Falling mortgage rates last week brought increased demand.
Total home loan applications increased 2.8% for the week ending Dec. 1 compared to the previous week, according to data from the Mortgage Bankers Association (MBA). The 30-year fixed-rate mortgage averaged 7.17% last week.
Slower inflation and the confidence financial markets have that we are nearing the end of the Fed’s hiking cycle has brought mortgage rates to the lowest level since August.
Purchase applications rose by 35% week-over-week on an unadjusted basis, though they were 17% lower than a year ago. According to Joel Kan, MBA’s vice president and deputy chief economist, they were mostly held back by “low inventory and still-challenging affordability conditions.”
Meanwhile, refinance applications posted their strongest week in two months. The refinance index rose by 14% on a weekly basis and was 10% higher than a year ago. Refinance applications exceeded their 2022 levels for the second week in a row, a first since late 2021.
“The overall level of refinance applications is still very low, but recent increases could signal that 2023 was the low point in this cycle for refinance activity, consistent with our originations forecast,” Kan said in a statement.
The adjustable-rate mortgage (ARM) share of activity decreased to 7.4% of total applications, down from 8.1% last week.
The share of Federal Housing Administration (FHA) loan activity increased to 15%, down from 13.5% the week prior. The share of Department of Veterans Affairs (VA) loan activity was 12.8%, up from 12.6% over the previous week, while the share of U.S. Department of Agriculture (USDA) loan activity remained unchanged at 0.5%.
California-based Pennymac Financial Services’s broker division, Pennymac TPO,launched a home equity loan product as tappable home equity nears its 2022 peak.
“Pennymac’s broker partners can now offer their clients a home equity loan as a second lien solution to access more cash, while still preserving the low interest rate of their first mortgage,” the company said.
A home equity loan — also known as a second mortgage — enables a homeowner to borrow money by leveraging equity in a home. The borrower receives the loan amount in one lump sum, which is paid back in monthly payments, typically for a term of up to 30 years.
The product is eligible only for primary residences with fixed-rate term structures of 10, 15, 20 or 30 years.
Currently available in 11 states, the minimum loan amount is $50,000 and the maximum is $500,000 with an 85% loan-to-value (LTV).
Pennymac’s home equity loan for brokers comes as U.S. homeowners sit on some $16.4 trillion of home equity in the third quarter of 2023. Tappable equity – the amount that can be accessed after retaining a 20% equity stake – stood at $10.6 trillion, nearing the peak in 2022, according to ICE Mortgage Technology‘s mortgage monitor report.
While cash-out refinancing was a popular way to access accumulated home equity when mortgage rates were lower, that’s a lot less appealing with rates over 7%.
Even with higher levels of home equity, borrowers are more likely to take out a second-lien mortgage rather than lose a low rate on their first mortgage through a cash-out refi.
Pennymac reported a total of $19 billion in total acquisitions and originations to date in the fourth quarter, including $16.3 billion in correspondent acquisitions; $1.6 billion in broker direct originations; and $600 million in consumer direct originations, according to its latest 8-K filing with the U.S. Securities and Exchange Commission (SEC) on Monday.
We’re writing today to address the unintended consequences that may result from the real estate agent commission dilemma stemming from recent lawsuits. As leaders of a non-profit, the Association of Independent Mortgage Experts (AIME), we advocate for over 65,000 wholesale mortgage brokers and homebuyers nationwide. There are multiple lawsuits challenging the prevailing structure of real estate agent commissions, and, as a result, there is no shortage of industry conversation on the topic.
Specifically, these lawsuits and surrounding conversations address the convention of sellers bearing the cost of commissions for both their agent and the buyer’s agent.
In this open letter, our discussion is deliberately narrow, centering exclusively on potential adverse impacts to the mortgage industry and borrowers that might arise if, as a result of this lawsuit, buyers find themselves compelled or expected to shoulder the cost of buyer agent commissions. Our analysis does not extend to the broader market ramifications, as such considerations fall outside our expertise.
Future homebuyers will undeniably feel the impact of this conversation for decades to come. As advocates for homebuyers, we feel it’s our responsibility to address the potential ripple effects for homebuyers nationwide.
The complexity of the home-buying ecosystem is vast. A single home purchase transaction involves buyers, sellers, real estate agents, mortgage lenders, settlement companies, appraisers, insurance companies, and court systems, to name a few. Modifying the operational dynamics of one component can send shockwaves throughout the entire system. Below, we shed light on the potential unintended consequences to mortgages and specific consumer groups should buyers be compelled to cover their agent’s commissions.
