Lawmakers on Capitol Hill remain in a virtual stalemate over a budget resolution that would keep the government funded for the remainder of the fiscal year. Should Congress fail to reach an agreement before Oct. 1, the U.S. government will shut down.
If that comes to pass, all “nonessential” government business will come to a halt, with some 4 million federal employees forgoing pay until the shutdown ends. Government services deemed essential, including many related to public safety and mandatory programs such as Medicare, Social Security and Veterans Affairs benefits, will remain in place.
“Sure, sure, but let’s get to the important stuff,” investors among you may be saying. “Is a shutdown likely to have a negative impact on my portfolio?”
“The headline answer is no,” says Ross Mayfield, an investment strategy analyst at Baird.
Here’s why financial experts say not to sweat it.
The main reason financial experts aren’t worried about a shutdown is because markets have been there before and emerged unscathed.
Since 1975, there have been 21 government shutdowns, which have lasted 8 days on average. The most recent, which began in late 2018 and stretched into 2019, lasted 34 days.
“If you look back at all those shutdowns and take an average return, [the S&P 500 is] actually positive, 0.1%. Essentially flat,” says Brian Levitt, global market strategist at Invesco. Put simply: “Historically, government shutdowns have not had an impact on markets.”
One reason for investors’ ho hum attitude, says Mayfield, is that they know any economic disruptions are temporary. While government employees may not see paychecks during a shutdown, they receive back pay when things resume. “It just kind of shifts things around in time rather than permanently disrupting the economy,” he says.
Another is that shutdowns tend to be short-lived. “There’s no winner. Both parties get blamed,” says Mayfield. “So they usually get resolved pretty quickly.”
That isn’t to say that markets might not get jumpy if the government goes into a more prolonged shutdown. “Political uncertainty often creates volatility in markets,” says Levitt. After all, credit rating agencies have cited political polarization among lawmakers as reasoning for dinging the U.S. government’s credit rating.
But any major market moves in the coming months will have more to do with economic data than with what politicians are doing, Levitt says.
“These things in Washington tend not to move markets as much as people think,” he says. “What the market is looking at is, ‘will things be better over the next months?’ And what that largely means right now is, ‘Does the inflation picture look better?'”
On that front, no one really knows for sure. But you’d be wise to avoid letting short-term fluctuations in the market mess with your portfolio strategy, Levitt says.
“While unnerving, concerns about shutdowns shouldn’t change investors’ long-term investment plans,” he wrote in a recent note. “This isn’t the first government shutdown, and it’s likely not the last.”
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An Australian multi-millionaire property developer has been lashed for accusing workers of becoming “unproductive” and saying a radical rise in unemployment was necessary to “remind people that they work for the employer”.
Founder and CEO of Gurner Group Tim Gurner made the comments at the Australian Financial Review’s Property Summit on Tuesday.
“I think the problem that we’ve had is that people decided they didn’t really want to work so much anymore though COVID and that has had a massive issue on productivity,” Gurner said.
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The 41-year-old identified productivity as a major issue in the housing sector, and a contributor to the current housing crisis.
“Tradies have definitely pulled back on productivity,” he said.
“They have been paid a lot to do not too much in the last few years and we need to see that change.”
Multiple builders have collapsed over the past few months and 1709 have gone under nationwide between July 2022 and April this year, with a shortage in supplies and rise in labour costs often flagged as the major causes.
The length of time between when a contract is signed and when a project is completed can leave projects unprofitable if there is a sudden increase in costs.
Gurner went on to say that he believed unemployment needed to rise.
“Unemployment has to jump 40 to 50 per cent in my view,” he said.
“We need to see pain in the economy.
“We need to remind people that they work for the employer, not the other way around.
“There’s been a systemic change where employees feel the employer is extremely lucky to have them, as opposed to the other way around.
“So it’s a dynamic that has to change.”
Gurner said it was clear to him that action was being taken “to kill that attitude”, evidenced in various layoffs seen in recent times and governments around the world were acting to increase unemployment “to get that to some sort of normality”.
“We’re starting to see less arrogance in the employment market and that has to continue because that will cascade across the costs balance,” he said.
Gurner’s comments have been met with outrage.
Australian Council of Trade Unions president Michele O’Neil slammed his comments as “incredibly offensive” and “just not factually true” while appearing on the ABC’s RN Breakfast on Thursday morning.
“I thought it was a spoof,” she said. “When I first saw it, I thought: ‘This is a sketch’.
“This is an uber-rich guy who is saying the quiet part out loud … he was basically advocating that you should make working people suffer to bring them under control.
“And he was talking about it being a good thing to increase unemployment by 50 per cent … saying that workers had got lazy, that people hadn’t been working hard enough.”
