speculating and investing can be nuanced and a matter of opinion. (After all, some investors view the stock market as a form of gambling.) But when traders are speculating, they are typically seeking super-high gains in a relatively short period of time: e.g., hours, days, or weeks.
In the case of commodities or futures trading, the time horizon might be longer, but the aim of making a big profit fairly quickly is at the heart of most speculation.
Speculators may also use leverage, a.k.a. margin trading, to boost their buying power and amplify gains where possible (although using leverage can also lead to steep losses).
The Psychology of Investing vs. Speculating
The psychology of a typical investor is quite different from that of a speculative investor, and again revolves around the higher tolerance for risk in pursuit of a potentially bigger reward in a very short time frame.
Long-Term Investing
Speculating
Taking calculated or minimal risks
Willing to take on high-risk endeavors
Pursuit of reasonable gains
Pursuit of abnormally high returns
Willing to invest for the long term
Willing to invest only for the short term
Uses a mix of traditional investments and strategies (e.g. stocks, bonds, funds)
Uses single strategies and alternative investments
Infrequent use of leverage/margin
Frequent use of leverage/margin
Historical Perspectives on Investing and Speculation
The history of investing and speculating has long been entwined. In the earliest days of trading thousands of years ago, most markets were focused on the exchange of tangible commodities like livestock, grain, etc. Wealthy investors might put their money into global voyages or even wars. Thus many early investors could be described as speculators.
But investing in forms of debt as a way to make money was also common, eventually leading to the bond market as we know it today.
The concept of investing in companies and focusing on longer-term gains took hold gradually. As markets became more sophisticated over the centuries, and a wider range of technologies, strategies, and financial products came into use, the division between investing and speculating became more distinct.
Recommended: What Causes a Stock Market Bubble?
Speculation History: Notable Market Bubbles and Crashes
The history of investing is rife with market bubbles, manias, and crashes. While the speculative market around tulip bulbs in 17th-century Holland is well known, as is the Great Financial Crisis here in the U.S. in 2008-09, there have been many similar financial events throughout the world — most of them driven by speculation.
What marks a bubble is a well-established series of stages driven by investor emotions like exuberance (i.e., greed) followed by panic and loss. That’s because many investors tend to be irrational, especially when in pursuit of a quick profit that seems like “a sure thing.”
Some classic examples of financial bubbles that changed the course of history:
• The South Sea Bubble (U.K., 1711 to 1720) — The South Sea company was created in 1711 to help reduce national war debt. The company stock peaked in 1720 and then crashed, taking with it the fortunes of many.
• The Roaring Twenties (U.S., 1924 to 1929) — The 1920s saw a rapid expansion of the U.S. economy, thanks to both corporations’ and consumers’ growing use of credit. Stock market speculation reached a peak in 1929, followed by the infamous crash, and the Great Depression.
• Japanese Bubble Economy (1984 to 1989) — The Japanese economy experienced a historic two-decade period of growth beginning in the 1960s, that was further fueled by financial deregulation and widespread speculation that artificially inflated the worth of many corporations and land values. By late 1989, as the government raised interest rates, the economy fell into a prolonged slowdown that took years to recover from.
• Dot-Com Bubble (1995 to 2002) — Sparked by rapid internet adoption, the dot-com boom saw the rapid growth of tech companies in the late 1990s, when the Nasdaq rose 800%. But by October 2002 it had fallen 78% from that high mark.
Key Differences Between Investing and Speculating
What can be confusing for some investors is that there is an overlap between investing in the traditional sense, and speculative investing in higher risk instruments.
And some types of investing fall into the gray area between the two. For example, options trading, commodities trading, or buying IPO stock are considered high-risk endeavors that should be reserved for more experienced investors. What makes these types of investments more speculative, again, is the shorter time frame and the overall risk level.
Time Horizon: Long-term Goals vs. Quick Gains
As noted above, investors typically take a longer view and invest for a longer time frame; speculators seek quick-turn profits within a shorter period.