Impact on military servicemembers and veterans
Foremost, this shift would adversely affect a group of individuals who’ve already given so much to our nation: our active-duty military servicemembers and veterans. VA Guidelines categorically prevent buyers from paying agent commissions (“VA Lender’s Handbook,” Chapter 8, Section 3, Subsection c). Consequently, should buyers be tasked with these fees, our military community would face the untenable choice of forgoing real estate agent representation or not availing their VA home benefit. Even in a scenario where paying agent commissions becomes a norm but isn’t mandatory, VA buyers stand to lose. Their offers — asking sellers to shoulder all commissions — might be overlooked in favor of more conventionally structured bids, especially in competitive markets.
Impact to first-time homebuyers
Moreover, first-time homebuyers (FTHB), particularly those from marginalized communities, would encounter heightened barriers. With home prices and interest rates climbing steadily, the barrier to homeownership is already too high. While the minimum down payment for FTHB on conventional financing stands at 3%, bearing agent commissions would effectively double this threshold in many instances.
Impact on the appraisal process
Incorporating inconsistent agent commission payment patterns — sometimes by buyers, other times by sellers — could compound complexities in the appraisal process. Determining property values involves analyzing several variables beyond just sale prices. Appraisers consider seller closing-cost credits, transaction nature, property conditions and more. Injecting “Who bore the buyer’s agent commission?” into this matrix, especially when such data isn’t currently available to appraisers, complicates matters further, destabilizing confidence in the value of the loan’s collateral.
Impact on down payments
Down payment costs are already a source of concern for many potential homebuyers. With this potential impact on borrowers, their intended down payment could be adversely impacted. For example, a homebuyer intending to put down a 20% down payment may now only be able to afford to put down a 17% down payment, thus needing to incur Private Mortgage Insurance (PMI), which could raise their monthly mortgage payment significantly.
Change, though often inevitable, does not operate in isolation. A shift in one part of the ecosystem can trigger unintended consequences throughout the entire ecosystem and its inhabitants. This principle holds true both in nature and in real estate transactions. While some outcomes can be foreseen, where there is smoke, there is fire, and we can be fairly certain that there are additional, unforeseen ramifications that only become clear after the fact. The issues highlighted in this letter likely serve as the tip of the iceberg.
In conclusion, we emphasize our hope that the potential unintended consequences of such lawsuits — particularly those affecting our nation’s Veterans and underserved communities — will be thoughtfully considered and integrated into the wider conversation on this issue.
Katie Sweeney is Chairman and CEO of the Association of Independent Mortgage Experts (AIME) and Brendan McKay is President of Advocacy at AIME.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
To contact the authors of this story: Katie Sweeney, Brendan McKay: [email protected]
To contact the editor of this story: Sarah Wheeler at [email protected]
Pending home sales in October fell to their lowest level since 2001. As mortgage rates edged near multi-decade highs, pending home sales declined 1.5% in October on a month-over-month basis, according to data released Thursday by the National Association of Realtors (NAR). As a result, NAR’s Pending Home Sales Index fell to a reading of 71.4, down from 72.6 in September.
Regionally, the Northeast posted a monthly gain in transactions, but the Midwest, South and West all posted losses. Year over year, all four regions saw a drop in transactions.
Historically high rates harmed the housing market in October
Annualized existing home sales remained below 4 million in October, the lowest rate since 2010. Meanwhile, new home sales posted a better performance as homebuyers pivoted to new construction amid waning existing home supply. New home sales fell 5.6% in October on a month-over-month basis but remained 17.7% above the previous year’s level.
In today’s tough housing market, the rental market is cooling off, giving some relief to homebuyers. The national median rent price fell again in October to $1,729, down from $1,747 in September. It dropped on an annual basis for the sixth consecutive month
NAR chief economist Lawrence Yun is optimistic that declining mortgage rates will help qualify more home buyers in the months ahead, but limited housing inventory will remain the sticking point.
“Multiple offers, of course, yield only one winner, with the rest left to continue their search,” he said in a statement.
Home sales should perform better in 2024 even if affordability remains a challenge
According to Bright MLS’s forecast, mortgage rates will continue to trend downward in 2024, finishing the year at 6.2%. Existing-home sales and housing inventory will increase next year, and home prices will remain stable, said Lisa Sturtevant, the MLS’s chief economist.
Rising home prices have pushed the third quarter’s tappable home equity amount near its 2022 peak, but interest rates are making homeowners reluctant to extract that wealth.
Mortgage holders withdrew a mere 0.41% of tappable equity in Q3, about 55% below the average withdrawal rate seen in the 12 years leading up to the Federal Reserve’s most recent tightening cycle, according to the latest ICE Mortgage Technology‘s mortgage monitor report.
“Indeed, in recent quarters, equity withdrawal rates have been running at less than half their long-run averages. That’s equivalent to $54 billion – $250 billion over the last 18 months – in ‘missing’ withdrawalsthat might have otherwise stimulated the broader economy,” said Andy Walden, vice president of enterprise research at ICE Mortgage Technology.
