Accounting, Digital, Broker Comp Tools; FHA, VA, USDA Developments; Why Rates are Stubborn
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Accounting, Digital, Broker Comp Tools; FHA, VA, USDA Developments; Why Rates are Stubborn
By: Rob Chrisman
4 Hours, 13 Min ago
Imagine my surprise at finding tag (like on the playground) is an organized sport. Imagine my surprise at finding two gas stations at the same intersection yesterday in Truckee, California with two different prices for unleaded! Rather than wait for the CFPB to tell me that I could save money by going to the cheapest station, as it did by paying for a study on how different lenders have different mortgage prices, I actually reasoned, all by myself, that I could, and did, buy the least expensive gasoline. Switching gears, but continuing on with the thinking vein, a lot of reasoning went into determining that a) the earth is round, and b) globes are not some newly invented conspiracy theory. Someone needs to let Georgia’s current GOP district chair Kandiss Taylor know globes are globes. What the heck am I missing by subscribing to the round earth concept? And how about this for sensationalist headlines from Auction.com: One-Third of Buyers Expect Home Prices to Decline. Really? “Despite rising expectations for a home price correction in 2023, 87% of buyers said they planned to increase or keep the same their property acquisitions for the year, up slightly from 86% in 2022.” (Today’s podcast can be found here and this week’s is sponsored by Built Technologies. Join Built Technologies on June 20th at 12 PM CST for an exclusive webinar that will dive into proactive portfolio monitoring as Built’s experts share best practices for achieving greater visibility into your construction portfolio.)
Broker and Lender Services and Software
Quorum Federal Credit Union has upgraded its Borrower Paid Broker Compensation Program. The program offers partners the opportunity to earn up to 2.00 percent borrower paid broker compensation on the entire line amount, up to $5,000, for all HELOC products. Primary and Second Home HELOCs offer no minimum draws, no early termination fees, and no annual fees. With minimum loan amounts at $25,000, Quorum offers financing up to $350,000. Investment Property HELOCs also offer no minimum draws and no early termination fees with minimum loan amounts at $50,000 and financing up to $250,000. Contact your Account Executive, visit the Quorum Partner Portal or email [email protected] for more information.
“Unite your mortgage process with an end-to-end digital closing solution. Initially, American Federal implemented the Mortgage Suite without Blend Close, but later realized our digital closing solution aligned with their growth strategy. Find out how they were able to speed up the borrower’s journey, close loans faster, and save more time. Dive into their case study.”
For independent mortgage banks coping with shrinking production volumes and rising costs per loan, outsourcing accounting is an elegant solution to what’s become a very common challenge. Whether you have no accounting expertise in-house or you have a new team with no mortgage experience, you can tap the Richey May Client Accounting and Advisory Services (CAAS) team for the support you need. This team is stacked with mortgage industry experts who can tailor your solution to meet your most pressing needs in a volatile time, with no training needed. Need help transitioning to loan level accounting? Need a fully outsourced function? You got it! Need industry training for your controller? We can do that. In this article, Richey May’s expert Kim Dittmer answers all your most frequently asked questions around outsourced accounting as a mortgage bank.
Ginnie, USDA, FHA, and VA Updates
The industry’s applications include about 25 percent VA, FHA, and USDA. These products continue to garner the lion’s share of production for underserved and, let’s face it, low-quality borrowers. These are the borrowers targeted by the Biden Administration. Freddie and Fannie (the GSEs) ask seller-servicers for these “mission loans” but LOs know that there are few cases where a lender could or should advise a consumer to take out a conventional loan versus FHA/VA. Let’s see what’s going on out there.
Anyone making a living on refinancing FHA or VA loans is in for a rough road. Overall, roughly 33% of all American homeowners wrapped into 30-year agency mortgage bonds are paying 3% or less on their home loans. Chris Maloney with BOKF writes, “Breaking that down across the three segments for how much of the universe is paying 3% or less on their mortgages as of the end of May, for conventional 30-year borrowers that comes to 32%, for FHA 30-year borrowers 21.9% and for VA borrowers 50.7%. And using the Optimal Blue lending rates as a guide, the amount of the 30-year universe that is out-of-the-money (defined as not having at least 50 basis points of incentive) finds 99.6% of the conventional 30-year and FHA borrowers in that state while for the VA borrowers it’s 99.5%.”
FHA posted a draft of Mortgagee Letter (ML), Payment Supplement Partial Claim, on its Single-Family Housing Drafting Table (Drafting Table) for public feedback. The draft ML proposes a new loss mitigation option, the Payment Supplement Partial Claim (Payment Supplement PC), to assist struggling borrowers that are delinquent on their mortgage payments and are unable to obtain a significant payment reduction with other available loss mitigation options. This option will be particularly useful for borrowers who have below market interest rates. View the FHA Press Release for details.
Don’t forget that the FHA is seeking comments on its proposed HECM Mortgagee Default Requirements. FHA recently posted a draft Mortgagee Letter (draft ML) that would expand FHA’s processes related to actual or anticipated mortgagee default on obligations to a borrower under Home Equity Conversion Mortgages (HECMs) insured by FHA.
At the end of May, The Community Home Lenders of America (CHLA) commended FHA Commissioner Julia Gordon for the announcement that FHA is proposing a program to create a flexible partial claim loan modification option for defaulted borrowers, which avoids having to take the underlying loan out of a Ginnie Mae loan pool. CHLA was the first national association to ask FHA to develop such a program option, in a letter to FHA last August.
All Participants Memorandum (APM) 23-08, Ginnie Mae announced updates to the adoption of Single Family and Manufactured Housing Program pooling into the new Single Family Pool Delivery Module (SFPDM) in MyGinnieMae. This transition from GinnieNET to the SFPDM application will enhance user experience and align Ginnie Mae with mortgage industry standards by using the MISMO-compliant Pool Delivery Dataset (PDD).
USDA Rural Development posted a bulletin on 05/30/2023, Interest Rate Decrease for SFH Direct Programs.
FHA announced the availability of 203(k) Rehabilitation Mortgage Program fact sheets for consumers and aspiring and current FHA203(k) Consultants. These materials are designed to help increase awareness and understanding of the features and benefits of the program. The fact sheets include a program overview with features, benefits, and requirements, as well as additional 203(k) Program resources.
PRMG Product Update 23-29, includes Investor Solution update on AirDNA requirement for short term rentals on a purchase. Clarification on UT Utah Housing FHA for wholesale loans regarding the allowance of In-House and Third-Party Processing Fees charges, and multiple clarifications on CO CHFA FirstStep Plus.
AmeriHome Mortgage General Announcement 20230512-CL summarizes previously published changes made during May, additional changes made with the announcement, and recent Agency and regulatory news.
Capital Markets
Why did rates improve Thursday, and this week, especially when there is no “big” data? Well, initial jobless claims, which are a leading indicator, hit their highest level since November 2021. That connotes some softening in the labor market which the Fed would like to see, and which could tip it toward holding, rather than raising, the overnight Fed funds rate.
Supply is also on the radar screen but expected. Investors remain cautious ahead of next Wednesday’s Federal Open Market Committee meeting and fears about the impending sale of $1 trillion of Treasury bills is also not helping sentiment: With the debt ceiling deal in place, the Treasury will issue more than $1 trillion in short-term debt to keep the lights on. This will push up short term rates at least in the near-term, which won’t help those looking for mortgage rate relief.