That’s because more traditional investors are inclined to seek profits over time, based on the quality of their investments. This strategy at its core is a way of managing risk in order to maximize potential gains.
Speculators are more aggressive: They’re geared toward quick profits, using a single strategy or asset to deliver an outsized gain — with a willingness to accept a much higher risk factor, and the potential for steep losses.
Fundamental Analysis vs. Market Timing
As a result of these two different mindsets, investors and speculators utilize different means of achieving their ends.
Investors focused on more traditional strategies might use tools like fundamental analysis to gauge the worthiness of an investment.
Speculators don’t necessarily base their choices on the quality of a certain asset. They’re more interested in the technical analysis of securities that will help them predict and, ideally, profit from short-term price movements. While buy-and-hold investors focus on time in the market, speculators are looking to time the market. 💡 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.
Real-World Implications of Investment vs. Speculation
To better understand the respective value and impact of investing vs. speculating, it helps to consider the real-world implications of each strategy.
The Impact of Speculation on Markets
It’s important to remember that speculation occurs in many if not all market sectors. So speculation isn’t bad, nor does it always add to volatility — although in certain circumstances it can.
For example, some point to IPO shares as an example of how speculative investors, who are looking for quick profits, may help fuel the volatility of IPO stock.
Speculation does add liquidity to the markets, though, which facilitates trading. And speculative investors often inject cash into companies that need it, which provides a vital function in the economy.
Strategic Approaches to Investment
Whether an investor chooses a more traditional route or a more speculative one, or a combination of these strategies, comes down to that person’s skill, goals, and ability to tolerate risk.
Diversification and Asset Allocation
For more traditional, longer-term investors, there are two main tools in their toolkit that help manage risk over time.
• Diversification is the practice of investing in more than one asset class, and also diversifying within that asset class. Studies have shown that by diversifying the assets in your portfolio, you may offset a certain amount of investment risk and thereby improve returns.
• Asset allocation is the practice of balancing a portfolio between more aggressive and more conservative holdings, also with the aim of growth while managing risk.
When Does Speculation Make Sense?
Speculation makes sense for a certain type of investor, with a certain level of experience and risk profile. It’s not so much that speculative investing always makes sense in Cases A, B, or C. It’s more about an investor mastering certain speculative strategies to the degree that they feel comfortable with the level of risk they’re taking on.
The Takeaway
One way to differentiate between investment and speculation is through the lens of probability. If an asset is purchased that carries a reasonable probability of profit over time, it’s an investment. If an asset carries a higher likelihood of significant fluctuation and volatility, it is speculation.
A long-term commitment to a broad stock market investment, like an equity-based index fund, is generally considered an investment. Historical data shows us that the likelihood of seeing gains over long periods, like 20 years or more, is high.
Compare that with a trader who purchases a single stock with the expectation that the price will surge that very day (or even that year!) — which is far more difficult to predict and has a much lower probability of success.
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*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. 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.
You’ve got some cash in a savings account earning a paltry 0.01%. You plan to spend it to buy a home or a car or something else in a few years. How can you invest the money until then to earn some extra interest?
It’s called short-term investing, and it’s tricky. Put your money in the stock market, and it could be gone when you need it. Put it in a traditional savings account, and it earns practically nothing. So, what should you do?
Recently, a listener to our podcast, Michael, emailed me with just this dilemma:
Let’s answer Michael’s question.
What is a Short Term Investment?
What exactly is a short-term investment? Well, there is no official definition. There is no governing body that defines what short-term or long-term investing is. It’s arbitrary.
For me, short-term investing is investing money you’re going to need to spend in fewer than five years.
Why five years? Because most of the time, the stock market doesn’t lose money over a 5-year period. It can, of course. Go back to the 1930s and 40s and you’ll find 5-year periods where the market was crushed, as this Bankrate slideshow demonstrates… 1932 was the worst. The 5-year period ending that year saw a drop of 60.9%.
