During my family’s Christmas celebration, I learned a little more about my oldest nephews. I don’t see them often, so it’s hard to know what interests them. This year, I learned that six-year-old Alex likes art. You can bet I’ll be encouraging this productive hobby — the only other two things I know he likes are dinosaurs and video games. I was also pleased to learn that his older brother, Michael, likes money.
“I have $86 saved,” Michael told me. “It’s for my trip to Florida.” The two boys were taking a trip over Christmas break to visit their grandmother.
“That’s great,” I said.
“And grandma is going to give us each $100 to spend at Disney World,” Michael added, “but I might save some of it.”
Michael turns nine tomorrow. To encourage smart money behavior, I sent him a book for his birthday. While compiling my guide to personal finance books as gifts, I was intrigued by Growing Money: A Complete Investing Guide for Kids. This book by Gail Karlitz received rave reviews. Kris and I both read it recently, and we think it’s perfect for Michael.
The first thing the book covers is inflation. Many adult books never mention the subject, so it’s refreshing to see a book aimed at grade-schoolers put it front-and-center. “In 1960,” Karlitz writes, “a kid with a quarter cold buy a pizza and a slice of pizza for 15¢ and a soda for 10¢. Today, you’d probably need at least $2 to buy the same meal!” (Or $4 if you live in my neighborhood.)
Growing Money has good chapters on banks and bonds, but most of the book is devoted to the stock market. Karlitz has written a brilliant chapter on how stocks work, using a hypothetical pizza parlor as an example. By keeping the scope small and understandable, she’s better able to convey concepts like equity, dividends, and IPOs. (She doesn’t always use those terms, however.)
The book also contains chapters on the history of the stock market, how investors make money, and how to buy and sell stocks.
The final chapter introduces the “Growing Money investment game”. Using $10,000 of imaginary money, participants buy and sell investments following the rules of real-life investing. The goal is to see how much money each person has at the end of six months. Yes, this is just like any other stock market portfolio game, but it’s aimed at kids. I think it’s an excellent way to introduce children to the stock market. When my Michael finishes the book, I think I’ll challenge him to a duel!
Growing Money offers a solid introduction to saving and investing, but it does have some weak spots. Only one page out of 120 is devoted to mutual funds. Because the book is aimed at children, taxes are barely considered. Still, its strengths outweigh its weaknesses.
Though this book is designed for children, I think most adults could profit from reading it, too. Actually, it’s a great book for parents to read with their kids. Growing Money provides clear, concise explanations of important financial concepts. It’s the sort of book to buy for your nephew, but read yourself before you pass it on.
The government is back in business and mortgage rates are moving a littler lower today. We’re about to get three straight days with important economic reports out, though, which could put some upward pressure on rates. If you’re considering locking in a rate on a purchase or refinance, we think you should take advantage of today’s low rates and act now. Read on for more details.
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Market Outlook 1.22.18 from Total Mortgage on Vimeo.
Where are mortgage rates going?
Rates move lower
President Trump signed a bill yesterday which put temporary funding into effect for the government through February 8th.
Click here to get today’s latest mortgage rates (Jul. 24, 2023).
We saw all of the major U.S. stock indexes bump higher after the news broke around midday, but the decision didn’t have much of an immediate effect on the bond and mortgage markets.
However, today we’re seeing Treasury yields move lower, with the yield on the 10-year Treasury note (the best market indicator of where mortgage rates are going) down about 2.5 basis points.
Mortgage rates typically move in the same direction as the 10-year yield, so we’re looking at some downward pressure on rates today.
Looking ahead to the rest of the week, we have several economic reports out every day that could influence the direction of rates.
The two most notable events, however, are the Durable Goods report and the first estimate for fourth quarter GDP, both scheduled to be released early Friday morning.
If we get some strong readings in those reports, we could definitely see mortgage rates move higher as we head into the weekend.
Rate/Float Recommendation
Lock now while rates are low
Mortgage rates are still at very low levels on a historical perspective. However, current mortgage rates are expected to rise over the long-term, so we do firmly believe that it’s in the best interest for most borrowers to lock in a rate sooner rather than later.
Click here to head to our Mortgage Builder and figure out how much you could save.
Today’s economic data:
Richmond Fed Manufacturing Index
The Richmond Fed Manufacturing Index hit a 14 for January. That’s outside of the lower end of the consensus range.
Fedspeak
Chicago Fed President Charles Evans will speak at 6:30pm.
Get the GreenLight and close in 21 days*
Notable events this week:
Monday:
Chicago Fed National Activity Index
Tuesday:
Richmond Fed Manufacturing Index
Fedspeak
Wednesday:
FHFA House Price Index
PMI Composite Flash
Existing Home Sales
EIA Petroleum Status Report
Thursday:
International Trade in Goods
Jobless Claims
New Home Sales
Kansas City Fed Manufacturing Index
Friday:
Durable Goods Orders
GDP
*Terms and conditions apply.
Carter Wessman
Carter Wessman is originally from the charming town of Norfolk, Massachusetts. When he isn’t busy writing about mortgage related topics, you can find him playing table tennis, or jamming on his bass guitar.
A diagonal spread is an options trading strategy that involves taking a long and short position on the same stock with different strike prices and different expiration dates. It’s a combination of a vertical spread and calendar spread.
Using this strategy can allow the trader to get an early payday if the stock moves in a direction that’s in their favor. The way it works is the trader makes two options trades — either call options or put options simultaneously, with different strike prices and expiration takes.
Diagonal Spreads Defined
Diagonal spreads combine a two-step options trading strategy and are considered an advanced trading tactic. It’s a combination of a calendar spread and a short call or put spread. These positions have different expirations and different strikes which spread off diagonally, hence the name of the strategy.
A calendar spread is when a trader buys a contract with a longer expiration date while going short on an option with a near-term expiration date with the same strike price. But if two different strike prices are used, this is a diagonal spread.
A diagonal spread includes a calendar spread, also referred to as a horizontal spread or a time spread, combined with a vertical spread, because different strike prices are involved.
How Diagonal Spreads Work
A long put diagonal spread involves purchasing a put for some time in the future while selling a put in the short-term. Purchasing an option in the later term tends to be more expensive due to the embedded value of time. On the other hand, the trader sells the nearer term option to lower the cost of the other option. Traders usually use diagonal spreads when they have conviction on a stock’s movement while minimizing the effects of time.
A diagonal bull spread becomes a valuable trade when the price of the stock increases, while a diagonal bear spread increases in value when the stock price decreases.
Diagonal spreads require experience because traders have to account for volatility and have a good sense of timing.
Setting Up a Diagonal Spread
When traders are bullish on a stock, they generally use call options vs. using put options when they’re bearish on a stock.
The most common way to set up a diagonal spread is to buy a back month option that is in the money, which is a futures contract whose delivery dates are further into the future. Then, you sell a front month option with a strike price that is out of the money, which is a contract that has a near-term expiration date.
Setting up a diagonal spread in this manner would constitute a debit spread, though credit spread structures can also be used.
Maximum Loss
When a stock’s price rises, the maximum loss is equal to the premium paid when buying a call. If the stock falls, the maximum loss is the difference between the strike prices plus or minus the option premium paid or received.