In addition to rate worries, as mortgage-backed security spreads remain at the widest levels since the 1980’s, home prices continue to move higher. Lower mortgage rates earlier in the year likely played a role in the uptick, however scarce supply of desirable homes continues to add to price pressures. A strong job market helps housing demand, particularly in the face of challenging affordability and last week’s release of the May employment report generally showed a healthy labor market, with the headline reading coming in around 145k above analysts’ estimates to register at 339k. Despite that new robust employment data, downward revisions to earlier numbers suggest a broad cooling trend remains intact. The numbers now show the US added an average of 182k private sector jobs in the past three months, the fewest since January 2021.
Despite a strong labor market, consumer sentiment also slipped in May to register down 9.1 percent from April, according to the University of Michigan Consumer Sentiment Survey. Inflationary expectations for the near term fell, while longer-term expectations rose to 3.2 percent, the highest level in 12 years. The Fed pays close attention to the UM inflationary expectations, so this is bad news for those hoping for rate cuts this year and does not bode well for those hoping for a sudden window of billions of dollars’ worth of mortgages coming into refinance incentive again
Lastly, while we’re waiting for all those recession predictions to come true, yield curve inversion has increased over the past couple of weeks as the market continues to capitulate to the Fed’s “higher rates for longer” message. The latest run up in rates over the past couple of weeks was a function of the market correcting its Fed Funds “hike, pause, cut” path. That upward pressure on the front-end of the yield curve immediately re-flattened the yield curve back into deeply negative territory.
Moral of the story: the Fed is not set to cut rates anytime soon as inflation remains an issue and investors have been forced to unwind bets that rate cuts will be in store later this year. As recently as a couple of weeks ago, three rate cuts were expected before year end. With no economic data on today’s schedule, we begin a slow news Friday with Agency MBS prices worse about .125 and the 10-year yielding 3.74 after closing yesterday at 3.71 percent; the 2-year’s up to 4.55 on continued inflation worries.
Employment
Village Capital & Investment is excited to announce that Pete Tamoney has recently been hired to help grow its Correspondent Lending division. Pete has been in correspondent sales for 20 years, most recently with Northpointe Bank. Village Capital is a GNMA buyer with no overlays and a consistently strong execution. You can contact Pete.
“Equity Resources is pleased to continue our expansion throughout our 19 states along the east coast and mid-west. We are an independent and family-owned mortgage banker that is proudly celebrating our 30th anniversary this year, continuing to create incredible opportunities for our team members, Realtor partners, as well as our B2B partners. We are currently searching for talented and career-focused loan officers that have a demonstrated “self-sourced” business philosophy. Equity Resources is an agency direct lender that offers an exceptional compensation and marketing platform for our loan officers, including a media and video production team, an underwriting “hotline,” a talented marketing and social media group, and an exceptionally tenured leadership team. We offer a full suite of loan products and programs (including several specialty lending programs). To learn more about “Why Equity Resources” and to join our award-winning team, please contact Tom Piecenski, EVP of Sales and Development (614.327.5353).”
“Are you frustrated as a retail loan officer or mortgage banker with the lack of flexibility to provide custom loan options? Take control: follow the lead of over 24,000 MLOs like you who have joined the wholesale channel in the last year. Whether you open your own independent mortgage brokerage or join a team as a loan officer, you’ll have the ability to provide your clients with the personalized solutions they need. Contact our team at BeAMortgageBroker.com today and you’ll be well on your way to a more fulfilling tomorrow.”
A Louisiana based full-service, independent mortgage banker averaging $1 billion in production annually is searching for a proven retail sales leader to run all business development initiatives. The Sales, Recruiting, and Marketing departments will report directly to this head of business development role, and the role will report directly to the CEO. The ideal candidate will have a demonstrated track record of hiring and managing multiple production offices across several states. The IMB is well capitalized, has agency direct approvals, offers niche products, significant technology advancements and a world-class operations team with experienced, tenured sales and fulfillment employees. For confidential consideration, please email resume to Chrisman LLC’s Anjelica Nixt for forwarding.
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Purchase mortgage rates climbed 55 basis points, reflecting surging inflation and the Federal Reserve‘s (The Fed) tightening monetary policy.
According to the latest Freddie Mac PMMS, purchase mortgage rates this week averaged 5.78%, compared to 5.23% the week prior. A year ago at this time, 30-year fixed rate purchase rates were at 2.93%.
“Mortgage rates surged as the 30-year fixed-rate mortgage moved up more than half a percentage point, marking the largest one-week increase in our survey since 1987,” said Sam Khater, Freddie Mac’s chief economist, according to a statement.
The government-sponsored enterprise index accounts solely for purchase mortgages reported by lenders during the past three days. Another index showed rates greater than 6% this week.
Black Knight’s Optimal Blue OBMMI pricing engine, which includes some refinancing data — but excludes cash-out refis to avoid skewing averages – measured the 30-year conforming mortgage rate at 6.03% Wednesday, up from 5.5% the previous week.
The 30-year fixed-rate jumbo was at 5.46% Wednesday, up from 4.99% the week prior, according to the Black Knight index.
Creating a path to success in today’s purchase market
Meeting the needs of a new generation of homebuyers while managing the ebbs and flows of a volatile housing market is a major endeavor for any mortgage lender. So, what should lenders be doing to thrive in the face of a post-pandemic housing market rife with new hurdles?
Presented by: Calyx
Higher rates usually reduce borrowers’ demand for mortgage loans. But, this week, mortgage application volume rose 6.6% from the past week as potential borrowers wanted to guarantee a lower rate: Refi applications increased 4% and purchase apps ticked up 8%, according to the Mortgage Bankers Association.
Overall, mortgage rates are following the Fed’s inflation-fighting monetary policy. Wednesday, the Fed raised the federal funds rate by 75 basis points, to 1.50-1.75%, a hike not seen since 1994. Friday, the inflation price index showed 8.6% increase in May.
And more rates hikes are expected to come out of the Fed meeting in July. During a news conference following the Fed’s committee meeting, Chairman Jerome Powell said: “Either a 50 bps or a 75 bps increase seems most likely at our next meeting.”
However, Powell said the central bank will react to incoming data.
“Any guidance that we give is always going to be subject to things working out about as we expect,” he said. “I like to think though that our guidance is still credible, but it’s always going to be conditional on what happens.”
The Fed’s actions are intended to restore greater balance to supply and demand in the housing market, which now faces inventory problems and rising housing prices.
“Higher mortgage rates will lead to moderation from the blistering pace of housing activity that we have experienced coming out of the pandemic, ultimately resulting in a more balanced housing market,” Khater said.
According to Freddie Mac, the 15-year fixed-rate purchase mortgage averaged 4.81% with an average of 0.9 point, up from last week’s 4.38%. The 15-year fixed-rate mortgage averaged 2.24% a year ago.
The 5-year ARM averaged 4.33%, with buyers on average paying for 0.3 point, up from 4.12% the week prior. The product averaged 2.52% a year ago.
Homebuyer affordability decreased slightly in May, as new mortgages took up a larger share of a the average person’s income while rates trended higher. High inflation and rising mortgage rates won’t lessen the burden on new home buyers in the coming months.