Rising equity levels are also contributing to low default and foreclosure activity.
Foreclosures starts rose to 33,000 in October – the highest level in 18 months – but still remained 35% below COVID-19 pandemic norms. Loans in active foreclosure inched up to 217,000, but remained more than 25% below pre-pandemic levels.
About 70% of loans currently three or more payments past due are protected from foreclosure by ongoing loss mitigation efforts. In addition, about 58% of these seriously delinquent mortgage holders hold more than 20% equity stakes in their homes.
“Strong equity cushions not only provide borrowers incentive to work with their servicers to return to making mortgage payments, they also open up other options, such as salvaging earned equity with a traditional home sale rather than going through foreclosure. The more the industry can do to educate, and update, borrowers as to their equity positions, the better,” Walden said.
Mortgage originations
Purchase lending dominated the market overall, driving 86% of all first-lien lending in the third quarter. In 2024, roughly 75% of originations expected to come from purchase loans.
Despite compressed volumes, cash-out refinance loans fueled what is left of the refinance market accounting for 92% of the third quarter activity. Borrowers withdrew a record $104,000 on average.
Rising mortgage rates continued to put pressure on homebuyers, with the average debt-to-income (DTI) ratio on purchase loans hitting 40.5% in October, a series high dating back to January 2018.
The average DTI among conventional mortgages reached 37.8% in October, also a series high, while the average among FHA and VA loans hit 45.5% and 44.4%, respectively. These figures are both up sharply from recent months, but slightly below last year’s high of 45.7% for FHA loans and 44.5% for VA loans.
Lenders have responded by tightening credit requirements and the average credit score among conventional, FHA and VA loans.
Average credit scores for FHA loans rose 14 points in October over the past 12 months while VA loans climbed 13 points.
The latest baseline increase in conforming loan limits has enabled loan originator Dave Krichmar’s client to make a 5% down payment instead of 10%.
The self-employed homebuyer found an $800,000 home in Texas, but with the conforming loan limit for 2023 being $726,200, the buyer needed a jumbo loan or a bank statement loan. Those loan types would require a larger down payment of at least 10% of the home’s value, or $80,000, which would stretch his budget too thin.
“With the latest Federal Housing Finance Agency (FHFA) announcement, he could qualify for a conforming loan paying a 5% down payment of roughly $40,000 rather than $80,000 – which could have put him on the sideline. Now he is off the sideline because a 5% down payment is completely doable,” said Krichmar, a mortgage banker at Legend Lending Corporation.
Based on annual changes to an index of national home prices, conforming loan limits for mortgages backed by Fannie Mae and Freddie Mac on one-unit properties will be $766,550 in 2024. For high-cost areas, the loan limit is $1.149 million.
Rising home prices also prompted the Federal Housing Administration (FHA) to adjust its loan limits — with the “floor” FHA loan limit for one-unit properties increasing to $498,257 in most parts of the country.
The increases in conforming and FHA loan limits will help certain homebuyers, including younger buyers with little cash saved and a small window of borrowers who were on the cusp of not being able to apply for an FHA or conventional loan due to lower floor FHA loan limits or baseline conforming loan limits.
“By increasing the maximum loan amount, the change means that more borrowers will be able to get conforming loans instead of jumbo mortgages, which often are harder to qualify for. It might open the door for homeownership just a touch wider for a few buyers who would have had trouble securing jumbo loans,” said Holden Lewis, a home expert at NerdWallet.
Who benefits from higher loan limits?
The latest increases in the FHA loan limits will move the needle a little bit, noted John Palmiotto, chief production officer at The Money Store.
“It can squeeze them into maybe a better property than they previously could [afford] so there’s a bit of an opportunity there,” Palmiotto said.
Amid a high interest-rate environment, FHA loans have become a popular option for borrowers who have lower FICO scores or need to qualify with a slightly higher debt-to-income (DTI) ratio.
Mandatory mortgage insurance premiums were reduced to 55 basis points (bps) for most borrowers in February, and FHA loans tend to come with lower interest rates than conventional loans while the difference in interest rates could often be offset by the greater number of fees — including the MIP charges
Demand for FHA loans has risen over the past year to comprise 26.3% of all new-home purchase applications in October 2023, the highest share of FHA new-home purchase applications made in a decade, according to the Mortgage Bankers Association(MBA).
Millennial homebuyers — about 28% of all buyers—who don’t have as much cash saved to be able to buy at a higher price point will benefit most from higher FHA loan limits.
“They will be more comfortable than the baby boomer generation taking out a larger mortgage to get what they want. They’ve seen massive real estate appreciation; they’ve seen it as a great investment vehicle,” Palmiotto noted.