Maximum Profit
It can be difficult to anticipate what the maximum gain may be since traders can’t know what the back-month option will be trading at when the front-month option expires as a result of shifting volatility expectations. In a long diagonal spread, the stock price must be near the short strike for a trade to go in the market participant’s favor.
The max profit potential for a short diagonal call spread is the net credit received minus commissions. If the strike price plummets below the short call, the value of the spread will be close to zero and the credit received is profit.
On the other hand, the max profit scenario of a short diagonal put spread is when the stock price soars above the strike price of the sold higher strike put option, as the value of the spread nears zero and the credit received is profit.
Breakeven Point
The breakeven point cannot be calculated, rather it can be estimated. The breakeven price at expiration for a long call is below the strike price of the short call. During expiration of a long call, the breakeven point is the stock price at which the price of the short call is the net credit received for the spread.
Traders are not able to predict what the breakeven stock price will be because it depends on market volatility, which can impact the price of the short call.
Diagonal Spread Examples
In one example, a trader is bullish on ABC stock, currently priced at $300. If the front month is January and the back month is February, the trader may want to purchase a $298 strike call with February expiry, which is in the money. Then the trader sells a $302 strike call with January expiry, which would be out of the money. This would give the trader a four-dollar wide diagonal spread.
In another scenario, a trader is bearish on XYZ stock at a current market price of $129. To set up a diagonal spread, the trader could buy a $132 February put, which would be several dollars in the money. Next, the trader could sell a $126 January put, which would be a few dollars out of the money. This trade would be a six-dollar wide diagonal spread.
Types of Diagonal Spreads
There are different types of diagonal spread strategies traders can use to get their desired outcome. Here are several diagonal spreads traders can try:
1. Long Call Diagonal Spreads
To execute on a long call diagonal spread, traders must buy an in the money call option with a longer term expiration date and then sell an out of the money call option with a nearer term expiration date. Traders can use this advanced options strategy if they are mildly bullish on a stock in the near term and very bullish in the longer term. An ideal set up for a long call diagonal spread is during times of low volatility as you do not want your trade to be disrupted by sharp price swings.
2. Long Put Diagonal Spreads
To execute on a long put diagonal spread, traders must buy an in the money put option with a longer term expiration date and then sell an out of the money put option with a nearer term expiration date that has an out the money strike. Traders typically use long put diagonal spreads to mimic a covered put position.
3. Short Call Diagonal Spreads
A short call diagonal spread is when traders sell a long-term call with a lower strike price and buy a shorter-term call with a higher strike price. A trader benefits from a short call option when the price of the underlying asset falls, thus making this a bearish strategy.
4. Short Put Diagonal Spreads
A short put diagonal spread involves selling a longer-term put with a higher strike price and buying a shorter-term put with a lower strike price. This is a bullish strategy, as the trader benefits if the underlying asset goes up in price, making both options expire worthless and netting the investor the net credit earned at the beginning of the trade.
5. Double Diagonal Spread
A double diagonal spread is when a trader buys a longer-term straddle and sells a shorter-term strangle, a trade that benefits from time decay and an increase in volatility. Traders setting up a double diagonal are long the middle strike calls and puts, which expire further in the future, and short out of the money call and put options with sooner expiries. The ideal outcome for double diagonals is to stay between the two OTM strike prices as they approach expiration.
Risks of Diagonal Spreads
The biggest risk traders have in diagonal spreads is overpaying for the diagonal spread. That said, the maximum risk is the debt a trader incurred to enter the position. If traders pay too much for their diagonal spreads they can remain unprofitable.
Market volatility can be used to the trader’s advantage when using diagonal spreads, although it can also pose a risk to such trades. Depending on the level of volatility, it can substantially change the price of the option and impact the trader’s profit potential. Diagonal spreads are an advanced trading strategy so traders who are experienced in dealing with volatility are best suited to incorporating diagonal spreads in their investment strategy.
The Takeaway
Setting up a diagonal spread correctly is an important part of the profit potential of the strategy, otherwise traders are at risk of losing money. This advanced options trading strategy requires traders to make both long and short trades, either with calls or puts, that have different expiration dates and strike prices. Traders should know these option trades are lined up diagonally from one another.
Qualified investors who are ready to try their hand at options trading, despite the risks involved, might consider checking out SoFi’s options trading platform. The platform’s user-friendly design allows investors to trade through the mobile app or web platform, and get important metrics like breakeven percentage, maximum profit/loss, and more with the click of a button.
Plus, SoFi offers educational resources — including a step-by-step in-app guide — to help you learn more about options trading. Trading options involves high-risk strategies, and should be undertaken by experienced investors.
With SoFi, user-friendly options trading is finally here.
Photo credit: iStock/percds
SoFi Invest® The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results. Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below. 1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes. SOIN1121485
For many people, a financial advisor is a key ally in helping you reach your financial goals. While most savvy people under 30 should be able to handle their finances on their own, many opt to hire a financial advisor to get access to personalized advice from a financial expert.
If you live in San Francisco and want help from a local financial advisor, you’ve come to the right place. The best financial advisors in San Francisco are standing by to help you create a financial plan, choose the best investment portfolio, and put you on track to reach your most important financial priorities. Keep reading for a list of the best financial advisors in San Francisco.
What’s Ahead:
Overview of the best financial advisors in San Francisco
Typical fees: The fee is quoted as an annual percentage fee, and is billed quarterly by taking the value of your assets at the end of each calendar quarter and applying one-fourth of that annual percentage fee.
Bingham Osborn & Scarborough Wealth Management, better known as BOS, is an investment and financial advising company for individuals with at least $3 million in investable assets.
The fee-only firm advises clients with a holistic approach that looks at all aspects of the client’s finances. BOS works to build long-term investment portfolios using a data-driven approach that incorporates taxes and other factors.
Burgess Financial Planning
Contact: 415-525-1041 or [email protected].
Services offered: Financial planning and investing advice.
Assets required: $3 million in investable assets.
Typical fees: $480 fee for an initial planning meeting.
A smaller shop, Burgess Financial Planning is a boutique firm with just one planner. Sean Burgess is a CFP and Registered Investment Advisor. He is a fiduciary (that means he always puts your best interests first) and doesn’t have any minimum required level of assets to get started.
Burgess charges a $480 fee for an initial planning meeting. If you decide to work with Burgess Financial Planning long-term, investment fees are charged based on assets under management. This firm earns an impressive 4.5-star rating with 35 reviews on Yelp.
Founded in 2014, Citrine Capital is a fee-only wealth management firm with a focus on the Bay Area’s high-tech community. Entrepreneurs, business owners, and startup employees will likely feel at home with this firm.
Citrine Capital works to organize client finances in a way that helps them reach financial goals, mitigate taxes, and manage wealth for long-term needs. Fees start at $7,000 per year for clients with a net worth below $1 million.
Typical fees: $290.00 per hour for financial planning.
Located across the Golden Gate Bridge in Corte Madera, Financial Connections offers financial management, investment management, and other services to Bay Area clients. The fee-only firm doesn’t take any commissions or compensation from large investment fund providers.
The firm’s team acts as fiduciaries project-based financial planning. For those with long-term and unique needs, you can sign up for a concierge service to plan for specific needs. Its investment management product comes with either customized portfolios or robo advisor-style modeled portfolios.
Typical fees: $300,000 to $400,000 annual minimum fee.