The national median payment applied for by applicants rose to $1,897 last month from April’s $1,889, according to the Mortgage Bankers Association (MBA). The national median mortgage payment for conventional loans was $1,960, down slightly from April’s $1,967, but significantly higher than a year ago, when it was $1,394 in May 2021. Federal Housing Administration (FHA) loan payments rose to $1,430 in May from the previous month’s $1,374.
“The ongoing affordability hit of higher home prices and fast-rising mortgage rates led to a slowdown in purchase applications in May,” said Edward Seiler, MBA’s associate vice president for housing economics and executive director at the Research Institute for Housing America, according to a statement.
“While the median principal and interest payment only increased $8 from April, a typical borrower is paying $514 more through the first five months of 2022 – a jump of 37.1%,” he said.
The average purchase mortgage rate rose to 5.27% in early May, according to Freddie Mac PMMS, a 13-year high until it surpassed the 6% level in June.
Citing inflationary pressures and mortgage rates above 5%, Seiler said the MBA expects sales of new and existing homes to fall below 2021 levels. The agency expects some 5.76 million existing homes to sell in 2022, well below the previous year’s sale of 6.13 million existing homes. New home sales are forecast to remain slightly more stable, with the sale of 769,000 new houses projected, down from 771,000 new houses sold last year.
The purchase applications payment index (PAPI), which measures how new monthly mortgage payments vary relative to income, rose 0.4% to 163.4 in May from 162.8 in April. An increase in MBA’s PAPI, indicative of worsening borrower affordability conditions, means the mortgage payment to income ratio is higher due to increasing application loan amounts, rising mortgage rates, or a decrease in earnings.
Black and white households’ homebuyer affordability dropped at the steepest rate at 0.7 points. The index for Black households rose to 166.6 and climbed to 164.3 for white households in May from April.
Borrowers in Idaho are facing the greatest affordability challenges with a PAPI index coming in at 253, followed by Nevada (249.7), Arizona (233.5) and Utah (210.9).
Meanwhile, borrower affordability conditions were best in Washington D.C. (99.7), with Alaska (102.6), Connecticut (111.2) and West Virginia (113) trailing behind.
“Persistently high inflation and the recent spike in lending rates will trigger a correction in the UK (Aa3 negative) housing market,” Moody’s Investor Service said in a report.
Matt Cardy | Getty Images News | Getty Images
LONDON – The U.K.’s biggest bank temporarily withdrew mortgage deals via broker services on Thursday, as the effect of higher interest rates ripples through the British housing market.
HSBC told CNBC Friday that it was reviewing the situation regularly, but did not specify whether the new deals would differ from its previous offerings. Higher rates are a possibility, given that the Bank of England is continuing to increase interest rates.
It comes eight months after hundreds of mortgage deal offers were pulled in one day after market chaos at the time sparked concerns about rising base rates.
In a statement issued Friday, HSBC said: “We occasionally need to limit the amount of new business we can take each day via brokers. All products and rates for existing customers are still available, and we continue to review the situation regularly.”
The banking group said the protocol was in order to ensure it meets “customer service commitments” and stressed that it remains open to new mortgage business.
Soaring rates
The HSBC decision comes as analysts expect mortgage rates to soar and housing prices to plummet in response to the increased base rate.
A large number of fixed-rate mortgage deals is set to expire this year, leaving homeowners vulnerable to the impact of interest rate hikes, according to economic research company Capital Economics.
The organization made an upward revision to its mortgage rate forecasts, which showed borrowers would be “subject to a larger interest rate shock than … previously envisaged.”
“Those coming to the end of a 2-year fix will see a particularly large increase in the cost of their mortgage. While those refinancing a 5-year fix this month may see their mortgage rate jump from 2.1% to 4.9%, those on a 2-year fix will see an increase from 1.4% to 5.2%,” Capital Economics said in a note published Thursday.
There are also warnings that house prices will tumble in the next two years, with credit ratings agency Moody’s forecasting a 10% decline.
“Persistently high inflation and the recent spike in lending rates will trigger a correction in the UK (Aa3 negative) housing market,” Moody’s Investor Service said in a report.
The Halifax House Price Index showed that U.K. house prices were flat in May after a 0.4% fall in April, while the average U.K. property now costs £286,532 ($360,000).
In February, U.K. house prices experienced their sharpest contraction since November 2012, according to building society Nationwide.
Prices tumbled 1.1% year-on-year, logging their first annual decline since June 2020.
The Bank of England raised its interest rate to 4.5% from 4.25% as the central bank attempts to tackle high inflation that currently sits well above the 2% target, at 8.7%.
The Organization for Economic Cooperation and Development predicts the U.K. will have the highest inflation rate out of all advanced economies this year.
Lenders and homeowners will be watching the central bank closely for its next base rate decision on June 22. It is widely expected the bank will agree its thirteenth consecutive increase.
A bank run is one of those rare financial terms that’s exactly what it sounds like. Source: Giphy.com, Paramount Pictures It literally starts with a crowd of people sprinting to the bank. And while that may sound like a mere nuisance to bank tellers trying to go home at 5:30, even the smallest bank runs can … [Read more…]
Depending on which rate tracker you look at, mortgage rates decreased, moved sideways or increased on a week-over-week basis.
Since June 1, the yield on the benchmark 10-year Treasury moved up 18 basis points to close at 3.78% on Wednesday.
But the spreads remain abnormally wide, and that likely contributed to the divergent movements among different trackers that use different methodology. The normal spread between the 10-year Treasury and the 30-year fixed-rate mortgage is between 150 and 200 basis points; no matter which tracker is used, they currently are in the 300 basis point range.
Freddie Mac’s Primary Mortgage Market Survey, which takes in rates on submissions to its Loan Product Advisor automated-underwriting system, reported an 8 basis point decline in the 30-year fixed-rate mortgage to 6.71% for June 8 from 6.79% one week prior. For the same week in 2022, the 30-year FRM averaged 5.23%.
The 15-year FRM fell to 6.07% from 6.18% week-to-week but rose from 4.38% on a year-over-year basis.
“Mortgage rates decreased after a three-week climb,” said Sam Khater, Freddie Mac’s chief economist, in a press release. “While elevated rates and other affordability challenges remain, inventory continues to be the biggest obstacle for prospective home buyers.”
Optimal Blue, a division of Black Knight, reported the 30-year conforming mortgage at 6.746% as of June 7, based on data submitted to its product and pricing engine. That compared with 6.719% on May 31; on June 1 it fell to 6.649% before tracking higher over the following days.
Zillow’s rate tracker, based on offers, was at 6.61% on Thursday morning, unchanged from the morning of June 1, and down one basis point from the previous week’s average.
“After some mild oscillations, mortgage rates are right where they were this time last week as investors await more conclusive signs of progress on inflation and monetary policy,” said Orphe Divounguy, senior macroeconomist at Zillow Home Loans, in a statement issued Wednesday night. “Last week’s stronger-than-expected employment report caused Treasury yields — and mortgage rates that follow them — to increase.”
But the services sector slowed down in May, according to the Institute for Supply Management purchasing managers’ index report. The price component had its weakest reading in two years, which is likely to be seen in the next Consumer Price Index reading.