But that’s rare.
When we have a pretty significant stock market correction or a bear market, it usually takes us at least five years to pull out of it. Of course, that’s not a guarantee. We could hit a bear market, and it could take us 10 years to pull out of it.
Either way, five years is where I draw the line. You may want to draw your own line more conservatively… or even less conservatively, for that matter. What I hope to do today is give you some information that will enable you to make a sound decision.
So, let’s begin.
The 10 Best Short Term Investments
1. Lending Club
Lending Club offers a great option with the potential for better returns. This P2P lending platform makes it easy to invest in loans to individuals and companies.
It’s also perfect for short-term lending. Loans on the platform are for either three or five years. If you know you won’t need the money until then, Lending Club is a reasonable alternative.
I’ve invested in Lending Club loans since the platform was first launched. My current annualized return, including loans that defaulted, is over 8%.
With higher returns, however, comes higher risks. Loans do go into collections and eventually default from time to time. Over the years, I’ve invested in 17 loans that defaulted.
The key is diversity. You can invest in a loan with as little as $25. By diversifying across many loans, you minimize the effect a single default will have on your portfolio.
LendingClub Pros and Cons
Very easy to invest in a diversified loan portfolio
Potential for high returns on a short-term basis
Not FDIC-insured
Cannot liquidate the loans early
Potential for losses
Expected Annual Return: 5.00 to 7.00+%
Read more: Lending Club Review
Lending Club Disclaimer:
2. Certificate of Deposit
The second option for short-term money is a certificate of deposit. CDs give us a lot more options than a savings account. The term of a CD can range from a few months to more than five years, and the longer the term, the higher the rates.
These higher rates, however, come with added risk. Here’s why.
A CD can be cashed in before it matures. For example, you could invest in a 5-year CD, but decide to withdraw your money after the first year. If this happens, however, most CDs charge a penalty. The amount of the penalty varies by bank and CD product.
As a result, it’s best to keep money in a CD until it matures. For this reason, picking the length of the CD is a critical decision.
So, you end up having this delicate dance- you want a long CD term so that you can make the most interest. But you don’t want to pay a penalty if you take the money out early.
CD Pros and Cons
FDIC insured
CD terms ranging from 6 months to 5 years or longer
Higher interest rates on longer term CDs
Can create a CD ladder
Still relatively low interest rates
Penalty for early withdrawal
Expected Annual Return: 1.00 to 2.50%
Here is a list of banks that offer high-yield CD options:
3. Investing With Betterment
Betterment presents an interesting opportunity for short-term investors. It’s not an investment. Rather, it’s an online company that makes investing in stock and bond ETFs easy.
The service can be used for all types of investing, including long-term retirement investing. To use Betterment in the shorter term, you must get the asset allocation right.
Learn More: The Perfect Asset Allocation Plan
Betterment lets investors decide how much to put in stock ETFs and how much to put in bond ETFs. For short-term investing, a 50/50 allocation protects against the downside while allowing for potentially higher returns.
Here’s the 50/50 asset allocation with Betterment:
The 50% in stocks gives us a chance to earn greater returns. The 50% in bonds helps protect short-term investors from a market crash.
There are no guarantees, of course. But looking at a 50/50 portfolio during the 2008-2009 market crash gives us some comfort.
Using PortfolioAnalyzer, I assumed we invested $10,000 at the start of 2008. Assuming we needed the money three years later, how would our 50/50 portfolio perform over a 3-year period. Remember that in 2008, a total U.S. stock index fund lost more than 37%.
Here are the backtested results of our 50/50 portfolio:
The portfolio still lost money in 2008, although far less than the 37% that the market dropped. And what was our final portfolio value at the end of 2010? It grew to $11,014, for an annual return of 3.27%.
While 3.27% is not a great return, remember that 2008 was a very bad year for stocks. Shift our time period one year forward (2009-2011) and our annual return jumps nearly 11%.