The increase in conforming loan limits are also expected to help some borrowers who would have otherwise needed a jumbo mortgage.
“A lot of people shop for homes based on a price range. So they’re able to just push a little bit further towards what they want, which may be doable,” Krichmar said.
“I’m in the San Francisco/San Jose/Oakland area in California, so we have the high balance conforming loan limit as well, which is going up to $1.149 million. For sure, that will help a lot of people who might not be qualified for [a] jumbo [loan]. Some people don’t have the ability to put up to 20% down,” said Brady Thomas, branch manager at American Pacific Mortgage.
How higher loan limits might move the housing market needle
Economists at Fannie Mae project home prices to increase by 2.8% on an annual basis in 2024. Meanwhile, economists at Capital Economics are expecting an annual increase of only 1.5% next year.
The MBA has a more optimistic view on home prices, expecting a 4.1% increase.
The FHFA’s increase for conforming loan limits in 2024 follows a formula that tracks increases in national home prices. The FHFA cited an average 5.56% increase in home prices across the country from the third quarter of 2022 to the third quarter of 2023.
But 2024’s higher conforming loan limits should enable more homebuyers to take advantage of conventional financing in 2024, noted Peter Idziak, senior associate of residential mortgage law firm Polunsky Beitel Green.
“I expect the increase in conforming loan limits will provide support for continued appreciation in home prices as more potential homebuyers are able to take advantage of federally-backed financing. In non-high cost areas, this support should be especially evident in the $725,000 to $955,000 price range, which roughly corresponds to the 95% to 80% [loan-to-value (LTV)] ratios based on the new limits,” Idziak said.
However, loan originators and housing professionals are skeptical the new changes will move the needle much to resolve widespread affordability issues.
“It’s not a big enough movement that it’ll draw that amount of attention. What price range is it affecting? It’s only affecting someone who was wanting to buy an $800,000 home but could only buy a home of $750,000. That’s a small window. For somebody who’s buying a $1 million home and $600,000 home, it’s not making a drastic change,” Krichmar said.
It’ll help around the edges, allowing people to buy at lower down payment amounts who normally wouldn’t be able to with a down payment for jumbo loans of at least 10% and as much as 20% of the home’s purchase price.
The heightened limits enable a larger pool of prospective homebuyers to secure financing with more favorable terms, which could potentially sustain housing demand and market activity, said Orphe Divounguy, senior macroeconomist at Zillow Home Loans.
“Nevertheless, the overall impact remains contingent on various economic factors, interest rate trends and localized housing dynamics.” Divounguy added.
For affordability to improve and homeownership to expand, mortgage rates will have to come down. Current high rates are creating an inventory lock-in effect because sellers with existing low-rate mortgages don’t want to give those loans up for a much higher rate on another property.
“I think rates will have a big impact because, one, they affect buyer affordability, and two, they affect inventory. So I don’t think that the increase that FHFA announced […] is going to have a huge impact because it was already expected and kind of part of [how] our market works,” Thomas said.
Mortgage originators will pay more to access consumer credit reports in 2024, reigniting complaints from mortgage lenders and trade associations.
In 2024, Fair Isaac Corp. (FICO), the company that retains the rights to the market’s adopted methodology to measure consumer credit risk, will charge one price – higher than the current price – to all mortgage lenders, independent of their volumes. The change represents a departure from the tier-based pricing structure it implemented in early 2023.
FICO will also collect the same per score price for soft pulls and hard pulls next year, an initiative that started in 2023 despite significant differences in these products.
“FICO will collect approximately $10 total for all three scores out of a $50 (or more) tri-merge report and score bundle, which continues to constitute a low percentage (approximately 20% or less) of the overall cost of a tri-merge report,” a spokesperson for FICO wrote in a statement to HousingWire.
For 2023, FICO said it would collect approximately $2 to $8 for all three score tiers out of a $40 to $50 (or more) tri-merge report and score bundle and out of an average $3,800 in closing costs. Compared to 2022, mortgage lenders in 2023 saw a price increase between 10% and 400%, mortgage trade groups and other stakeholders said.
For 2024, two mortgage executives who spoke on the condition of anonymity for fear of retaliation, told HousingWire that they expect prices to increase by more than double in some cases. Ultimately, the sources added that lenders will charge more to their borrowers, who are already facing affordability challenges.
“It seems like only yesterday you could pull a single borrower tri-merge for $15 and a joint for $30,” Greg Sher, Managing Director of NFM Lending, wrote in a LinkedIn post that went viral in the mortgage industry. “Now those prices will be in the neighborhood of $50 and $100 respectively — one well-known, widely used credit reporting agency plans on charging $75/$150. For clarification purposes, every IMB uses 3rd party vendors (also known as credit reporting agencies).”