“Cooling inflation and a general economic slowdown would put downward pressure on long-term interest rates like the 10-year Treasury yield,” Divounguy said.
On Wednesday, the Mortgage Bankers Association reported a 10 basis point decline in the 30-year FRM to 6.81%.
“The housing market has gotten off to a slow start this summer due to higher mortgage rates, low inventory and economic uncertainty,” a Thursday morning statement from MBA President and CEO Bob Broeksmit said. “The labor market continues to be exceptionally strong, which could bring more buyers back into the market once rates move away from their recent highs.”
Divounguy forecasts that mortgage rate movement should remain muted over the next seven days, “but upward bias remains as investors await next week’s CPI inflation report and Federal Open Market Committee forward guidance.”
The housing market is getting stranger by the day.
While affordability has arguably never been worse, prices are rising and there are virtually no homes for sale.
This is making it difficult for both housing bulls and bears to make the case for a boom or a crash.
When all is said and done, we might just experience a stagnant market that fails to keep up with inflation.
And a severe economic downturn in the housing industry due to a lack of sales volume.
New For Sale Listings Hit Seasonal Low in June
First things first, new real estate listings are off a whopping 25% from a year ago, according to a new report from Redfin.
This covers the four-week time period ending on June 4th. Just 89,249 homes were listed.
And the real estate brokerage noted that new listings fell in all metros analyzed.
The declines were the most pronounced in Las Vegas (-42.3% YoY), Phoenix (-40.9%), Seattle (-40.4%), Oakland (-39.8%), and San Diego (-37.2%).
These happen to be areas that saw massive home price appreciation, then big home price corrections.
It seems homeowners are now staying put in these areas, perhaps as they come to terms with the inability to make a move from a financial standpoint.
Ultimately, the mortgage-rate lock in effect continues to make it both unfavorable and sometimes impossible for existing homeowners to move.
Simply put, selling your home with a 2-3% mortgage rate, only to buy one with a 7% mortgage rate, doesn’t pencil.
And rents aren’t cheap either, so it’s not a viable option to sell and rent for much less.
Active Real Estate Listings Are Falling When They Typically Rise
Meanwhile, active listings (the number of for-sale homes available at any point during the period) declined 4.6% from a year earlier.
This was just the second decline in 12 months, the first being a week earlier when actives fell 1.7%.
Redfin noted that active listings were also down month-to-month at a time of year when they typically rise.
Because of the lack of new listings, the total number of homes on the market fell to its lowest level on record for an early June.
Long story short, there is no housing inventory, which is somewhat good news because there aren’t a lot of buyers either.
As noted, affordability isn’t great with mortgage rates at/near 7% and home prices still historically high.
This explains why the median home sale price was down just 1.6% from a year ago at $379,463.
That represented the smallest decline in the past three months as many markets that were down year-over-year begin to turn things around.
Housing Supply Is Up Slightly from a Year Ago
While new listings and active inventory are down, housing supply inched up a bit from last year.
As of June 4th, supply was at 2.6 months, which is the amount of time it would take to clear inventory at the current sales pace.
But while it’s up 0.5% from a year ago, it’s still well below the 4-5 months that represents a healthy, balanced housing market.
The reason it’s higher is because homes are sitting on the market longer and taking more time to receive offers.
Again, you can blame affordability for this as there are fewer eligible buyers out there. And perhaps fewer who are interested even if they can afford it.
About a third of homes that went under contract received an accepted offer within the first two weeks on the market, down from 38% a year ago.
And homes that sold were on the market for a median 28 days (the shortest span since September), but much longer than the record low 18 days a year earlier.
So it’s clear the housing market isn’t thriving at the moment, but due to a continued lack of inventory, prices remain sticky.
But that could change if mortgage rates remain elevated during the softer part of the calendar year (summer/fall/winter).
Still, the resilience of home prices continues to exceed expectations and defy the housing bears.
Read more: When will the housing market crash again?
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Investing in stocks can seem like a daunting task.
There are so many things to consider when it comes to investing, and the stock market is constantly moving.
Stock market investing is a popular option to increase net worth and make money.
Many people are looking for ways to invest their money, with the number of individual investors increasing rapidly in recent years.
This guide covers many important factors for how to invest in stocks for beginners.
Starting out as a newbie trader can be scary and overwhelming… don’t worry, all seasoned traders had to start at the beginning too!
Let’s take away that quell those thoughts and focus on why you want to learn to invest in stocks.
This guide will give you everything you need to know about how to invest in stocks as a beginner investor!
What Are Stocks?
In the most basic form, stocks are a form of investment. When you own a stock, you have a piece of ownership in the company’s equity.
The stock market is a real-time financial market in which investors buy and sell stocks and other securites. The stock market is made up of many companies and individuals who are actively investing in stocks.
Stocks are an excellent way for companies and individuals to invest in a company and receive a share of the company’s profits.
Many of the growth stocks (FAANG stocks) are those who investors want their stock price to increase over time. Thus, increasing their overall portfolio’s net worth.
FAANG Stocks is an acronym for: Meta (formerly known as Facebook), Amazon, Apple, Netflix, and Alphabet (formerly known as Google).
Some companies like Chevron (CVX) pay out a dividend each quarter to their investors.
There are thousands of stocks available to trade.
What Can You Invest In The Stock Market?
There are many investment opportunities in the financial market, so it is important to be informed about what you can invest in. Below are some of the places where you can invest your money:
Stocks
Bonds
Mutual funds
ETFs
Commodities
Futures
Options
Now, we are going to look at the most common.
Individual stocks
Individual stocks are a type of investment that you can make yourself.
You can choose how many shares of a certain company you want to purchase.
For example, you like Tesla for how they are innovative in the electric car space. You can choose to invest 20 shares of their stock.
As a long-term investor, you want to hold a portfolio of 10-25 stocks. Find a list of beginning stocks to build your portfolio.
Individual stocks can be bought or sold as a way to dip your toe into the stock-trading waters.
As a short-term investor, you are looking to make money as the stock price increases or decreases.
Mutual Funds
Mutual funds are managed portfolios of stocks.
As a result, mutual funds typically have load fees equal to 1% to 3% of the value of the fund.
One of the most popular mutual funds is VTSAX because of its expense ratio is .04%
Mutual funds are a clear choice for most investors because of the simplicity to invest in the market. This can be a good investment for both novice and experienced investors, as they offer decent returns with lower risk.
They tend to rise more slowly than individual stocks and have less potential for high returns. Mutual funds are a great way to diversify your portfolio and gain exposure to a variety of different securities.
All mutual funds must disclose their fees and performance information so that you can make an informed decision about whether or not to invest.
Exchange traded funds (ETFs)
Exchange traded funds (ETFs) are a type of exchange-traded investment product that must register with the SEC and allows investors to pool money and invest in stocks, bonds, or assets that are traded on the US stock exchange.
They are inherently diversified, which reduces your risk.
This is a good option for beginner investors because they offer a large selection of stocks in one go.
ETFs have a lower minimum to start investing, which is a draw for many investors starting out with little funds. Plus there are many different types of ETFs to choose from.
ETFs are similar to mutual funds, but trade more similarly to individual stocks. With ETFs and Index Funds, you can purchase them yourself and may have lower fees.