As a result, a 50/50 portfolio with Betterment is a reasonable choice for those needing the money in three to five years.
Betterment Pros and Cons
Very easy to implement
Money can be withdrawn at any time
Potential for much higher returns
Fees are very low
Not FDIC-insured
Potential for capital losses
Expected Annual Return: 0 to 10+%
Learn More: Betterment Review
4. Online Savings Account
Traditional banks pay as little as 0.01% on a savings account. That’s as close to zero percent as you can get.
One option for short-term savings that pay more is to go with an online bank. While the rates are still nothing to brag about, the top online savings accounts today pay about 0.50%. Chime®is now paying an APY of 2.00%, which is right in line with the best online savings accounts available. Chime offers a terrific online savings and checking account geared toward savers. You can see the top current rates here.
Online Saving Account Pros and Cons
FDIC insured
Funds can be withdrawn at any time
Rates better than a brick and mortar bank
No monthly fees
Interest rates are still low
Inflation exceeds the rates
Expected Annual Return: 1.30%
Here are some high-yield savings account options:
5. Municipal Bonds
There is a significant downside to bonds: taxes. Interest earned on bonds is taxed, as are any capital gains.
One option to reduce the tax burden is municipal bonds (known as “munis”). These bonds are typically free of federal income tax and may be free from state income tax, too. Munis are an excellent option for those in the higher federal tax brackets.
I’ve invested in Vanguard’s Intermediate-Term Tax-Exempt Fund (VWIUX) in the past. SEC yields on these funds are lower than similar taxable bonds. The comparison must be made on an after-tax basis. This fund currently sports an SEC yield of almost 2%.
Municipal Bonds Pros and Cons
Potential for higher returns
Tax advantages
Easy access to funds without penalty
Potential for losses
Not ideal for those in lower tax brackets
Expected Annual Return: 2 to 5% (after tax)
6. Short Term Bonds
Our third option is short or intermediate-term bond funds. More specifically, we want to look at low-cost index mutual funds and ETFs. Both Vanguard and Fidelity offer several options.
Here, you have some important choices to make. Do you want a fund that invests just in U.S. government bonds or one that also invests in corporate bonds? Do you want a short-term bond fund or an intermediate-term bond fund?
Like everything else in life, these choices involve trade-offs.
U.S. Government bonds are more secure than corporate bonds, but they pay less. Short-term bonds are less sensitive to interest rate fluctuations than intermediate-term bonds, but they pay less. Today, short-term government bonds do not pay much more than an online savings account. For example, the SEC yield on Vanguard’s short-term Treasury fund is just 1.25%.
For my money, I want to do better than that in a bond fund. While intermediate-term funds can lose money in a given year, they are reasonably stable. Vanguard’s Intermediate-Term Bond Index Fund (VBILX), for instance, costs just 0.07% and sports an SEC yield of over 2.50%.
A review of the performance of VBILX shows that it lost money in only one of the past ten years:
Short Term Bonds Pros and Cons
While not FDIC-insured, still reasonably secure
Intermediate-term bonds can yield significantly higher rates than a savings account
Money can be withdrawn from the fund when needed
Not FDIC-insured
Can lose money
Rates are historically low
Expected Annual Return: 1.00 to 6.00%
7. Bulletshares
There is a downside to traditional bond funds. They can experience capital losses as funds sell some bonds to buy new ones. If interest rates have risen, the fund incurs a loss on the sale of bonds.
Enter Guggenheim’s Bulletshares. These ETFs combine the potential returns of a bond fund with the fixed maturity of a CD. I first learned about Bulletshares from Jeanne J. Fisher, MBA, CFP, CPFA of ARGI Financial Group.
Traditional bond funds continue in perpetuity. The fund management regularly sells bonds as maturities age and replaces them with new bonds with longer maturities. In contrast, Bulletshares have a defined term of one to ten years.