Scott Olson, executive director at the Community Home Lenders of America (CHLA), said that increasing prices in this difficult economic environment will “only make it difficult for borrowers to participate in the American dream.”
Soft and hard pulls
Another change for 2024 is related to the pricing structure of soft pulls, which are performed to provide pre-approval letters, only visible to the borrower and without impacts on credit scores. Its prices will come closer to those applied to hard pulls, which are recorded on the borrower’s credit report, visible to anyone and can trigger leads.
“Last year, we implemented a tier-based pricing structure for mortgage originations, and FICO collected the same per score wholesale price for most soft pulls as hard pulls, but some lenders qualified for a lower price in certain cases for some soft pulls,” the spokesperson for FICO told HousingWire.
Brendan McKay, president of advocacy at the mortgage broker group Association of Independent Mortgage Experts (AIME), complained FICO doubled the cost of hard pulls at the beginning of 2023.
“Now they are charging the same amount for a soft credit pull, an inherently inferior product that provides less actionable information than a hard credit pull. There has been no justification given for the increased expense.”
According to McKay, the cost burden will be passed directly onto consumers, and those from underserved communities will feel it most.
“Despite being a private institution, FICO is currently a critical component in the mortgage process. As an industry, we owe it to future homeowners to bring attention to the misuse of power,” McKay said.
Fannie Mae and Freddie Mac are moving away from the current Classic FICO credit score model, requiring lenders to use two credit scores generated by the FICO Score 10 T and the VantageScore 4.0 models, which are considered more inclusive than their predecessor.
Price to originators
A FICO representative said the company does not set the retail price for end users.
Ultimately, “Anything above these wholesale prices, charged as part of a tri-merge score and report bundle, is collected and retained by others who sell and distribute the scores,” the spokesperson said.
Credit bureaus, which work with the FICO model, may pass the FICO price increases to their clients.
TransUnion and Experian did not reply to a request for comments.
Meanwhile, a spokesperson for Equifax wrote to HousingWire that beginning in January 2024, it will have a price adjustment to “reflect cost increases from third-party providers of credit reports and credit scores.”
However, the spokesperson added, “Equifax is sensitive to the impact these third-party cost increases may have on customers, especially given current market conditions. With this in mind, Equifax is not increasing the costs related to the Equifax credit file component of the tri-merge credit report for 2024.”
The Mortgage Bankers Association (MBA) president and CEO Bob Broeksmit said that, “In light of these media reports about another round of unexplained sharp price increases, we reiterate our concerns about the lack of transparency into the factors that are driving these pricing changes.”
“Given the unique market structure and limited options for obtaining credit reports and credit scores, MBA urges policymakers to examine the drivers of these cost increases to ensure transparency and to protect consumers from paying higher costs in connection with their home mortgages,” Broeksmit said.
Editor’s note: This story was updated after publication to include comments from the Mortgage Bankers Association.
“This case has now been pending for more than four and a half years, and we’re ready to move forward and towards trial,” he said on the call.
Ethan Glass of Cooley, an attorney for the National Association of Realtors (NAR), took a different view and urged Wood to not set a date just yet, stating that it is “way premature” as the court has yet to even take motions for summary judgment, “let alone decide them.”
Glass also asked if NAR could let the court know in a week or so if the trade group would like the court to extend its Dec. 19, 2023, deadline for submitting things like motions for summary judgment.
“We are still analyzing what the consequences of the [Sitzer/Burnett] jury verdict are,” Glass said.
A final ruling on the Sitzer/Burnett suit is not expected until April or May 2024, however, the plaintiff’s motion for injunctive relief must be filed before Jan. 8, 2024. The three defendants who were present at the trial, NAR, Keller Williams and HomeServices of America, have all vowed to appeal the verdict.
Glass added that NAR is unsure if there may or may not be reasons to extend the deadline, as the trade group and its counsel are still looking into things.
Braun argued that legal issues still playing out in the Sitzer/Burnett suit was not a reason to delay the trial in the Moehrl case.
Surprisingly, this view was supported by Timothy Ray of Holland & Knight, who is representing Keller Williams. Ray stated that he believes there were “serious errors” in the Sitzer/Burnett trial and that that trial should not be held up as a “standard for how we should go forward in Moehrl.” He added that Keller Williams would like to see the “Moehrl case to stand on its own consistent with the law” in its district and circuit.
Wood agreed with Ray’s view, stating: “I don’t think the fact that the other case has proceeded to trial and there are certain legal issues that will be challenged post-trial … affects what I need to do to keep the case moving here. It is a different case with some different issues, some overlapping issues, in a different circuit. So, I tend to agree with Mr. Ray’s point that this case should stand on its own.”