Workers “got us through” the pandemic by working “day and night to keep us safe”, O’Neil told the ABC.
It was “incredibly offensive” for someone who had “made his fortune off the back of skilled tradespersons building the properties that he’s developed” to say tradespeople are pulling back on productivity, she said.
“It was the most extreme arrogance I have heard … said out loud in a long time … it’s actually shocking.
“If people think in Australia there is no class difference, just have a listen to this guy and then think about the working people who made his fortune for him.”
‘People are really suffering’
The economy is currently in favour of corporations, O’Neil said.
“The growth we have seen and productivity in Australia in the last decade, the lowest share of it ever, has been shared with working people,” she said.
“When productivity has been increasing, more and more of it was going to corporate profits and not going back to the workers who are actually building that productivity.
“We’ve also seen one of the lowest investment periods for corporate Australia, ever. And we’ve seen some of the highest growth in CEO salaries and in profits.”
O’Neil said a healthy economy was not one in which company profits and executive salaries soared while workers missed out.
“People are really suffering now with the cost of living,” she said.
There are more people working multiple jobs than we’ve ever had, O’Neil said, and seeing more people out of work and facing job insecurity will not solve anything.
“One in four workers are casual and get no paid leave,” O’Neil said.
“And this multimillionaire thinks that we have to cause more pain to working people so that they’re not as arrogant.
“Well I just find that shocking and offensive.”
Gurner’s comments even attracted the ire of US democrat Alexandria Ocasio-Cortez.
“Reminder that major CEOs have skyrocketed their own pay so much that the ratio of CEO-to-worker pay is now at some of the highest levels *ever* recorded,” Ocasio-Cortez wrote on X, formerly known as Twitter.
Gurner previously came under fire for comments he made about millennials and avocado toast on Channel 9’s 60 Minutes in 2017.
“When I was trying to buy my first home, I wasn’t buying smashed avocado for $19 and four coffees at $4 each,” he said.
He went on to accuse millennials of thinking lifestyles portrayed by celebrities, such as the Kardashians, were normal and didn’t require hard work.
“(Young people) want to eat out every day, they want to travel to Europe every year,” he said.
“You have to start to get realistic about your expectations.
“There is no question we are at a point now where the expectations of younger people are very, very high.”
Gurner’s early leg up
Gurner’s first investment was an apartment in St Kilda worth $180,000.
“I was fortunate enough to have my boss at the time approach me to renovate it while he fronted up the money,” Gurner told news.com in 2017.
After selling it for a profit of $12,000 a year later, Gurner combined this with a loan of more than $30,000 loan he received from his grandfather — which he used to obtain a $150,000 loan.
He then purchased a gym, which he renovated and sold.
Gurner was a teenager at the time.
“It was incredibly difficult,” he said.
Gurner Group now reports a development and management portfolio worth of $9.5 billion on its website.
- Homeowners are sitting on nearly $30 trillion of home equity, just shy of the peak in 2022.
- Here are the best ways to tap your home for cash.
Many Americans are house-rich, at least on paper.
That’s roughly $200,000 cash per homeowner in equity that can be tapped, which is the amount most lenders will allow you to take out while still leaving 20% equity in the home as a cushion.
Even with high rates of home equity, borrowers are more likely to take out a second loan to pull cash out, rather than lose their low rate through a cash-out refi.
Otherwise, a home equity line of credit, also known as a HELOC, lets you borrow money against a portion of your home’s equity. Instead of taking out a home loan at a fixed amount, a HELOC is a revolving line of credit, but with better rates than a credit card, that you can use when you want to, or just have on hand.
Last year, originations of home equity loans and HELOCs increased 50% compared with two years earlier, according to the Mortgage Bankers Association, or MBA.
“Given the nearly $30 trillion of accumulated equity in real estate, there is untapped potential for home equity lending for lenders and borrowers,” said Marina Walsh, MBA’s vice president of industry analysis.
When it comes to borrowing against your home, the terms can vary greatly, according to a LendingTree report that analyzed more than 580,000 home equity loan offers across the country.
The average home equity loan amount offered to homeowners is $104,102, LendingTree found. Homes in Iowa had the most favorable terms with an average interest rate of 9.88% — two percentage points higher than the average rate of 7.88% offered in Maryland, the lowest in the nation.
Still, at less than 10%, rates are significantly lower than what it costs to borrow on credit cards, which charge roughly 20%, on average.
However, “it’s not that easy to withdraw money from your home,” said Zillow’s senior economist, Nicole Bachaud. “Not everybody is going to qualify for getting an extra loan.”