Why Stock Prices Fluctuate
Stock prices fluctuate because the financial markets are a complex system. There are many factors that can affect the price of a stock,
There are a number of factors that can influence stock prices, including:
Economic indicators like GDP growth, inflation, and unemployment rates
Company earnings reports
The overall health of the economy
Political and social instability
Changes in interest rates
War or natural disasters
Supply and demand,
Actions of the company’s management
Short squeezings like what happened with GME or AMC
The volatility in the stock market is the #1 reason most people stay out of investments. However, on average, the stock market has moved up 8-10% a year.
What is the best thing to invest in as a beginner?
The best thing to invest in as a beginner is your time.
You need to learn how the stock market works. Just like you would get a certification or degree, you should highly consider an investing course.
Learn and devote as much time as you can to investing in stocks.
How To Invest In Stocks For Beginners?
Investing in the stock market can be a great way to make money! If you’re looking for ways to make money or grow net worth, investing in a stock is a smart choice.
With online access and trading being easier now than ever, it can be easier than ever to start buying stocks.
Let’s dig into how to invest in stocks like a pro.
FYI…You should do your own research before investing.
Step #1: Figure out your goals
Figure out your goals to help with setting an investing strategy.
What are you trying to achieve with stock market investing? Is it supplemental income? A certain level of wealth for retirement? Are you looking for short-term or long-term gains?
Once you know what you’re aiming for, it will be easier to find the right stocks and make wise investment decisions.
Your reason to invest in stocks will be different than everyone around you.
Some people want to supplement their weekly income.
Others want to invest in companies for the long term.
My goal is to make weekly income from the stock market. That is my investment strategy for non-retirement accounts.
You need to spend time understanding WHY you want to buy stocks.
Knowing this answer will help you define what type of trader you will be.
Step #2. Decide how you want to invest in the stock market
When you decide to invest in the stock market, you need to choose what you want to invest in.
You can invest in stocks, which are shares of ownership in a company, or you can invest in bonds, which are loans that a company makes. There are also other options like mutual funds and exchange-traded funds (ETFs), which are collections of stocks or bonds.
Also, you can expand this to what types of investments will you have in various retirement or brokerage accounts. For example, you may invest in mutual funds with your 401k, ETFs with your Roth IRA, and stick with individual stocks for your taxable account.
This is a personal decision.
Many people when they are first starting to trade stocks choose to limit purchasing stocks with a limited percentage of their overall portfolio.
Step #3. Are you invest in stocks for the short term or long term?
The buy and hold investor is more comfortable with taking a long-term approach, while the short-term speculator is more focused on the day-to-day price fluctuations.
Once again, this is a personal preference.
One of the most common themes of many investing gurus is, “Remember that stock prices can go down as well as up, so it’s important to stay invested for the long term.”
However, this full-time trader wants to make money on those highs and lows.
Knowing your overall investment horizon will help you decide how much time you plan to hold onto your investments to reach your financial goal.
Also, you can choose different time horizons for different accounts.
Step #4: Determine your investing approach
Passive and active investing are two main approaches to stock market investing.
Passive investing does not involve significant trading and is associated with index funds.
Passive investing is a way to DIY your investments for maximum efficiency over time.
Thus, you would contribute to your investment account on the xx day of the month with $xx amount of money.
This happens with consistency regardless of where the market stands on that day.
You are less warry of where the stock market will go and focused on overtime it will continue to go up.
Active investing takes the opposite approach, hoping to maximize gains by buying and selling more frequently and at specific times.
Active investing is when an investor is actively acquiring, selling, or holding bought stocks.
This could be with day trading or swing trading.
You may hold stocks for less than a day, a few days, or a couple of weeks.
The purpose of having active investing is to make profits.
In the stock market, investors make efforts to increase their net worth over time or to make income off the market.
Step #5: Define your investment strategy
When it comes to investing in the stock market, there are a few key factors you need to take into account: your time horizon, financial goals, risk tolerance, and tax bracket.
Do you want to be an active trader or stick with passive investing? What kind of investor am I?
There is no right or wrong answer as this is a personal preference.
Ultimately, you want returns to be greater than the overall S&P 500 index for the year.
Once you’ve figured these out, you can start focusing on specific investment strategies that will work best for you.
Be aware of any fees or related costs when investing. Fees can take a bite out of your investments, so compare costs and fees.
Step #6: Determine the amount of money willing to lose on stocks.
Trading stocks online is inherently risky.
You want to consider what your “risk tolerance” is. Simply put, how much are you willing to lose in stocks before you want to quit?
The biggest reason most people quit trading stocks is that they do not know their risk tolerance and fail with risk management.
You will lose on trading stocks. The goal is to lose a small amount on some of the trades and gain a greater amount of more of your trades.
How much risk you can reasonably take on given your financial situation?
What are your feelings about risk?
What happens when your favorite stock drops 25%?
Understanding your risk tolerance and how much you are willing to lose will help you keep your losses small.
Start with a small amount of money when investing in stocks. Also, make sure you have enough money saved up so you can handle any losses that may occur.
How to Start Investing in Stocks
There are a variety of ways to start investing in stocks. Some methods include getting a small account balance and then buying shares, creating an investing club with friends, or researching the companies you want to invest in.
Now, that you have determined how and why you want to invest in stocks. Let’s dig into the nitty gritty of how to manage a stock portfolio.
On the other hand, if you don’t invest enough, you could miss out on potential profits. Try starting with an amount you’re comfortable losing if the stock market does go down.
1. Open an investment account
There are a few things you need to do in order to start investing in the stock market.
The first is to open an investment account with a broker or an online brokerage firm.
There are different types of accounts you can open:
Taxable accounts like an individual or joint brokerage
Retirement accounts like IRA or Roth IRA
These are the most basic investment accounts, here is a list of types of investment accounts.
If you plan to hold EFTs or mutual funds, Vanguard is a great place to start.
If you plan to be an active trader, I would look at TD Ameritrade or Fidelity. Be wary of Robinhood or WeBull.
2. Saturate yourself in Stock Market Knowledge
On the simplest level, it can be incredibly easy to begin your investing career with little-to-no knowledge, research, and expertise.
If you have even a remote understanding of stocks, then learn what you need from an easy-to-find YouTube video, followed by watching some of your favorite TV shows to learn more about the market and its secrets.
With that said, you need to be digesting the basics from start to end of getting your first investment started.
As the title reveals, investing can seem intimidating and complicated. Thus, stock market knowledge is invaluable.
3. Consider an Investing Course
A typical investing course would teach how to invest in stocks (and possibly other investments).
As a beginner trader, it is unlikely you will know the full extent of how the stock market works. There are many intricacies you must learn and understand.
Beginners should learn about stock investing basics, such as diversification and investment criteria.
Many investing courses offer a platform on how to make money by trading stocks.
Personally, I highly recommend buying this investing course.
If you choose not to follow my advice, that is fine. Come back when you have lost more money in the stock market than the price of the courses.
I CAN NOT STRESS ENOUGH… how important it is to have a solid foundation and practice in a simulated account before you use your real money.
4. Research the companies you want to invest in
When you’re ready to start investing in stocks, it is important that you do your due diligence and research the companies you want to invest in.
Look for trends and for companies that are in positions to benefit you.