At the end of the term, assets are returned to existing shareholders. And unlike CDs, a shareholder can sell his or her ETF shares at any time without penalty.
Related: What Are ETFs (and Are They a Strong Investment Option)?
Bulletshares come in two flavors: (1) corporate bonds and (2) high-yield corporate bonds. The first invests in investment-grade corporate bonds. The second buys bonds issued by corporations with a credit rating below investment grade. It involves more risk but offers higher returns.
As an example, the Guggenheim BulletShares 2020 High Yield Corporate Bond ETF has a current yield to maturity of over 5%.
Bulletshares Pro and Cons
Potential for higher returns
ETF shares can be sold at any time
Fixed maturity dates
Not FDIC-insured
Funds can lose money
Expected Annual Return: 1.50 to 5.50%
8. Wealthfront
Like Betterment, Wealthfront is a robo-advisor that makes investing easy. I list it here in addition to Betterment for one reason: It’s free.
Well, it’s free for your first $5,000 if you sign up using a DoughRoller link. After that, the cost is similar to Betterment. For both, you pay the very low fees charged by the ETFs. You also pay a Betterment or Wealthfront fee of about 25 basis points.
With Wealthfront, however, the 25 basis point fee is waived for the first $5,000.
Wealthfront Pros and Cons
Very easy to implement
Money can be withdrawn at any time
Potential for much higher returns
Fees are very low
Not FDIC-insured
Potential for capital losses
Expected Annual Return: 0 to 10%
Read more: Wealthfront Review
9. Worthy Bonds
Worthy Bonds offers you an opportunity to earn 5% on your money, with an investment of as little as $10. It’s a peer-to-peer investment site, where you can invest money in bonds issued by small businesses. The bonds aren’t guaranteed by a government agency, like FDIC, but many of them are collateralized by business inventory.
When you use the Worthy Bonds mobile app, you can automatically add funds to your investment account. Similar to many micro-savings apps, Worthy Bonds uses spending round-ups to move small amounts of money into your investment account as you spend. For example, if you pay $4.10 for a cup of coffee, the app will charge your account an even $5. $4.10 will go to pay the merchant, and $0.90 will go into your investment account. Once you accumulate an even $10 in round-ups, the funds can be used to purchase a bond.
Worthy Bonds Pros and Cons
Invest with as little as $10
An investment of $1,000 can be diversified across 100 different bonds
Interest is credited weekly
There are no fees charged on your account
Earn interest at more than twice the rate of inflation
Pays simple interest only, and does not compound for higher returns
The maximum investment is not more than 10% of your net worth or annual income, or $100,000
Expected Annual Return: 5%
Read more: Worthy Bonds Review – A Worthy Investment for Everyone
10. SmartyPig
The final investment option on our list offers an interesting twist to online savings accounts. SmartyPig combines a high yield with savings goals. As of August 2018, SmartyPig currently offers a high yield savings APY of 1.55%.
Now, the savings goals. With SmartyPig, you set specific savings goals. You can set multiple goals, or just one. You then add to the account until you reach your goal. In this way, SmartyPig is ideal for short-term savers.
Related: 6 Keys to Setting Financial Priorities
SmartyPig Pros and Cons
FDIC-insured
Potential for returns higher than most online banks
Makes saving for a specific goal very easy
Low rate compared to other options
Expected Annual Return: 1.00+% (depending on account balance)
Is the Stock Market a Good Place for Short-Term Investing?
We could stop here. After all, the above short-term investing options should cover most situations. Yet many will ask one remaining question: Why not just put all our money in the stock market?
It’s an understandable question. Particularly when the market is rising, missing out on money can be painful. It’s funny, though. Nobody asks me this question in a bear market.
And that’s the point. With the stock market, you can lose money over a short period of time.
Thinking Long Term: Sweat In Up Markets So You Don’t Bleed In Down Markets
Let’s return to 2007 and run a test. We’ll use the Vanguard S&P 500 index fund as a proxy for the market. And we’ll assume we have $10,000 at the start of 2007, that we’ll need to use in three to five years.