Founded by Kathryn Hall in 1994, Hall Capital Partners is a large financial planning firm with more than $30 billion in client assets under management. It exclusively works with high-net-worth clients, many of whom hold eight-figure and nine-figure portfolios.
If you have that kind of wealth, the $300,000 to $400,000 annual minimum fee isn’t a huge deal. But for most of us peons with merely tens or hundreds of thousands, or even assets in the low millions, Hall Capital Partners probably isn’t going to work for you. If you just made it big time from your company’s IPO, however, it could be worth giving Hall Capital Partners a call.
Morling Financial Advisors is an investment manager and financial planner founded in 1999. Suitable to high-tech Silicon Valley, Morling Financial Advisors has its own app for clients to log in and view their account details.
Financial planning services start at $300 per month. Investment management services start at 1% for those with under $1 million in assets and go down to 0.60% for those with $10 million and up.
Paragon Financial Planning
Contact: 510-227-5354 or [email protected] or [email protected].
If you are in Oakland or Alameda, the office of Paragon Financial Planning may be convenient for you. Paragon Financial Planning is a small office led by Samantha N. Dinh, a Certified Financial Planner.
She’s doing something right, as Paragon Financial Planning earns perfect five-star ratings after 34 reviews on Yelp. Dinh offers financial planning, investment management, and insurance services through her company.
Summary of the best financial advisors in San Francisco
Those looking for no minimums and an affordable advisor
How I came up with this list
This list of the best financial advisors in San Francisco is based on several sources.
They are fee-only planners
Financial advisors on this list don’t earn from shady commission deals. They are all fee-only planners where you know what you will pay upfront and can rest easy that there are no major financial conflicts of interest.
They are fiduciaries
Fiduciaries are legally required to put your interests first. It’s a good idea to only work with a financial or legal expert who acts in a fiduciary capacity.
They earn good customer reviews
Before adding a financial advisor, I checked out reviews on multiple sites including Google and Yelp, and public lists of awards given to San Francisco financial advisors.
They work with a wide range of clients
Top advisors from this list may be a good fit for people from all financial backgrounds, whether they have $1,000 to invest or $100,000,000. While every financial advisor on this list isn’t the right fit for every reader, there should be an advisor that meets the needs of most people looking to get started with a financial advisor.
Remember that not all people need a financial advisor. Resources like those available here at Money Under 30 could give you all you need to make good financial decisions without the added cost of a finance professional. Ultimately, it’s up to you and your comfort level with your finances to decide if you would benefit from the services of a San Francisco financial advisor.
What questions should you ask a financial advisor?
How can you help me with my finances?
A financial advisor is a licensed financial professional with the expertise to help you manage various parts of your finances. That can include creating a financial plan, managing your investments, or a fully hands-on advising experience where they handle most of your day-to-day finances. Some focus on taxes, some focus on specific types of business owners or employees, some work with anyone.
There are many types of financial advisors. The one thing they all have in common is a business built around helping you manage your money.
Why should I hire you instead of doing it myself?
A financial advisor is best for someone who isn’t confident that they are making the right financial decisions. Most people don’t get much financial education at school, if any. That means unless their parents taught them about money, they could be just making best guesses around major financial decisions like saving for retirement or buying a home.
If you want help creating a financial plan or having your plan double-checked by a professional, a financial advisor could be right for you.
Are you a fiduciary?
A fiduciary is a type of financial advisor that is obligated to put your interests first. That means they are not allowed to put your money into a fund that isn’t aligned with your long-term goals and needs.
Ideally, you should only ever work with a financial professional that acts in a fiduciary capacity.
What services do you offer?
Financial advisors can offer a range of services. Here are some of the most popular services you can find from a financial advisor.
Financial planning – Reviewing where your money is today and how it influences your future is important. With financial planning services, advisors help you chart out the right savings and investments to reach your goals.
Investments –If you don’t know the difference between a stock, bond, and ETF, this service could be very valuable to you. Some financial advisors help you set up your portfolio to manage yourself. Others will manage it for you long-term.
Taxes – Financial advisors may be able to help with tax planning and tax savings strategies. Not all advisors offer tax services, but it’s an extra perk and could allow you to manage all of your money needs in one place.
Consulting –As well-versed financial pros, some advisors also offer business consulting services with a focus on financial management.
What are the costs of hiring a financial advisor?
If you are hiring a financial advisor, it’s important to ask them how they get paid. That’s because financial advisors can charge fees in different ways. They could also make money in ways that give them an incentive to suggest investments that are not in your best interest.
Fee-only financial advisors are only paid by client fees. This is the best type of financial advisor to choose. I would argue that it’s the only financial advisor relationship that works toward the client’s best interests.
Fee-only advisors may charge monthly or annual fees, hourly fees, or fees based on the size of your portfolio. Rates and services can vary, so it could make sense to shop around before choosing a financial advisor.
Some financial advisors are paid commissions by insurance companies and investment firms for selling their products. This is a major conflict of interest. Under this scenario, advisors may be paid to funnel your money into mutual funds or other financial products that are not in your best interest.
Summary
San Francisco and the Bay Area are home to some of the most successful companies in the world. But it’s also one of the most expensive places to live. A financial advisor can help you make the most of your money and keep it working to help you reach your financial goals.
By choosing a fiduciary financial advisor that works as a fee-only advisor, you should be in good hands. This list of the best financial advisors in San Francisco is a great place to get started.
In December 2021, when the 30-year fixed mortgage rate still averaged 3.1%, a borrower could get $700,000 mortgage that required monthly payments of principal and interest of just $2,989.
Fast-forward to Wednesday, and a $700,000 mortgage taken out at the current average mortgage rate of 6.90% would equal a $4,610 per month payment, which is $583,000 more over 30 years than that mortgage issued at a 3.1% rate. When adding on insurance and taxes, that monthly payment could easily top $6,000. Not to mention, that calculation doesn’t account for the fact that U.S. home prices in June 2022 were 12% above December 2021 levels and 39% above June 2020 levels.
Mortgage planners like John Downs, a senior vice president at Vellum Mortgage, have the hard job of breaking this new reality to would-be homebuyers. However, unlike last year, Downs says most 2023 buyers aren’t surprised. The sticker shock, the loan officer says, is wearing off.
Just before speaking with Fortune, Downs wrapped up a call with a middle-class couple in the Washington D.C. area, who told him they were expecting a mortgage payment of around $7,000.
“The call I just had was a typical area household. One person makes $150,000, the other makes $120,000. So $270,000 total and they said a payment goal of $7,000. I’m still not used to hearing people say that out loud,” Downs says.
Even before these borrowers speak to Downs—who operates in the greater Baltimore and Washington D.C. markets—they’ve already concluded that these high mortgage payments will be “short-lived,” and they’ll simply refinance to a lower payment once mortgage rates, presumably, come down.
To better understand how homebuyers are reacting to deteriorated housing affordability (and scare inventory levels), Fortune interviewed Downs.
This conversation has been edited and condensed for clarity.
Fortune: Over the past year, mortgage rates have spiked from 3% to over 6%. How are buyers in your market reacting to those increased borrowing costs?
John Downs: I must say, the reaction today is quite different from last year. It’s almost as if we have lived through the “7 stages of grief.” We appear to have entered the “acceptance and hope” phase.