Consider stocks across a wide range of industries, from technology to health care. It’s also important to remember that stock prices can go up or down, so always consider this before making any investment decisions.
5. Choose your stocks, ETFs, or mutual funds
Next, you have to decide what fits your investing strategy. Are you looking to buy:
Stocks
ETFs
Mutual Funds
Regardless of which type of investment you make, you must look for companies that have attractive valuations and growth prospects. In the case of index funds or ETFs, which fund has the companies you find attractive.
Most importantly, you should also take into account the company’s financial health and its prospects for future growth.
Make sure you understand the risks associated with holding a particular stock, including possible price fluctuations and loss of value.
7. Take the Trade
This is the hardest step for most people is to take their first trade.
Thus, why learning to trade stocks is great to learn a simulated account using fake money. Then, move to a LIVE account using your real money.
At some point, in your investing in stocks journey, you must press the buy button.
For many the investment platform may be overwhelming to use, so check out your brokerage’s YouTube videos to help you out.
8: Manage your portfolio
Managing your portfolio is important to keep your investments in good shape.
If you are a long-term investor, diversify your portfolio by investing in different types of investment vehicles and industries.
If you prefer to swing trade or day trade, then you want to make sure you always have cash on hand and are rotating your portfolio to take profit.
Investing can be difficult for beginners who often lack knowledge about the stock market.
It is important to remember to keep investing money and rebalance your portfolio on a regular basis. This will help ensure that you stay on top of your investments and achieve the desired result.
9. Selling Stocks
For most investors, it is harder to sell their stocks than to purchase them. There are a variety of factors for that. But, you must sell your stocks at some time to realize your gain.
Don’t panic if the market crashes or corrects – these events usually don’t last very long and history has shown that the market will eventually rebound. Most people tend to panic sell when stocks are low and FOMO buy when the market is at highs.
When you are ready to sell, aim to achieve a percentage return on your investment.
This will require some focus on your time horizon and the stocks you want to invest in.
Also, you need to consider any taxes that may be owed on the sale of stock.
If you’re new to stock investing, consider using index funds instead of individual stocks to gain broad market exposure.
10. Journal & Analyze your Trades
Journaling is a way of recording the important decisions you make during trading to help yourself remember what happened in your trades. It can be used as a tool for reflection, learning from mistakes, and reviewing your strategy.
Analyzing your trades means looking back on your trading history with the goal of improving it.
This is the most overlooked step of the investing process.
When it comes to buying and selling stocks, journalling what is happening in the market is an important part of being a successful investor.
Stock Market Investing Tips for Beginners
Ask any seasoned trader, and they will have a list of investing tips for beginners.
They have made plenty of trading mistakes they do not want to see newbies do the same thing.
When starting to invest in the stock market, beginner investors often seek out consistent and reliable investments.
This allows them to slowly learn about the stock market and take calculated risks while also earning a return on their investment. Over time, as they gain experience, they can expand their portfolio to include riskier but potentially more rewarding stocks.
1. Invest in Companies That You Understand
An investor should know the company they are investing in and have an idea of what type of return they expect.
When you are starting out, it is best to invest in stocks of companies that are easy to understand and have a proven track record.
Do NOT invest in stocks based on the advice of friends, what you read in the news, or on a whim – these can be risky moves. Be wary of the popular stocks you can find on the Reddit Personal Finance threads.
2. Don’t Time the Market
In the world of investing, there is one rule that no investors should ever break: do not time the market.
By following this rule, you will always be on top of your investments and will be able to reap the rewards.
There are times to buy stocks and sell stocks. This is something you will learn when investing in a high-quality investing course.
As an average investor, trying to time the market will leave you frustrated by your minimal returns or great losses.
3. Avoid Penny Stocks
Penny stocks are the lowest-priced securities on the market, and they don’t offer any significant upside potential to their investors. While you may hit a home run return on some, many penny stocks tend to trend sideways.
The risk is not worth the return.
If you plan to invest in stocks, avoid penny stocks and focus on healthy companies.
4. Consider Buying Fractional Shares
Fractional share investing lets investors buy less than a full share at one time. Many times, you may not be able to afford the price of a full share.
For example, buying a share of Amazon (AMZN) may cost you upwards of $2800 or more. Thus, you can invest a smaller amount with a fractional share.
You would have to check if your brokerage company allows the purchase of fractional shares.
5. Stay the Course
In order to be successful, a trader must stay the course and maintain their focus. By staying focused, they will have less chance of making mistakes that may lead to big losses or overtrading.
When you’re starting out in the stock market, it’s important to be disciplined with your buying. Don’t try to time the market, because you’re likely to fail. Instead, buy shares over time and stay the course.
That way, you’ll be more likely to see a profit in the long run.
6. Avoid Emotional Trading
In order to be successful in the stock market, you have to maintain a level head.
Responding emotionally will only lead to bad decision making. Instead, stay the course and trust your research and analysis.
Know your weaknesses as well as your strengths.
7. Do Your Research
When you’re ready to start investing in the stock market, it is important to do your research so you can make informed decisions.
There are a lot of stocks to choose from, and it can be tempting to invest in them all.
But remember, you don’t want to spread yourself too thin. Invest in stocks that you believe in and that have a good chance of making you money.
8. Build Wealth
Stock market investing is one of the best ways to grow your money over time.
For long-term investing, you buy stocks in companies and hold them for a period of time, typically years. Over time, as the company grows and makes more money, so does your stock. This is one of the most common ways to build wealth over time.
The other way with short-term investing is to consistently take profit and grow your account over time.
Stock investing FAQs
Here is a list of the most common questions and answers on stock investing.
Q: What is the difference between investing and trading?
Trading is buying or selling financial products with the goal of making a profit. This is normally a day trader or swing trader.
Investing, on the other hand, refers to the process of putting money into an investment with the hope that it will grow. Someone who is focused on the long-term.
Q: Do you have to live in the U.S. to open a stock brokerage account?
No, you do not have to live in the U.S. to open a stock brokerage account. You must find a brokerage company in your area of residence abroad.
Q: How much money do I need to start investing?
The very common question of, “How much should you invest in stocks first time?”
It is recommended to start investing with $500 or more. However, you can start with Acorns with as little as $5.
Check out this investor’s story by starting with a small account of $500 and growing it over $35k in less than 6 months.
It is best to grow your account with your growth or profit.
Q: Do I have to pay taxes on the money I earn from stocks?
Yes, you will be required to pay taxes on the money you earn from stocks.
Q: What are the best stocks for beginners to invest in?
The best stocks for beginners to invest in are those that have a history of staying consistently on an uptrend. These companies’ stock prices have typically risen over the course of the year.
Find a list of beginning stocks to build your portfolio.
Q: How do beginners buy stocks?
Above, we outlined this in detail. In order to buy stocks, there are a few different steps that you should follow in order to maximize your chances of success.
The first step is making sure you have an account. Once you have an account, the next step is to decide which stocks you want to invest in. Then, you must buy your stock. Finally, you must decide when you want to sell your stock for a realized gain or loss.
Q: How many stocks should you own?
The best answer is it depends on your investing strategy.
As a short-term investor, you can only manage a smaller number of trades.
As a long-term investor, you need a more well-rounded portfolio. of15-25 stocks.
More likely than not, the short answer is “as many as you can afford.”
Q: What is the best thing to invest in as a beginner?