How would a $10,000 investment have performed? At the end of three years, we would have $8,395, for an annual return of -5.66%. At the end of five years, we would have $9,837, for an annual return of -0.33%
Yes, 2008 was a bad year. But again, that’s the point. Investing 100% of short-term money in the stock market presents a significant risk of loss of capital. Fortunately, we have better ways to invest for the short term.
Public is an app that helps you invest in individual stocks, even if you don’t have much money to commit. What makes it good for short-term investments is its lack of fees. There is no commission to buy or sell a stock so you can move your money in and out of the market at will without worrying about minimum investment terms. Read our Public app review
How to Manage Your Short Term Investments
Track and Analyze your Short-Term Investments for Free: Managing investments can be a hassle. You may have multiple IRAs, multiple 401ks, as well as taxable accounts. And then there are bank accounts. The easiest way to track and analyze all your investments, regardless of where they are located, is with Empower’s free financial dashboard.
Empower enables you to connect all of your 401(k), 403(b), IRAs, and other investment accounts in one place. Once connected, you can see the performance of all of your investments and evaluate your asset allocation.
With Empower’s Retirement Fee Analyzer you can see just how much your 401k and other investments are costing you. I was shocked to learn that the fees in my 401(k) could cost me over $200,000!
Empower also offers a free Retirement Planner. This tool will show you if you are on track to retire on your terms.
If all of this is overwhelming and not something you want to handle on your own, you may want to think about working with a financial advisor or investment advisor. We suggest visiting Paladin Registry, where you can fill out a form online to tell them what you are looking for. It’s free to use and Paladin Registry will email you a list of three highly-rated professionals that match your needs. From there you can interview each one and choose the best fit.
Happy investing!
Rob Berger is the founder of Dough Roller and the Dough Roller Money Podcast. A former securities law attorney and Forbes deputy editor, Rob is the author of the book Retire Before Mom and Dad. He educates independent investors on his YouTube channel and at RobBerger.com.
Cinema has long been a source of heated debate, especially regarding films that tried too hard to be serious and ended up just seeming pretentious. With the arrival of streaming platforms, more accessible movie-making tools and an increased ability for filmmakers to challenge the norm, recent years have seen a wave of new daring cinema—acclaimed as genius by some yet widely disliked by others.
Nowhere is this disparity in opinion more apparent than with these 20 pretentious movies. So what do you think? Are there times when lines should not be crossed regarding artistic expression, or are pushing boundaries necessary? Below are the top 20 pretentious movies shared across online:
1. Extremely Loud and Incredibly Close
One user posted, “Extremely Loud and Incredibly Close. A The Holocaust and 9/11 mash-up with an autistic kid as the main character? Pure pretentious as s- Oscar bait.
“I had to read the book in high school, and the best thing I could say about it was that it provided easy pickings for annotation assignments.”
Another user added a story behind the film, “Daily reminder that the author of the book awkwardly flirted with Natalie Portman via email, thought she was as into him as he was into her, and left his wife of 10 years for her, only to be met with bemused puzzlement from Natalie.”
One user replied, “Jesus, those emails were painful to read from both of them. I can’t believe people write like that in their personal emails. He did end up dating Michelle Williams for years after his divorce, so I guess he’s got some game.”
2. Eat Pray Love
One user added, “Eat Pray Love(2010), a pretentious film based on an equally pretentious true story.”
One user replied, “So true, lol. Like I would love to just take off for a year, but unfortunately, I have to work.”
3. Crash
“Crash (2004)—simultaneously the most pretentious movie I’ve ever seen and the stupidest,” one user added.
Another user shared, “I remember seeing it when it came out and found it fairly forgettable. Then it kinda gained this reputation as ‘didn’t deserve the Oscar,’ so I watched it again recently. It tries so hard to be topical (and perhaps it was in a way), but it’s soooo over the top yet surface level at the same time with its message. There are some good performances in the movie, but that can’t save the script.”