With all the reports pointing to home prices stabilizing, one might think that buyers are comfortable with these rates and corresponding mortgage payments. The reality is quite different. Many would-be homebuyers have been pushed out of the market due to affordability challenges through loan qualifications or personal budget restraints. Move-up buyers also find themselves in the same predicament.
As a result, my market (Baltimore-DC Metro Region) has 73% fewer available homes for sale than pre-pandemic, 57% fewer weekly contracts, and an 8% increase in properties being relisted. (Information per Altos Research) As a result, prices have remained relatively stable due to the balance of buyers outweighing sellers.
I’m seeing buyers today taking the payments in stride for various reasons. Their incomes have risen dramatically, upwards of 25-30% since 2020, and the income tax savings through the mortgage interest deduction is now a meaningful budget item to consider. Many also say, “I can always refinance when rates come down in the future,” which leads to a sense that this high payment will be short-lived.
When I say buyers are comfortable with these payments, I know there are also two to three times more buyers who run payments using online calculators who opt out of having conversations in the first place! To prove this, our pre-approval credit pulls (a measure of top-of-funnel buyer activity) are running about 50% lower than pre-pandemic.
Among the borrowers you’re working with, how high are monthly payments getting? And how do they react when you give them the number?
For the better part of the last decade, most of my clients would enter a pre-approval conversation with a mortgage payment limit of no more than $3,000 for a condo and $4,500 for single-family homes. It was rare to see numbers higher than that, even for my higher-income wage earners. Today, those numbers are $4,000 to $6,500 respectively.
To my earlier comment, active buyers today seem to expect it. It’s as if they are comfortable with this new normal. Surprisingly, the debt-to-income ratios of today (in my market) are very similar to where they were five years ago. Income is ultimately the great equalizer. Yes, the payments are dramatically higher today, but the buyers’ residual income (post-tax income minus debt) is still in a healthy range due to local wages.
Remember, we are still talking about a much smaller pool of buyers in the market today so this conversation is skewed towards those with more fortunate lifestyles.
Tell us a little bit more about what you saw in the second half of 2022 in your local housing market, and how that compares to the first half of 2023?
There are dramatic differences between those two periods. In the second half of 2022, there was nothing but fear. The stock market was under stress, inflation was running wild, and housing began to stall. Across the country, inventory began to rise, days-on-market pushed dramatically higher, and price decreases were rampant. The safest bet then was to do nothing, and that’s just what buyers did. The mindset was, “I will wait until prices fall and rates push lower before I buy.”
The start of 2023 sparked a reversal in many asset classes. The stock market found a footing and pushed higher, mortgage rates rebalanced, property sellers adjusted their prices, and employers began pushing out significant wage increases. As a result, housing stabilized, and in some areas, aggressive contracts with multiple offers, price escalations, and contingency waivers became the norm.
The strength in housing was not as universal as it was in 2021. There were very hot and cold segments, depending on location and price point. The affordable sector (<$750,000 in my market) and higher-end (>$1.25 million) seemed to perform very well with heightened competition. The mid-range segment is where we noticed some struggles. One common theme is that buyers at every price point seem much more sensitive to the property’s condition. When the housing payments are this elevated, it doesn’t take much for the buyers to walk away!
What do you make of the so-called “lock-in effect”— the idea that existing market churn will be constrained as folks refuse to give up those 2-handle and 3-handle mortgage rates?
I believe the “lock-in effect” is very real. My opinion is based on countless conversations I’ve had in the past 6-9 months with homeowners who want to move but can’t. Some cannot afford to buy their current home at today’s value and rate structure. Others just cannot stomach the significant jump in payment to justify the increase in home size or the preferred location.
I believe the reason we are seeing struggles in the mid-range home is that the traditional move-up buyer is stuck. In my market, that would be the person who sells the $700,000 home to purchase at $1 million. They currently have a PITI housing payment of $2,750; the new payment would be $6,000 rolling their equity as a down payment. That jump is too much for most, especially those with a median income. That payment would have been $4,500 a couple of years ago, which was much more manageable.
Based on what you’re seeing now, do you have any predictions on what the second half of 2023 might look like? And any thoughts on the spring of 2024?
Despite high rates, the desire to buy a home is still high for many. Given the lag effects of Fed tightening (raising interest rates) coupled with an overall improvement in inflation, one can assume mortgage rates have topped out and will continue to improve from here. Think of playing with a yo-yo on a down escalator, up-and-down movement but generally pushing lower. As rates improve, affordability and confidence will shift, bringing out more buyers and sellers.
I believe this will be supportive for home values and give buyers more choice as inventory increases. Keep in mind, most sellers become buyers, so the net impact on inventory will be negligible. Knowing that some sellers will keep their current home as a rental, one could argue that inventory will worsen. At least buyers will have more house options each week, a stark difference from today.
When discussing strength in housing, thinking through local dynamics is crucial. The DC Metro area has a diverse, stable job market which I do not see reversing if an economic slowdown occurs. We didn’t have a tremendous push towards short-term rentals as many other areas and the “work-from-home” (WFH) environment had most people stay within commuting distance to the cities.
One thing I expect is an unwinding of WFH in 2024. In fact, I’m already experiencing that. Many clients are being called back to the office, either through employer demands or fear they will be exposed to corporate downsizing efforts. As a result, I expect underperforming assets (D.C. condos and single-family rentals in transitional areas of the city) to catch a bid while single-family rentals in the commuting neighborhoods plateau from their record-setting appreciation over the past few years.
Housing market affordability (or better put the lack thereof) is at levels unseen since the peak of the housing bubble. Do you have any advice on how would-be buyers can ease that burden?
This may be the most complex question because everyone is at a different place in life. For the better part of the last 20 years, my consultation calls were 20 to 30 minutes long, and we could formulate a great plan. Today, that pushes over an hour and usually requires a detailed follow-up call. If I had to sum up all my conversations, I would say it comes down to forecasting life and patience.
Forecasting is a process where you map out life over the next two to three years—discussing job stability, income projections, saving and investment patterns, debts rolling off (or being added), kids, schools, tuition, etc. From there, talking about local market dynamics such as housing supply, population growth, and interest rate cycles and projections. This helps formulate a solid budget to use for a home purchase.
Patience can mean several things. For some, it means renting for a period of time to save more money or ride out periods of uncertainty. For others, it could be looking for the right sale price mix and seller concessions for rate buy-downs, closing costs, etc. Sometimes it means being patient with your desired location. Maybe you just can’t have that specific house in that specific area for a few years and settling for the next best location is good enough for now. Housing used to be a stepping stone for many but the low-rate environment of the past few years allowed everyone to get what they wanted right away. We seem to have lost the art of having patience in life.
This story was originally featured on Fortune.com
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Angelo Robert Mozilo, the founder of Countrywide Financial, died from natural causes this weekend, his family announced. He was 84 years old.
Mozilo was a pioneer of the mortgage industry, though a deeply controversial figure.
“Independent of how people outside of the industry may perceive this man, insiders know what an incredible force he was,” his son Eric Mozilo wrote in a LinkedIn post. “Over his span of 50 years, he dedicated his life to delivering the American dream of homeownership to millions. He absolutely insisted on ensuring that minorities were represented, first and foremost. No company, not even up until today, has even come close to the size and dominance of Countrywide. Most of today’s mortgage industry leadership, whether it be an employee, an executive, or even a business affiliate, have had a connection or roots with Angelo and Countrywide. Lastly, he was the best Dad a son could ever ask for.”