Looking ahead, Wood said she thought setting a trial date as soon as “it’s reasonable to do so makes sense.”
In the meantime, the parties have until Jan. 22, 2024, to submit a joint state report, in which they are to estimate the number of trial days and testimony hours they anticipate needing. Wood also instructed that the parties should take into account that Anywhere and RE/MAX are unlikely to participate in the trial if their settlements receive final court approval.
Filed in 2019, the Moehrl lawsuit, like the other commission lawsuits, take’s aim at NAR’s Participation Rule, which requires listing brokers to make a blanket offer of compensation to buyers’ brokers in order to list a property on the MLS.
The home seller plaintiffs allege that NAR and the corporate brokerage defendants have conspired to artificially inflate agent commissions, increasing the costs shouldered by home sellers. The suit received class-action status in March 2023.
Penny stocks offer a unique glimpse into the lesser-seen side of the stock market. These stocks, tied to small and sometimes obscure companies, present a blend of opportunity and challenge, attracting investors with their potential for high returns despite inherent risks.
In the history of penny stocks, there are tales of spectacular gains and equally dramatic losses, reflecting their unpredictable nature. This market segment appeals to a certain type of investor: one who is not just willing to take on risk, but who is also keen on conducting thorough research to unearth potential opportunities in overlooked corners of the market.
This introduction to penny stock trading aims to strike a balance between the excitement of potentially lucrative investments and the sober reality of the risks involved. As we delve into this topic, we’ll explore both the allure and the cautionary aspects of trading in penny stocks, offering insights for those curious about this intriguing area of finance.
What are penny stocks?
Penny stocks are defined by the Securities and Exchange Commission (SEC) as shares issued by small or micro-cap companies for any amount below $5 per share.
They typically trade on the over-the-counter (OTC) or dark market. But you may find some on U.S. securities exchanges, foreign exchanges, and in rare cases, on major stock exchanges.
They are designed for investors who can withstand a high level of risk, as the low price point is a tell-tale sign of bigger issues going on within the company. It could be anything from cash-flow issues to impending bankruptcy or fraud. You could also be dealing with a startup with little to no track record or a company with management woes.
Profit Potential in Penny Stocks: What to Expect
Penny stocks, often trading below $5 a share, can seem like a gateway to quick profits in the stock market. They’re attractive because of their low entry cost and the dream of buying a stock for pennies today that might be worth dollars tomorrow. However, it’s crucial to temper expectations with reality.
While there are occasional stories of penny stocks skyrocketing in value, these are more the exception than the rule. The overall success rate for investors in penny stocks is generally lower than in more traditional stock investments, largely due to their volatility and the opaque nature of many companies represented in this segment.
Navigating the Risks: The Realities of Penny Stock Investments
When considering penny stocks, it’s important to understand the risks involved. These stocks are known for their low liquidity, which means it might be difficult to sell your shares at the optimal time.
Moreover, the penny stock market is often a playground for manipulative tactics like ‘pump and dump’ schemes. In such scenarios, stock prices are artificially inflated through misleading or overly optimistic statements, only to be sold off by insiders at a profit, leaving other investors with losses.
What’s more, the lack of comprehensive financial information about these small or micro-cap companies adds another layer of risk. With less regulatory oversight compared to larger, more established stocks, it’s harder for investors to make fully informed decisions.
Making Informed Decisions
If you’re considering diving into the world of penny stocks, it’s vital to do your homework. Thorough research and a well-thought-out strategy are key. Look for penny stock companies with solid fundamentals, transparent business models, and potential for growth.
Be wary of stocks that exhibit sudden price jumps without any underlying business changes. Remember, a disciplined and patient approach, along with a readiness to react to market changes, is essential in navigating the high-risk, high-reward world of penny stock trading.
How to Get Started with Penny Stocks
Step 1: Conduct Thorough Research
Before you jump into penny stocks, it’s essential to do your homework. Start by understanding what penny stocks are and how they differ from traditional stocks. Research the companies behind these stocks thoroughly.
Look into their financial health, business models, and market potential. Pay special attention to their balance sheets, earnings reports, and any news that could affect their stock prices. Remember, information is power in the world of investing, and this is especially true for penny stocks.
Step 2: Set Realistic Investment Goals
Determine what you want to achieve with penny stocks. Are you looking for quick profits, or are you more interested in long-term growth? Setting clear and realistic goals will help guide your investment decisions and keep your expectations in check. Be aware that while penny stocks offer the possibility of high returns, they also come with a high risk of loss.
Step 3: Choose the Right Trading Platform
Select a trading platform or broker that caters to penny stock investors. Look for platforms with low fees, as penny stocks are typically low-value investments and high transaction costs can eat into your profits.