4. The Room
One Redditor posted, “I think considering Tommy Wiseau’s intention to make a serious drama, The Room is pretentious. I know he refuted the claim that The Room was supposed to be serious. But sorry, I have severe doubts.”
One user shared, “There’s no way in h*ll that The Room was anything other than a sincere effort by Tommy to make a legitimate dark drama. Making the movie as it is, with the intention of being received as it has been, would make Tommy a comedic genius in three separate areas: writing, acting, and directing. I don’t think he is. Just like some great movies are lightning in a bottle, The Room is lightning in a bottle in the opposite direction.”
5. You People
One online user posted, “You People with Jonah Hill and Eddie Murphy. The film goes out of its way to make Jonah Hill a ‘Bumbling Clueless Overly-Cautious Woke White Guy’ and Eddie Murphy a ‘Put Everyone On The Spot Overly Proud Black Man.’ NO self-respecting person (Jonah Hill’s character) would ever dig themselves into a racial awkwardness hole as often as he does. And no self-respecting person (Eddie Murphy’s character) would go out of their way to be so defensive and make Jonah Hill’s character so uncomfortable.
“If it were purely a comedy, it would have made sense to make them both so clueless, but since it was supposed to be a ‘woke’ rom-com, then they could have done well-meaning people more credit by making Jonah Hill more discerning and Eddie Murphy more gracious. Instead, both characters just reinforced stereotypes from beginning to end.”
Another user replied, “First rom-com I watched that was completely lacking both romance and comedy. To call it a movie at all is a compliment to You People and an insult to all other movies ever created.”
6. Seven Pounds
“Seven Pounds,” shared one user.
Another Redditor replied, “Or any Will Smith bazillion Oscar Bait movies.”
Another user commented, “Collateral Beauty takes the cake for me. Even the title is pretentious.”
7. Downsizing
One Redditor posted, “Downsizing. I’m surprised nobody’s mentioned this one. I sit down thinking I’m about to watch a lighthearted comedy starring Matt Damon about people who shrink themselves and get into some hijinks. Turns out. Instead, the movie’s message (pretty early in the film, too) is, ‘You can’t shrink the problems of the world, ST*PID!’ The rest of the movie was a guilt trip about lower-class poverty and environmental issues. It seriously felt like the filmmakers were scolding me. …”
One user responded, “I came here to say this. I went to the theatre to watch it because I was excited to see it. It’s a fun movie with Matt Damon and Kristin Wiig getting shrunk down like a grown-up Honey I Shrunk the Kids.
“She was barely in it, super preachy, meandering, boring, and nothing like what was advertised. Oh, and the ending was stupid, too. I shouldn’t have bothered waiting for it, but they already had $40 or so of my money. At least the snacks were ok. Probably the best part of the movie. They realized what a mess it was and pulled a bait-and-switch with the trailers as a last-ditch effort to save it. I’m still mad if you can’t tell, lol.”
8. Now You See Me
“Now You See Me … I don’t understand how people can be impressed with ‘magic tricks’ that are only possible with special effects. B-, please! I can make f- Godzilla coming out of my pocket if I can use CGI. That s- is not impressive.
“On a side note, what a waste of opportunity when they didn’t call the second movie “Now you don’t,” stated one user.
Another user added, “Also, there were zero clues for the twist. It’s just a ‘surprise this random thing happened. Now be in awe.’”
9. Tenet
One online user shared, “Given the following definition of pretentious: ‘Trying to appear or sound more important or clever than you are’
“I’ll go for Tenet. When people think of pretentious films, they tend to list arty films. But pretension just means having an unearned sense of self-regard, and Tenet has that. It’s a film that is desperate for you to think it’s clever and profound but is ultimately hollow and not half as clever as it thinks it is.