Originally from New York City and the son of a Bronx butcher, the brash and charismatic Mozilo founded Countrywide in 1969 with his former mentor David Loeb after receiving a Bachelor of Science degree from Fordham University. For most of its history, Countrywide was known for originating low-risk loans. Mozilo was president of the Mortgage Bankers Association (MBA) in 1991-1992.
He gained full control of the company in 2000, after Loeb’s retirement, and put it in growth mode, becoming the largest mortgage provider in America by 2004, surpassing Wells Fargo and Washington Mutual. In 2006, Countrywide made roughly $10 billion in new loans each work week. The company said its five-year total return at the end of 2006 was 340%, close to 10 times higher than that of the S&P 500.
Mozilo avoided working with subprime loans until the late 1990s, when after noticing that his firm was losing business to competitors, Countywide embraced the type of subprime mortgage lending that eventually led to the housing crisis in 2008. And they did it at a massive scale.
Though he publicly defended the company’s lending practices and said he was championing minority homeownership, Mozilo knew about the poor underwriting standards, according to documents disclosed during government settlements.
“On Sunday I met a mortgage broker from a town near Troy, Michigan who told me that he does all of his business with Countrywide. First I was pleased with the news until he told me why. He said that the area he serves is severely economically depressed and the only way he can qualify his borrowers is the via the pay option ARM,” he wrote to a colleague at Countrywide in 2005. “I have heard this story many times over from mortgage brokers who utilize the pay option for very marginal borrowers for the sole purpose of creating volumes and commissions. We simply cannot and will not allow our company to be victimized by this pervasive behavior and since we can’t control the behavior of others it is essential that we control our own actions.”
When home prices started to fall in 2006 and investors abandoned the mortgage-backed securities (MBS) market in 2007, Countywide began running out of money. With Countrywide needing short-term funding and investigations into its mortgage lending business already swirling, Mozilo sold his company to Bank of America for $4 billion. The bank would ultimately lose about $50 billion on the investment.
Mozilo was charged with insider trading and securities fraud by the U.S. Securities and Exchange Commission (SEC) in 2009, tied to stock sales. According to the New York Times, Mozilo sold $406 million since Countrywide was listed on the New York Stock Exchange in 1984, $129 million realized in the 12 months ending August 2007.
Mozilo settled with the SEC in October 2010 for $67.5 million in fines and accepted a lifetime ban from serving as an officer or director of any public company.
Mozilo became the “face of the financial crisis,” the New Yorker reported.
Mozilo and his wife Phyllis were the founders of The Mozilo Family Foundation, providing scholarships for youth. Phyllis died in 2017. In 2019, Mozilo stepped down from the board’s chairmanship and was engaged in consulting initiatives.
Rob Chrisman first reported the news of his death on Monday.
In 2019, speaking at a hedge fund conference in Las Vegas, Mozilo said he didn’t care that he was still held responsible for the financial crisis.
“A lot of years went by, my wife passed away, I turned 80 years old, and now I don’t care,” Mozilo said, according to a New York Post report. “There’s other things more important in life. Somehow, for some unknown reason, I got blamed for it.”
With over 50 countries to choose from, Africa offers a diverse array of mouthwatering and unique dishes that are sure to tantalize you. But African street food is more than just delicious—it’s a reflection of the continent’s rich history and diverse cultural influences. These flavorful dishes have been influenced by African, Latin American, European, and Asian culinary traditions. Sampling street food is one of the best and most authentic ways to experience the culture and people of a country. And the best part? It’s usually affordable, with street food like Senegal’s Accara costing less than a dollar!
1. Suya
Suya is a mouthwatering Nigerian dish is thought to have originated among the Hausa people. Thin slices of juicy beef or chicken are seasoned, then grilled over open charcoal grills. But the dry spice blend is what makes it so unique. Known as suya or yaji, this blend is a combination of ground peanuts and red peppers that adds a smoky, nutty flavor to the meat. Depending on the region, additional ingredients can be incorporated, giving each suya its own distinct flavor profile. In Nigeria, you’ll find suya skewers sold individually, making it the perfect on-the-go snack that’s quick, cheap, and nutritious. For those who prefer to sit down and enjoy their meal, suya is often served in restaurants with sliced onions and tomatoes as a refreshing and flavorful accompaniment.
2. Attieke
Attiéké is made from fermented and ground cassava roots that are transformed into fluffy, flavorful couscous. And it’s not just for dinner—Attiéké is a versatile dish that can be enjoyed for breakfast, lunch, and dinner. Attiéké is usually served with a colorful medley of sliced onions and juicy tomatoes, as well as succulent grilled chicken or crispy fried fish for added protein. The aroma of Attiéké wafts through local markets across Ivory Coast, where you can buy it in individual portions or large bags to take home. So, whether you’re looking for a hearty meal or a tasty snack, Attiéké is the perfect choice to satisfy your cravings and transport you to the vibrant streets of Ivory Coast.
3. Brik
Brik is a delicacy popular North African that’s famous for its crispy, flaky exterior and delicious savory fillings. Traditionally, brik is made using malsouqa dough, but these days, most people opt for the more readily available phyllo pastry. The pastry is carefully laminated to create a crunchy, layered texture that perfectly complements the savory stuffing inside. Brik can be filled with a variety of ingredients, but the most popular is a tuna-based mix that’s spiced up with traditional North African flavors like cilantro, chilis, pepper, and coriander seeds. To take things up a notch, a raw egg is often placed on top of the tuna filling before the pastry is expertly folded and either fried in deep oil or baked in an oven. As the brik cooks, the egg partially cooks inside the flaky pastry, creating a rich, delicious flavor.
4. Kushari
This tasty blend of rice, pasta, and lentils has rich, complex flavors and a satisfying texture. The name Kushari comes from the Hindu word khichri, a traditional dish made with rice and lentils, but this hearty meal has become a true icon of Egyptian cuisine. One of the best ways to experience Kushari is from a street vendor, where it’s served fresh on big, shiny metal platters. The dish typically features small yellow lentils and rice that are slowly simmered in a rich, flavorful stock, with crunchy fried vermicelli and buttery browned onions.
5. Kebda Eskandarani
This dish features succulent beef liver fried to perfection and seasoned with a fiery blend of cumin, garlic, cardamom, and chili peppers. One of the best things about Kebda Eskandarani is its versatility. You can enjoy it in a hearty sandwich with a creamy tahini dip, or on its own with a side of warm rice, zesty lime wedges, or fluffy pita bread. If you’re ever in Alexandria, be sure to seek out one of the many street food carts or fast food shops serving up this delectable dish.
6. Nyama Choma
Get ready to tantalize your taste buds with Kenya’s unofficial national dish—Nyama Choma! It’s a mouth-watering barbecued meat delicacy, which translates to “grilled meat”. Served up and down the country, Nyama Choma is typically made using succulent goat or beef that’s been slow-roasted to perfection. To complete the meal, locals often pair it with some local beer and sides like the staple Ugali.