The best thing to invest in as a beginner is an index fund.
Indexes are great because they diversify across many different types of investments and don’t require much effort on the part of the investor to maintain. Index funds are also less risky than other investments, especially in the beginning stages of an individual’s investing career.
Q: How do we make money?
Traders make money in many ways. They can trade stocks, bonds, futures, and options on equities. They can go long when the market goes up and short when the market goes down.
Traders also use trading systems that are usually automated to manage the trades they make to maximize profit.
Trading is a risky investment and it’s not uncommon for traders to lose money. In order to keep losses small, many traders use the trading strategy based on minimizing risk in order to get the desired return.
Learn how fast you can make money in stocks.
Q: Why is Youtube Option Trading So Popular?
Video on how to trade options is very popular on Youtube. This is because of the high volume of interest on this topic.
For many people, learning options is an advanced strategy that takes more time and knowledge to learn.
This is my favorite youtube option trading channel as well as an overall investing strategy.
Additionally, traders are able to get a much higher return on motion trading versus going long or short on stocks.
Q: What is volume in stocks?
Volume is a measure of the number of shares traded in a given period, usually trading days.
This is an important metric if you plan to exit your trade to know there are enough buyers to buy your stock.
Q: How to invest in penny stocks for beginners?
Penny stocks are shares of a company that typically trade for less than $5 per share, which is also known as penny stock trading.
Investing in penny stocks can be a lot of fun and the highest risk, and there are many ways to get involved. For anyone who is new to the world of investing in penny stocks, it can be intimidating to know where to start.
However, there are a few things that you should keep in mind before diving into the world of penny stocks. One of these is researching what types of companies you want to invest in. Many of these penny stocks are not healthy companies and burning through cash.
It is important to always be careful when investing in penny stocks. Keep in mind that the risk of losing money is high and you should invest only what you are willing to lose.
Q: How to invest in stocks for beginners robinhood?
Robinhood is a stock brokerage company that allows users to invest in stocks without paying any fees. It also provides real-time quotes and charts. To invest, the user must have an account with Robinhood that holds at least $0.
Most major brokerage companies have zero commission fees on trading stocks as well.
Beware, Robinhood is known for stopping to trade various stocks during times of volatility whereas other’s brokers do not.
Q: What is a good price to buy at?
This is a hotly debated question as every investor sees the market from their view.
More often than not, people wonder the best time to buy stocks.
As such, you can read is now a good time to buy stocks?
Ready for Stock Market Investing?
If you are new to investing in stocks, there are a few things you take into consideration before diving into the market.
For starters, it is important to understand how stock markets work. You should also know the difference between a stock and an investment.
Investing in stocks can be a bit complicated, but this guide walked you through the basics of how to invest.
Before you invest in stocks, it is important that you understand your investment strategy. That way, you can make informed decisions about where to put your money and how much risk you are willing to take on.
Most people shy away from learning how to actively trade stocks because of the movies about Wall Street they have watched.
You will get a deeper understanding of investing in stocks the longer you educate yourself on the concept.
Overall, it is wise to diversify your portfolio and don’t put all your eggs in one basket.
So, what is your next move to start investing?
One of the best ways to improve your personal finance situation is to increase your income.
Here are the best investing courses to guide your path. With time and effort, you can start enjoying the lifestyle you want.
Learn how to supplement your daily, weekly, or monthly income with trading so that you can live your best life! This is a lifestyle trading style you need to learn.
Honestly, this course is a must for anyone who invests. You will lose more in the market than you will spend this quality education – guaranteed.
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Photo Credit:
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After taking a second job as a driver for Amazon to make ends meet, this former teacher pivoted to be a successful stock trader.
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Check out this interview.
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Whether you can retire, and whether your money will last after you retire, starts with a very simple maxim: spend less than you have. However, once you start actually crunching some numbers, you find that the equation of retirement is actually quite complicated, with many variables that have different consequences. And that’s a good thing, because it gives you options — different levers you can pull to shore up your retirement security.
What are those levers, and which will have the biggest impact on your retirement? As with many things regarding financial planning, the answers depend partially on your unique circumstances. However, in this article we’ll discuss the factors common to most retiree-wannabes, and quantify their results for two hypothetical workers – one 35-year-old and one 50-year-old — using the “Am I saving enough? What can I change?” calculator found on Fool.com. That calculator produces results in terms of the number of months your retirement will be fully funded. As the tool estimates the impact each variable has on our test subjects, we will report the results in terms of additional years of a fully funded retirement, just so you don’t have to divide the results by 12 in your head (not that we don’t trust your math skills — we just think it makes more sense to think in terms of years).
And now, let’s lay out the starting point for each of our guinea pigs, whom we’ll call Fergie and Madonna.
Name
Fergie
Madonna
Current Age
35
50
Income
50,000
75,000
Age at retirement
65
65
Monthly retirement income
$4,167
$4,688
Current value of 401(k)
$50,000
$250,000
Annual savings
$5,000
$7,500
Years retirement is funded
11.4
16.9
Age at which savings is depleted
76.4
81.9
As we go through this exercise, don’t focus too much on their particular numbers or how much those profiles are similar to yours. What we’re investigating is how many years of fully funded retirement are added due to various changes. The magnitude of those effects will be similar regardless of where Fergie, Madonna, or you are starting.
And now, let’s pull some levers.
Strategy 1: Increase savings rate from 10 percent to 15 percent Years added to Fergie’s retirement: 4.8 Years added to Madonna’s retirement: 3.0
Let’s start with the no-brainer: Saving more will boost your retirement security. The younger you are, the bigger the impact. Remember that your savings rate is the combination of your contributions to your investment accounts as well as an employer match, if you get one. So someone who saves 10 percent but also receives a match of 50 cents on the dollar up to a saving rate of 6 percent is actually saving a total of 13 percent.
Strategy 2: Retire later Years added to Fergie’s retirement: 2.8 at age 67, 10.0 at age 70 Years added to Madonna’s retirement: 5.0 at age 67, 8.1 at age 70
Retiring later can be very powerful, for three reasons: additional years of saving, additional years for portfolio to grow, and higher Social Security benefits. Also, while not captured in our analysis, another factor in your retirement security is how long your retirement will last, which is determined by when you’ll retire and when you’ll expire. You can control only one (assuming we don’t want to get macabre here), and the later you retire, the shorter your retirement will be. The benefits of retiring later also apply — though not as large — to working part-time in the first few years of retirement. All that said, a strategy of working a few years later is contingent upon being physically able to keep punching the clock.
Strategy 3: Require less retirement income Years added to Fergie’s retirement: 10.3 Years added to Madonna’s retirement: 6.9
Our original scenario assumed that Madonna could live on 75 percent of her preretirement income, and Fergie would require 100 percent (since she’s not reached the ideally higher income she’ll have right before retirement). If we Strategy 4: Get a lump sum due to downsizing, inheritance or other source Years added to Fergie’s retirement: 1.8 Years added to Madonna’s retirement: 3.2
This is tricky to quantify since the benefit depends on the size of the lump sum and when it’s invested. For our calculations, we assumed each Fergie and Madonna received a $50,000 windfall at age 50. The most likely source of such a chunk of change would be downsizing, which might be a good strategy for those who bought a big house many years ago in order to raise kids who have since left the nest. As for inheritances, they are big question marks since you don’t know what someone else’s estate will be worth or how much of it you’ll inherit. But those who are confident they’ll get something from someone might include a conservative estimate in their calculations.