“Edit: I just remembered the main character is literally called ‘Protagonist.’ Proper pretentious first-year film student stuff.”
One user answered, “I upvoted, even though I like Tenet because I can’t argue with your logic.”
10. Bang Bus “Episode 3”
One user posted, “Bang Bus ‘Episode 3′. The premise was already in. There was nothing new about it.”
Another replied, “Is that the one where they pick up a young woman and interview her in a s- van? I’ve only seen the first 10 minutes. I can’t believe there are sequels.”
11. My Dinner With Andre
“I love the movie, but ‘My Dinner With Andre’ is pretty pretentious and self-satirizing at the same time,” one Redditor stated.
Another user replied, “If you were out to dinner and the people at the table next to you were having that conversation, your eyes would roll right out of your head and fall on your plate.”
12. Most Woody Allen Movies
One Redditor shared, “Oof, I’m gonna get hate for this, but I feel like most Woody Allen movies are pretentious …”
Another user also posted, “When I think of pretentious movies, I think of Woody Allen b- s-. Movies about making movies about New York and how cool you have to be to be famous. F- off.”
13. Garden State
“A little obvious, but Garden State. It has all the hallmarks and takes itself way too seriously.
“That being said, it’s made with a lot of heart and ambition, and I do enjoy it, but it’s just the first thing that comes to mind—from the all-white bedroom to the shirt made out of wallpaper print to literally screaming into a void.
“Well-intentioned, entertaining, endearing but ultimately a pretentious cringe fest—sorry Zach!” posted one user.
14. Birdman
One online user posted, “I thought Birdman was pretentious on my first viewing. That being said, I was, like, 19 when I saw it, and I’m 28 now. I may need to watch it again because being pretentious kinda felt like the point of the movie.”
Another user replied, “My favourite part about Birdman was seeing Edward Norton playing himself.”
15. Rubber
“Rubber … I thought it’d be about a sentient tire blowing people up. But it kept cutting to a surrogate audience standing in a field watching the events and doing meta-commentary on film. Also, Lady in the Water … He was writing a movie critic character just to make them an ah you can kill off. Then, making the struggling writer the saviour of the world through his excellent writing and then casting YOURSELF for the role? Lol,” one user posted.
16. Wes Anderson’s Newer Films
One user posted, “Wes Anderson’s newer films are the definition. Bring back Owen to rein him in.”
Another user commented, “I came into this thread specifically to see how soon Asteroid City would come up.”
“Wes Anderson is so confident in his style at this point in his career, that someone calling his latest effort pretentiousness would just read as, ‘Oh good, you saw my film. Thank you, it was very pretentious,’” one user responded.
17. Mother!
“Mother!” shared by one Redditor.
Another user commented, “This is one movie I loved, but I can recommend it to no one.”
18. Cloud Atlas
One Redditor posted, “Cloud Atlas. That movie is the definition of smelling your gas in public. It’s just so g-d- stupid in an ‘I’m 14, and this is deep’” sort of way.”
19. Joker
“Joker. … That movie thinks it’s brighter than it is but fails to hold a consistent theme in a way that says effectively nothing. It doesn’t work as a character study either because the character is also inconsistent. It’s only really grounded by a legendary performance by Joaquin,” stated one user.
One user replied, “That’s because it’s directed by the man who did The Hangover movies, doing his best attempt at Scorsese.”
20. Tree of Life
One user shared “Tree of Life.”
One user commented, “(whispers) ‘What is life?’ (Random shot of a kid walking into the sunset.) (More whispering.) ‘What does it all mean?’ (Camera pans into a blank wall.) (Whispering so quietly that it’s barely audible) ‘What is all this?’ (Dinosaurs explode in the background).”
Another user commented, “I like the movie (it’s more a montage movie than a movie-movie), but this gave me a chuckle. It’s definitely not for everyone!”
What do you think of the movies listed above? Share your thoughts in the comments below!
Source: Reddit.
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