7. Shawarma
Shawarma is a Middle Eastern dish that has become popular all around the world. It typically consists of marinated meat (chicken, lamb, or beef) that is stacked on a spit and slowly roasted to juicy perfection. The meat is then thinly sliced and wrapped in a soft pita bread with vegetables such as tomatoes, lettuce, onions, and sauces like hummus, tahini, or garlic sauce. Shawarma is a delicious and convenient meal that you can enjoy on the go or sit down to savor every bite.
8. Hawawshi
Imagine a traditional baladi bread stuffed to the brim with a scrumptious mix of minced meat, veggies, and aromatic spices. The meaty filling is generously seasoned, and when it’s baked inside the bread dough, it creates a taste sensation that’ll have you drooling. You’ll know it’s ready when the bread achieves a crispy, golden texture that’s both light and satisfying. And to make this treat even better, it’s usually served alongside fresh veggies, salads, and mouthwatering dips.
9. Mahjouba
These savory, flaky flatbreads are a true delight for your taste buds. Made with semolina, these thick crepe-like bread are then filled with a heavenly mix of sweet caramelized onions and tangy tomatoes, creating a perfect balance of flavors. And if you want to spice things up, you can add some Harissa sauce on the side for an extra kick. This Algerian delicacy is a must-try for anyone who loves hearty and delicious food. So, whether you’re strolling through the bustling streets of Algiers or trying it at home, you’re sure to enjoy every bite of Mahjouba!
10. Forodhani and Dafu
One of the most beloved street foods in Zanzibar is the Forodhani, lovingly nicknamed the ‘Zanzibar pizza’. Imagine a mouthwatering mixture of veggies, egg, and mayo (plus meat if you prefer) all wrapped up in thin dough and fried to crispy perfection. You can find it at night market stalls throughout Stone Town. If you’re looking for a refreshing snack, try a young coconut, known locally as Dafu. Not only are they delicious, but they also boast numerous health benefits, like curing sunstroke and fighting dehydration. Keep an eye out for the ubiquitous salesmen peddling these tropical treats on their bicycles all over the island.
11. Accara
One of the most popular snacks in Senegal is Accara, a crispy black-eyed bean fritter that will make your mouth water. This mouthwatering dish is typically served with a tangy tomato-and-onion-based hot sauce called kaani, which perfectly complements the crispy texture of the fritter. If you’re a foodie, you may recognize the similarities between Accara and the Brazilian acarajé fritter. Both dishes feature the same crispy fritter base, but Senegalese Accara has its own unique twist. It’s often served on a crusty baguette with an oniony sauce that adds an extra layer of flavor to this already delicious snack.
12. Akara
Akara, a beloved Nigerian snack, consists of deep-fried bean cakes made from finely ground beans mixed with onions, peppers, and an array of spices. These protein-rich delights are renowned for their lightness and nutritional value. They pair perfectly with Agege bread, famous for its soft, fluffy texture, and ability to complement a variety of dishes, including stews. The traditional method of making Akara involves blending peeled brown beans with spices and onions, then deep-frying the mixture in vegetable or canola oil.
From suya in Nigeria to Attiéké in Ivory Coast, we’ve covered a range of delicious and unique dishes. African street food is not only mouthwatering but also a reflection of the continent’s rich cultural history and culinary traditions. So, if you’re looking to explore new flavors and cultures, be sure to add African street food to your culinary bucket list.
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“Saving is the key to wealth,” I wrote last week while trumpeting the extraordinary power of compound interest. “If you do not spend less than you earn, and if you do not save the difference, you cannot build the wealth you desire.” The younger you are when you begin saving, the more time compounding has to work in your favor, and the wealthier you can become. “The next best thing to starting early,” I wrote, “is starting now.”
Other Options
A few readers noted that while the mathematics of compounding make sense, it’s not motivational for those too old to take advantage of its full force. “This is pretty depressing for those of us who spent our 20s with practically no income thanks to universities,” wrote one commenter. Her sentiments were echoed by several others.
It’s important to note that saving is not the only smart thing you can do with your money. Your education is an investment, too. Yes, you should begin to save as soon as possible, but there are other good options, too.
My friend Joel is in medical school. I haven’t talked to him about his personal finances, but I doubt he has much saved right now. He lives a frugal lifestyle, but that’s out of necessity. He doesn’t have an income that allows him to splurge or to save. But Joel is obtaining an education that will pay dividends in the future. He’ll leave school with huge debt, but he’ll also have tremendous earning power. And he loves his work.
There are times when it makes sense not to save. Save when you can, but don’t sacrifice your happiness or your future to fully fund your Roth IRA.
Past, Present, Future
What if you didn’t start saving when you were young? What if you could have saved, but opted not to? What if, like me, you find yourself approaching 40 with the bare minimum of retirement savings. What should you do?
First, don’t beat yourself up over the past. There’s no sense fretting over choices you made when you didn’t know better. Do I wish that I’d saved for retirement instead of buying comic books and computer games? Absolutely. But what’s done is done.
Instead, structure your present so that it matches your priorities. If you’ve decided that saving is important, that you want to put your money to work in the stock market, then make moves in that direction. Open a Roth IRA. Set aside $50 or $100 or $200 a month.
If you look at your current situation and still don’t think you can save for retirement, that’s fine. Sometimes other things take priority. When you’re choosing between funding a Roth IRA and attending university, both are excellent options. (I would prefer the education.) But when you’re choosing between a Roth IRA and a new car, I believe saving for retirement is almost always the right choice. Be conscious of the trade-offs you’re making. You can’t have everything.
Finally, set goals for the future. The road to wealth is paved with goals — they are the fundamental building blocks of success. When you know what it is you’re trying to achieve, you can steer your life (and your finances) in that direction.
For example, I want to write from home. I’ve spent the past year arranging my life to make this possible. My future financial plans also reflect this. (That’s one reason we’re accelerating our mortgage payments; if I wasn’t self-employed and working from home, this might not be a priority.)
Happiness is More Than Money
If you didn’t start saving when you were young, don’t panic. Examine your priorities. Set goals. Structure your finances to reflect what it is you hope to get out of life. Saving is important — and you should begin as soon as possible — but it’s not the only component of personal finance.
Last year, Scott Adams (of Dilbert fame) wrote about his Happiness Formula:
Happiness = Health + Money + Social Life + Meaning
Whenever I feel bad about my financial situation, I remind myself that money isn’t everything. It’s only one part of the Big Picture. I’m actively working to improve my relationship with money, and that’s what matters.
There is no one right answer. Do what works for you.
In December 2021, when the 30-year fixed mortgage rate still averaged 3.1%, a borrower could get $700,000 mortgage that required monthly payments of principal and interest of just $2,989.
Fast-forward to Wednesday, and a $700,000 mortgage taken out at the current average mortgage rate of 6.90% would equal a $4,610 per month payment, which is $583,000 more over 30 years than that mortgage issued at a 3.1% rate. When adding on insurance and taxes, that monthly payment could easily top $6,000. Not to mention, that calculation doesn’t account for the fact that U.S. home prices in June 2022 were 12% above December 2021 levels and 39% above June 2020 levels.
Mortgage planners like John Downs, a senior vice president at Vellum Mortgage, have the hard job of breaking this new reality to would-be homebuyers. However, unlike last year, Downs says most 2023 buyers aren’t surprised. The sticker shock, the loan officer says, is wearing off.
Just before speaking with Fortune, Downs wrapped up a call with a middle-class couple in the Washington D.C. area, who told him they were expecting a mortgage payment of around $7,000.