Ensure the platform provides adequate tools and resources for researching penny stocks. Some platforms may have restrictions or higher fees for trading penny stocks, so it’s crucial to read the fine print before making your choice.
Step 4: Start Small and Diversify
When you’re ready to start trading, begin with a small investment to test the waters. Penny stocks are highly volatile, so it’s wise not to put all your eggs in one basket. Diversify your investments across different stocks and sectors to spread the risk. Remember, diversification is a key strategy in mitigating risk in any investment portfolio.
Step 5: Learn from Mistakes and Stay Updated
Even the most seasoned investors make mistakes, especially in the unpredictable world of penny stocks. Take note of any missteps and learn from them. Stay updated on market trends and news that could impact your investments. Continuous learning and adapting your strategy based on your experiences and market changes are crucial for success when investing in penny stocks.
Common Mistakes to Avoid With Penny Stocks
Falling for hype: One of the biggest traps with penny stocks is getting swayed by hype. Avoid making decisions based on promotional emails or hot tips without doing your own research.
Ignoring red flags: Don’t overlook red flags like inconsistent financials, frequent changes in company leadership, or lack of transparent information.
Overtrading: Resist the urge to trade too frequently. Overtrading can lead to impulsive decisions and increased transaction costs.
Neglecting exit strategy: Always have an exit strategy for each investment. Decide in advance at what point you will sell, whether to capture profits or cut losses.
How to Find Promising Penny Stocks: Effective Strategies
Locating promising penny stocks is a nuanced process. While some penny stocks are available on major stock exchanges like Nasdaq, most are traded over-the-counter (OTC). Understanding where and how to find these stocks is crucial for potential success in this high-risk, high-reward market.
Explore OTC Markets and Major Exchanges
Most penny stocks are traded on OTC markets such as the Over-the-Counter Bulletin Board (OTCBB) and Pink Sheets, where listing requirements are less stringent than on exchanges. However, some penny stocks are also listed on larger exchanges like Nasdaq, adhering to their stricter regulations and offering slightly more stability. Familiarizing yourself with both OTC and large exchanges broadens your scope for finding potential stock picks.
Leverage Financial Information Sources
To aid in your search, utilize financial information sources like Google Finance or Yahoo Finance. These platforms provide valuable data on OTC stocks, including price movements, volumes, and company news. They are excellent starting points for initial research and tracking stock performance.
Selecting the Right Broker for Penny Stock Trading
Choosing a broker that aligns with your goals is crucial. Consider factors like fee structures, trade surcharges, volume restrictions, and trading limitations. Broker fees, especially for low-value transactions like penny stocks, can significantly impact your profits. Ensure the broker you choose allows you to trade penny stocks, as not all do.
Assessing Broker Resources and Tools
In addition to fee structures, assess the resources and tools each broker offers. Some brokers provide specialized resources for penny stock traders, such as advanced screening tools, research reports, and educational content. These can be invaluable in helping you make informed decisions.
Tips for Choosing a Broker
Compare fee structures: Look for brokers with low fees and surcharges for buying penny stocks.
Check for volume restrictions: Ensure the broker doesn’t impose restrictive trading limits that could hinder your strategy.
Research broker reputation: Choose a broker with a good reputation for customer service and reliability.
Evaluate educational resources: Consider brokers that offer educational materials and resources specifically designed for penny stock traders.
Finding the Best Broker for Your Penny Stock Investments
When it comes to choosing the best broker for penny stocks, there isn’t a one-size-fits-all answer. The ideal broker varies based on individual trading styles, preferences, and goals. Here’s a comprehensive list of the best online brokers for stock trading of 2023 can be a great starting point.
It’s important to verify that the brokers you’re considering do indeed offer penny stock trading, as not all brokers provide this service. Make sure to choose a broker that aligns with your investment strategy and provides the necessary tools and resources for penny stock investors.
Risks and Considerations of Penny Stock Trading
Before you dive into the world of penny stocks, there are some risks you should be aware of.
Trade Volume and Fees
It’s no secret. The trading volume for penny stocks is relatively low because of their risky nature, so you may find it difficult to buy and sell at the most optimal times. You also want to pay attention to the fees that brokers sometimes tack on to penny stock trades.
If you find that they are substantially higher than what you’d pay to trade regular shares, move on to brokers that don’t employ this practice.
Exchanges
If the shares aren’t listed on a major exchange, like the NYSE or Nasdaq, proceed with caution as the regulations are little to non-existent. In turn, you have much more to lose, as there’s no way to gauge how the penny stock company will perform in the short or long term with little information to go on.
Return on investment
When trading stocks, there’s no guarantee that you’ll turn a profit. In fact, the odds definitely aren’t in your favor if the company the shares are tied to is in the midst of a financial storm or rough patch.