Many other important factors
While those four are significant variables in your retirement equation that you might be able to control, several other factors will play a part. Here are just a few:
Investment returns: We assumed a 6 percent annual return for our calculations. Whether that turns out too pessimistic (as we hope) or optimistic, time will tell. But had Fergie and Madonna earned 8 percent a year, their retirements would essentially be fully funded. While that sounds oh-so-promising, don’t bet on getting bailed out by markets.
When to take Social Security, and what the program will look like: The decision about when to begin receiving benefits is not simple, especially if you’re married. Choosing the right strategy for your situation can provide higher benefits for the rest of your life. Of course, given the financial challenges facing the program and the country as a whole, it makes sense for younger workers to assume they’ll get three-quarters or less of what they’re currently projected to receive.
Income growth: Our analysis assumed that Fergie’s and Madonna’s income would grow at the rate of inflation, yet for most professionals, income actually grows faster. If our hypothetical workers were real go-getters and earned raises that exceeded inflation by two percentage points, that would fund another one to three years of retirement, due to bigger contributions to investment accounts and higher Social Security benefits.
Calculate, monitor, repeat
As you can see, your retirement has a lot of moving parts — some you can control, many you cannot. The good news is that a few tweaks here and there can have a large collective impact – and the sooner you begin tweaking, the better. No financial tool can predict the future, but some number-crunching can determine if you’re headed in the right direction, and the potential consequences of changing one or a few variables. Once you’ve done the analysis and taken action, monitor regularly — at least once a year. The road to retirement will take many twists and turns, but keeping your hand on the steering wheel and checking the map every once in a while will increase the chances that you’ll get there safe and sound.
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The real estate market is cooling down, observers say.
Reports released this week by several respected market observers point to less good and increased bad and ugly ahead for the housing market.
For some of the good, a U.S. Census Bureau report released late last week spurred a bout of optimism when it revealed that new-home sales jumped by nearly 11% month-over-month in May on a seasonally adjusted basis, after declining by 12% in April.
Moody’s Investors Service, in a housing-market report released this week, puts some ugly back into the home-sales figures for May, however.
“At 696,000 units, May new home sales were around 17% below the recent peak of 839,000 units in December last year,” the Moody’s report notes. “[On June 21], the National Association of Realtors said that existing-home sales declined for the fourth consecutive month.
“Existing-home sales fell in May by 3.4% on a seasonally adjusted basis to 5.41 million, the lowest since June of 2020 and similar to pre-pandemic levels.”
Those figures, along with “sharp recent increases in mortgage rates” and other supporting data, lead Moody’s to conclude that the “U.S. home-price boom is over.” The firm, which rates securitization offerings and provides other capital-market services, predicts “material declines” in both new- and existing-home transactions this year, compared with 2021.
Supporting the ugly outlook for the housing market is the release today, June 29, of the quarterly CFO Survey, conducted jointly by Duke University’s Fuqua School of Business and the Federal Reserve Banks of Richmond and Atlanta. The survey of more than 300 U.S. financial executives conducted between May 25 and June 10, shows optimism about the broader U.S. economy continuing to decline.
The average index score for the current survey was 50.7, compared with 54.8 in the prior quarter and 60.3 two quarters ago.
“Price pressures have increased, real revenue growth has stalled and optimism about the overall economy has fallen sharply,” said John Graham, a Fuqua finance professor and the survey’s academic director. “Monetary tightening [by the Federal Reserve] is one of several factors dampening the economic outlook.”
The CFO Survey’s findings are echoed by a revised first-quarter 2022 gross domestic product (GDP) estimate released Wednesday by the U.S. Department of Commerce’s Bureau of Economic Analysis (BEA). It shows that a drastic economic slowdown is already underway.
“Real gross domestic product [a measure of all goods and services produced in the economy] decreased at an annual rate of 1.6 percent in the first quarter of 2022 …,” the BEA report states. “In the fourth quarter of 2021, real GDP increased 6.9 percent.”
The BEA’s first-quarter GDP estimate, it’s third to date, was revised downward from -1.4% and -1.5% in the two prior estimates. The grim data led Mortgage Capital Trading (MCT), a San Diego-based capital market software and services firm, to broach the “R“ word in its daily market-overview report.
“Concern over a slowing economy and aggressive interest rate hikes from the Fed are beginning to dominate market sentiment,” the MCT report states. “This morning’s GDP release [on June 29] came with a downward revision for the last reading, further supporting views that a recession is either in progress or coming soon.”
What does all this mean for the housing market in the months ahead? The Moody’s report attempts to frame some of the expectations.
“We expect some increases in existing-house prices over the next 18 months, though for appreciation to be well below the general rate of inflation,” the Moody’s report states. “After that, we expect home appreciation to settle in at levels somewhat lower than the rate of overall U.S. inflation.”
The report even indicates that there “is risk that existing home prices will have a minor correction over the next two years, similar to housing markets in many other developed counties facing risks after recent booms.”
The “moderation” in the U.S. housing market is ongoing and the full effects of recent rate increases have yet to be fully realized, the Moody’s report adds, especially with respect to housing prices.
Moody’s predicts that housing demand will “dampen significantly” in the months ahead due to the doubling of rates for 30-year fixed mortgages since the start of the year, which is fueling a huge jump in monthly mortgage costs. Freddie Mac’s most recent Primary Mortgage Market Survey shows the average 30-year fixed rate mortgage at 5.81% as of June 23.
“The monthly costs of new mortgages on existing homes sold at median transaction prices [are] more than 60% higher than a year ago,” the Moody’s report states. “Although higher mortgage rates do not always drive home prices lower, they typically affect sales activity and drive down the rate of price appreciation.
“We also expect higher rates to restrict for-sale supply because current homeowners will be reluctant to lose low-rate fixed borrowing costs.”
So, in effect, moderating or even declining home prices could be neutralized by rising borrowing costs, leading the housing market toward stagnation — the doldrums — in the worst-case scenario.
There is some good news mixed in with all this bad and ugly, however. Moody’s points out that some “fundamental housing strengths” will likely help to mitigate the degree of any market correction, at least over the next 12 to 18 months.
Those strengths include “favorable demographic trends, solid underwriting of outstanding mortgages and lingering housing supply constraints from a period of underbuilding,” according to the Moody’s report. Also on the bright side, according to Moody’s, is that a moderate decline in housing prices could be good for the market longer-term. That’s assuming the Federal Reserve wins the fight to tame inflation, now running at 8.6%, without causing a major spike in unemployment, which was at 3.6% in May for the third month in a row, according to the Bureau of Labor Statistics.
In short, the housing market has reached a fork in the road, based on the Moody’s analysis — with one path leading to the doldrums, or even decline, and the other toward resurgence and a new normal.
“If U.S. home prices were to decline modestly, it would increase affordability for potential homebuyers and improve demand, including for individuals who were priced out of the market in the recent months because of rapidly rising interest rates,” Moody’s reasons in its report. “However, sustained large increases in mortgage rates or a material weakening in the labor market could lead to sharper declines in housing activity and prices.”