“The call I just had was a typical area household. One person makes $150,000, the other makes $120,000. So $270,000 total and they said a payment goal of $7,000. I’m still not used to hearing people say that out loud,” Downs says.
Even before these borrowers speak to Downs—who operates in the greater Baltimore and Washington D.C. markets—they’ve already concluded that these high mortgage payments will be “short-lived,” and they’ll simply refinance to a lower payment once mortgage rates, presumably, come down.
To better understand how homebuyers are reacting to deteriorated housing affordability (and scare inventory levels), Fortune interviewed Downs.
This conversation has been edited and condensed for clarity.
Fortune: Over the past year, mortgage rates have spiked from 3% to over 6%. How are buyers in your market reacting to those increased borrowing costs?
John Downs: I must say, the reaction today is quite different from last year. It’s almost as if we have lived through the “7 stages of grief.” We appear to have entered the “acceptance and hope” phase.
With all the reports pointing to home prices stabilizing, one might think that buyers are comfortable with these rates and corresponding mortgage payments. The reality is quite different. Many would-be homebuyers have been pushed out of the market due to affordability challenges through loan qualifications or personal budget restraints. Move-up buyers also find themselves in the same predicament.
As a result, my market (Baltimore-DC Metro Region) has 73% fewer available homes for sale than pre-pandemic, 57% fewer weekly contracts, and an 8% increase in properties being relisted. (Information per Altos Research) As a result, prices have remained relatively stable due to the balance of buyers outweighing sellers.
I’m seeing buyers today taking the payments in stride for various reasons. Their incomes have risen dramatically, upwards of 25-30% since 2020, and the income tax savings through the mortgage interest deduction is now a meaningful budget item to consider. Many also say, “I can always refinance when rates come down in the future,” which leads to a sense that this high payment will be short-lived.
When I say buyers are comfortable with these payments, I know there are also two to three times more buyers who run payments using online calculators who opt out of having conversations in the first place! To prove this, our pre-approval credit pulls (a measure of top-of-funnel buyer activity) are running about 50% lower than pre-pandemic.
Among the borrowers you’re working with, how high are monthly payments getting? And how do they react when you give them the number?
For the better part of the last decade, most of my clients would enter a pre-approval conversation with a mortgage payment limit of no more than $3,000 for a condo and $4,500 for single-family homes. It was rare to see numbers higher than that, even for my higher-income wage earners. Today, those numbers are $4,000 to $6,500 respectively.
To my earlier comment, active buyers today seem to expect it. It’s as if they are comfortable with this new normal. Surprisingly, the debt-to-income ratios of today (in my market) are very similar to where they were five years ago. Income is ultimately the great equalizer. Yes, the payments are dramatically higher today, but the buyers’ residual income (post-tax income minus debt) is still in a healthy range due to local wages.
Remember, we are still talking about a much smaller pool of buyers in the market today so this conversation is skewed towards those with more fortunate lifestyles.
Tell us a little bit more about what you saw in the second half of 2022 in your local housing market, and how that compares to the first half of 2023?
There are dramatic differences between those two periods. In the second half of 2022, there was nothing but fear. The stock market was under stress, inflation was running wild, and housing began to stall. Across the country, inventory began to rise, days-on-market pushed dramatically higher, and price decreases were rampant. The safest bet then was to do nothing, and that’s just what buyers did. The mindset was, “I will wait until prices fall and rates push lower before I buy.”
The start of 2023 sparked a reversal in many asset classes. The stock market found a footing and pushed higher, mortgage rates rebalanced, property sellers adjusted their prices, and employers began pushing out significant wage increases. As a result, housing stabilized, and in some areas, aggressive contracts with multiple offers, price escalations, and contingency waivers became the norm.
The strength in housing was not as universal as it was in 2021. There were very hot and cold segments, depending on location and price point. The affordable sector (<$750,000 in my market) and higher-end (>$1.25 million) seemed to perform very well with heightened competition. The mid-range segment is where we noticed some struggles. One common theme is that buyers at every price point seem much more sensitive to the property’s condition. When the housing payments are this elevated, it doesn’t take much for the buyers to walk away!
What do you make of the so-called “lock-in effect”— the idea that existing market churn will be constrained as folks refuse to give up those 2-handle and 3-handle mortgage rates?
I believe the “lock-in effect” is very real. My opinion is based on countless conversations I’ve had in the past 6-9 months with homeowners who want to move but can’t. Some cannot afford to buy their current home at today’s value and rate structure. Others just cannot stomach the significant jump in payment to justify the increase in home size or the preferred location.
I believe the reason we are seeing struggles in the mid-range home is that the traditional move-up buyer is stuck. In my market, that would be the person who sells the $700,000 home to purchase at $1 million. They currently have a PITI housing payment of $2,750; the new payment would be $6,000 rolling their equity as a down payment. That jump is too much for most, especially those with a median income. That payment would have been $4,500 a couple of years ago, which was much more manageable.
Based on what you’re seeing now, do you have any predictions on what the second half of 2023 might look like? And any thoughts on the spring of 2024?
Despite high rates, the desire to buy a home is still high for many. Given the lag effects of Fed tightening (raising interest rates) coupled with an overall improvement in inflation, one can assume mortgage rates have topped out and will continue to improve from here. Think of playing with a yo-yo on a down escalator, up-and-down movement but generally pushing lower. As rates improve, affordability and confidence will shift, bringing out more buyers and sellers.
I believe this will be supportive for home values and give buyers more choice as inventory increases. Keep in mind, most sellers become buyers, so the net impact on inventory will be negligible. Knowing that some sellers will keep their current home as a rental, one could argue that inventory will worsen. At least buyers will have more house options each week, a stark difference from today.
When discussing strength in housing, thinking through local dynamics is crucial. The DC Metro area has a diverse, stable job market which I do not see reversing if an economic slowdown occurs. We didn’t have a tremendous push towards short-term rentals as many other areas and the “work-from-home” (WFH) environment had most people stay within commuting distance to the cities.
One thing I expect is an unwinding of WFH in 2024. In fact, I’m already experiencing that. Many clients are being called back to the office, either through employer demands or fear they will be exposed to corporate downsizing efforts. As a result, I expect underperforming assets (D.C. condos and single-family homes in transitional areas of the city) to catch a bid while single-family homes in the commuting neighborhoods plateau from their record-setting appreciation over the past few years.
Housing market affordability (or better put the lack thereof) is at levels unseen since the peak of the housing bubble. Do you have any advice on how would-be buyers can ease that burden?
This may be the most complex question because everyone is at a different place in life. For the better part of the last 20 years, my consultation calls were 20 to 30 minutes long, and we could formulate a great plan. Today, that pushes over an hour and usually requires a detailed follow-up call. If I had to sum up all my conversations, I would say it comes down to forecasting life and patience.
Forecasting is a process where you map out life over the next two to three years—discussing job stability, income projections, saving and investment patterns, debts rolling off (or being added), kids, schools, tuition, etc. From there, talking about local market dynamics such as housing supply, population growth, and interest rate cycles and projections. This helps formulate a solid budget to use for a home purchase.