While this isn’t a definitive nail in the coffin, you have to think about the time between the purchase of shares and when the penny stock price appreciates and if it’s worth the wait. This could take months, if not years.
Penny Stock Scams
Be on the lookout for scam artists that promise to make you wealthy from trading penny stocks overnight. They do this by promoting a particular penny stock heavily or issuing warnings that a particular penny stock should be avoided at all costs. Either way, these deceptive marketing tactics can drive stock prices up or down in a jiffy and wreck your earning potential.
Strategies for Trading Penny Stocks Successfully
Setting clear goals and risk tolerance
Ensure that you clearly understand your investment goals and risk tolerance before you get started. This can help guide your decision-making and ensure that you are comfortable with the level of risk you are taking on.
Using stop loss orders and other risk management techniques
Stop loss orders and other risk management techniques can help to limit potential losses in penny stock trading. These techniques can help to protect your investment and keep you from making rash decisions in the face of market volatility.
Being patient and disciplined in decision-making
Successful penny stock investors are often disciplined and patient. They take the time to thoroughly research potential investments, avoid the temptation to chase after quick gains, and stick to a well-thought-out trading plan.
Bottom Line
Penny stock trading offers a unique blend of risks and rewards, appealing to those willing to navigate its volatile waters. It’s crucial to approach this market with thorough research, a clear strategy, and realistic expectations. Remember, while the potential for high returns exists, so does the risk of significant losses.
Your Next Steps
Educate yourself further: Continuously expand your knowledge about penny stocks. Resources like financial websites, investment books, and online courses can provide deeper insights.
Stay informed: Keep up with market trends and news. Regularly visit financial news platforms and consider subscribing to newsletters focused on penny stocks.
Connect with a community: Engage with online forums or local investment groups where you can exchange ideas and learn from experienced penny stock traders.
Trading penny stocks isn’t for everyone, but with the right approach, it can be a rewarding part of your investment portfolio. Always invest wisely, understand the risks involved, and never stop learning.
Frequently Asked Questions
How much money do you need to start trading penny stocks?
It depends on the broker you open an account with. Each broker has different minimum deposit requirements for opening an account. Most of them don’t have any requirements at all.
Are penny stocks hard to trade?
Penny stocks can be volatile and unpredictable. They are also subject to market manipulation. Most active traders who trade them are day traders, and only about 10% of them are actually profitable.
Why are penny stocks risky?
Penny stocks can be highly volatile and are typically subject to greater risks than larger, more established stocks. They may also be more susceptible to fraud and manipulation, which can lead to significant losses for investors.
Is Robinhood good for penny stocks?
You can trade penny stocks on Robinhood. However, the only penny stocks supported by Robinhood are stocks that trade on either the NASDAQ or NYSE. While most penny stocks are not listed on these major exchanges, exchange-listed penny stocks are typically viewed as the safer alternative to OTC stocks.
Government-owned corporation Ginnie Mae announced on Wednesday that it has revised its definition for high-balance loans, conforming to new limits announced earlier this week by the Federal Housing Finance Agency (FHFA), according to All Participants Memorandum (APM) 23-13.
“Under the new definition, effective for pools or loan packages submitted on or after Jan. 1, 2024, a ‘high balance loan’ is defined as a single-family forward mortgage loan with an original principal balance (minus the amount of any up-front mortgage insurance premium) that exceeds the [new] limits,” the company said in a statement.
For the contiguous 48 states and the District of Columbia, American Samoa and Puerto Rico, the new maximum loan amounts for a one-unit property is $766,550, while in special areas, including Alaska, Hawaii, Guam or the U.S. Virgin Islands, the one-unit property limit is $1,149,825. (These figures are net of any financed mortgage insurance premium or guaranty fee.)
High-balance loans are eligible for Ginnie Mae mortgage-backed securities (MBS) under conditions specified in chapter nine of its MBS Guide.
On Tuesday, FHFA announced that the baseline conforming loan limit for mortgages backed by Fannie Mae and Freddie Mac in 2024 will increase to $766,550. That’s up 5.5% compared to the current limit of $726,200. The conforming loan limit increase slowed compared to 2023, reflecting the slower pace of home-price appreciation this year.
The Federal Housing Administration (FHA) also announced changes to its own lending limits for forward and reverse mortgages. The FHA is increasing its “floor” and “ceiling” FHA loan limits in 2024 to $498,257 and $1,149,825, respectively, for a one-unit property.
The FHA-backed Home Equity Conversion Mortgage (HECM) program operates off of a single national limit. For 2024, it is increasing to $1,149,825, or 150% of the conforming loan limits on mortgages backed by Fannie Mae and Freddie Mac.