Patience can mean several things. For some, it means renting for a period of time to save more money or ride out periods of uncertainty. For others, it could be looking for the right sale price mix and seller concessions for rate buy-downs, closing costs, etc. Sometimes it means being patient with your desired location. Maybe you just can’t have that specific house in that specific area for a few years and settling for the next best location is good enough for now. Housing used to be a stepping stone for many but the low-rate environment of the past few years allowed everyone to get what they wanted right away. We seem to have lost the art of having patience in life.
“We have a pipeline right now of companies that have signed letters of intent but not yet closed,” Graham said. “That is significant, the highest it’s been in years.
“…If the market stays as it is, there’s a lot more shakeout coming.”
Graham said it’s easy to track stock deals involving IMBs because there are so many public filings. It’s much harder to track asset sales, he added, because there are limited required public filings.
He said STRATMOR and many of its peers also advise clients not to announce asset deals because such publicity is not a benefit to either party to the transaction.
“Normally you’re trying to keep it out [of the public eye],” he explained. “It [publicity] helps the advisors, and it helps the [loan-officer] recruiters, but it doesn’t exactly help the buyer and seller trying to get settled in a transition of the assets of the company.”
Graham added that STRATMOR has good visibility into both stock and asset deals occurring in the market due to its research capabilities, but he does concede there is one exit strategy — a lender shutdown — that is pretty much a dark box as far as tracking the numbers.
Consequently, the shrinkage of the existing IMB industry may be even more severe than the M&A figures alone reveal.
“… We have absolutely been involved in shutdown engagements [this year],” Graham said. “In 2020, we had none of those,” adding that they are absolutely increasing in the industry, “but that’s very hard to track.”
“Shutdowns are not exactly my favorite part of our consulting practice,” Graham said. “But we help lenders with it, and usually they need help, because it’s a lot more complicated and there’s a lot more risks.”
Occasionally, he explained, there’s an extraneous external event that makes a lender “a dead man walking,” but most of the time a shutdown is being pursued because the lender’s leadership waited too long to seek a buyer.
“They could have marketed their company, and they could have done a reasonable M&A, and they could have had a more graceful exit and probably be paid a premium, but they waited too long,” Graham said. “…We have calls with lenders every single week in that category.”
Mounting pressures in mortgage
The pace of shutdowns and M&A deals continues to rev up, in part, because of several mounting industry pressures that are cranking up the heat on IMBs.
Chief among them, according to Brett Ludden, managing director and co-head of the financial services team at Sterling Point Advisors, are the rapid pace of loan-repurchase demands coming from the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac coupled with mounting pressure on struggling lenders to remain in compliance with GSE and warehouse covenants. Those covenants, or contracts, include requirements related to lender financials, such as minimum net worth or income requirements, that, if breached, can lead to cancellation of the agreements.
If an IMB is cut off by the GSEs for violating its net worth requirements, for example, it can still sell its loans at a haircut to loan aggregators, but such a covenant violation, Ludden and other experts say, also will trigger increased scrutiny from its warehouse lenders.
“A number of lenders right now are concerned with covenants,” Ludden said. “Fannie Mae has ratcheted up pressure, for example, with their move to monthly P&L [profit and loss] reviews with companies that are not performing, and they expect those companies to deliver on their forecasts on production and profitability month over month.
“…If I’m a warehouse-line provider, I’m going to say, ‘Hey, if they get cut off by Fannie, I’m going to assume that Fannie knows something that I don’t know, and we’re going to cut them off too. So, that’s going to be a challenge as well.”
In most cases, if a lender’s warehouse lines start to evaporate, it also loses the liquidity necessary to fund new loans.
“The ironic thing about it is that by cutting off these struggling companies, you create, to some extent, a self-fulfilling prophecy, which is by cutting them off, you’re going to make them worse off,” Ludden said.
He added that on the loan-repurchase front with respect to the GSEs, Sterling’s data shows that there has been “a material increase in the speed at which repurchase requests have occurred from the time of [loan] origination.” Repurchase requests are prompted after GSE quality-review teams uncover underwriting errors in mortgages purchased by the agencies.
“It could be the GSEs are trying to get their money back faster in their review process because they’re worried about these lenders going under,” Ludden said. “We still think the [repurchase-wave] peak occurred in the third or fourth quarter of last year, but we’re seeing that repurchases in the first, second and into the third quarter of 2023 are not that far off from the peak of late 2022.”
Ludden explained that every time a lender has to repurchase a loan from the GSEs, they face the prospect of either selling it at a loss in the “scratch and dent” market or holding onto it, if possible, with the hope that in the future “they can sell it at less of a loss.”
“If you have to repurchase even just four loans, you just paid out a million dollars of your cash,” he added. “That is a lot of money to smaller lenders, or medium-sized lenders.
“…To me, it’s the $500 million to $1 billion players [based on mortgage originations] that are really going to feel the brunt of the challenge here because they have $2.5 million net worth requirements, they’ve got material cash requirements, and they’ve been burning through their equity for the past 18 months — and it’s not going to let up.”
A “killer” 5-10 years ahead
Brian Hale, founder and CEO of Mortgage Advisory Partners, said the mortgage market has simply been down longer than most originators anticipated when rates first started spiking in the second quarter of last year in the wake of the Federal Reserve’s inflation-fighting campaign.
“My own view is the first couple of quarters of 2024 are still going to be less good than people thought they were going to be six months ago,” he said. “And so, the group of companies that could have sold, might have closed, decided to hold on thinking rates are going to come down eventually.
“First of all, no, they don’t. Secondly, I think they will [rates will improve], but not as fast as people want or need them to come back to improve the market … and so you still have an awful lot of lenders who aren’t making profit [in fact, up to three-quarters of the industry by some estimates].”
Hale added that at this time, “buyers have the upper hand.”
“I just think the entire calculus on when things get better, and how much they get better, has shifted to the right on the timeline,” he said. “So, what people are now talking about is mid-2024 or maybe 2025 will be a killer [renewed boom].”
Offering a note of optimism for lMBs now enduring the bleak landscape out there, Hale said when the market does rebound, it will be after the hard times have “rinsed out a lot of capacity, and so the rush will come back against a much skinnier industry, and things will feel great” for the survivors.
“I still believe that the next five or 10 years are going to be killers in the real estate, mortgage and homebuilder markets as far as the eye can see, once this inflation disaster gets behind us,” Hale said. “I think if you can be a survivor, you can do very well then.”
Ludden, however, sees survival as the key word in all of this and far from a given for many lenders. He said the margin erosion independent mortgage banks are experiencing now makes the game ahead about survival of the fittest.
“I’ve talked to multiple lenders that saw double-digit decreases in margins month over month throughout the second quarter,” he explained. “And talk about pain because you’re already struggling….
“You’re trying to do business, and somebody’s willing to give up some more margin, so they win the business, but that hurts the industry as a whole. It’s kind of a fight to the bottom.”
Ludden said his firm saw what he considers “a groundswell” of renewed interest in the second quarter of this year from mortgage lenders seeking some kind of exit from the business. He added that the “next roughly 12 months” is going to be the real test of who survives and who disappears from the market.
“If you’re breaking even right now, you’re not making money in the fourth quarter [of 2023], and you’re likely not making money in the first quarter [next year],” Ludden said. “The next time you’ll likely make money is going to be March of 2024, so that’s a long way to go, and if you get to August or September [next year] and you’re not in super shape, I’d say you’re in real trouble.”