Fewer banks offered this option during the height of the Covid pandemic, when lenders tightened their standards to reduce their risk. Access to HELOCs has improved, although the most preferable terms still go to borrowers with higher credit scores and lower debt-to-income ratios.
“Though a home equity loan can be a good way to pay for big expenses, like major renovations, or to consolidate high-interest debt, getting one isn’t without drawback,” added Jacob Channel, LendingTree’s senior economist.
“Not only can qualifying for a home equity loan be more challenging than qualifying for other types of debt, defaulting on a home equity loan can have serious negative consequences,” Channel said. In some extreme instances, defaulting on a home equity loan can mean that you’ll lose your house, he noted.
Even now, “borrowers shouldn’t rush out to get a home equity loan until they fully understand all of the risks associated with them,” Channel cautioned.
Keep in mind that different lenders will also offer different terms and interest rates, Bachaud added. She recommended talking to several mortgage companies or loan officers, as well as weighing all the costs before deciding what makes the most sense.
Last week, I shared a post translating the whole of financial planning into the language of life, suggesting that all the jargon, products, pitches, services, and strategies can be beneficially simplified into a four-quadrant approach that imputes more meaning into our money management:
- Live – Provide a predictable source of income to ensure provision in the present.
- Grow – Grow your assets to ensure provision for the future.
- Protect – Protect your family, lifestyle, and property.
- Give – Give to the people and causes that are important to you.
The temptation is to assume that the practice of investing is buried within a single pillar above—Grow—and indeed, I believe that is how the financial industry has presented investing to the world and how most of us, even as financial advisors, have seen it. But what if we deconstructed portfolio management even further? Or, for starters, why would we do that?
According to Dr. Daniel Crosby, the author of several books, including The Behavioral Investor and The Laws of Wealth, “By simply breaking our investments into constituent buckets and labeling them with a purpose, we are able to gain the perspective necessary to ignore volatility in favor of what matters most.”
What matters most, especially in times of market ups and downs, is staying the course. So, is there any evidence that a “bucketed” approach to investing helps investors do so? Crosby introduced me to a study by the SEI Wealth Network following the most dramatic stretch of market volatility in most of our lifetimes, the financial crisis of 2007 through 2009.
They compared how investors responded in “traditional investment portfolios” (think your standard 60/40 stock/bond setup) to those invested in a “goals-based investment strategy” (like the “bucketed” approach we’re discussing). Here’s what they found:
“Of those in a single, traditional investment portfolio:
- 50% chose to fully liquidate their portfolios or at least their equity portfolios, including many high-net-worth clients who had no immediate need for cash.
- 10% made significant changes in their equity allocation, reducing it by 25% or more.
Of those clients in a goals-based investment strategy:
- 75% made no changes.
- 20% decided to increase the size of their immediate needs pool but left their longer-term assets fully invested.”
If I’m reading that correctly, 60% of those in the typical portfolio structure bailed on the plan. At the worst possible time. And 95% of those with a purpose-driven approach stuck with the plan. At the most important time.
So, would you like to see what a goals-based, “bucketed” approach to portfolio management could look like in practice? Let’s look at three examples, recognizing that the power of this methodology is in its customizability. It is more a framework than a prescription, and every individual or family’s breakdown will be different.
The Millionaire Next Door – This 70-something couple has $1,000,000 in retirement savings, mostly in IRAs, receives $40,000 per year in Social Security income, and needs an additional $30,000 per year in income to live comfortably, for a total of $70,000 per year.
- Give – Faithful tithers, the MND couple has a plan in place to contribute $8,000 per year to their church as Qualified Charitable Deductions (QCDs), directly from their IRA accounts.
- Protect – $30,000 plus $10,000 for a special trip to Europe adds up to $40,000 in FDIC-insured savings vehicles.
- Live – The MND couple would feel most comfortable having 10 years’ worth of living expenses (and giving) invested in low-volatility vehicles. If we only assumed the investments would keep pace with inflation, that would mean $380,000 would be invested in this bucket.
- Grow – With the next 12 months on lockdown and a decade of income provided, they are more comfortable taking risks with the remaining $572,000 to be invested in their Grow bucket. If we estimated a 7% rate of return on the portfolio, they would have $1,125,210 in this bucket, ready to refill the Live bucket (and more) in 10 years. Even if we assumed a 5% rate of return, they’d still have $931,727 ready to be redeployed in a decade.
The Careful Client – This 60-something recent widow was a successful entrepreneur who was very comfortable taking risks in her chosen field but has always been uncomfortable with the wild swings in the market. Having sold her business, she has $6 million, almost entirely in cash and an annual income needs of $125,000—and doesn’t want to rely at all on Social Security for her financial security.
- Protect – The careful client wants to build a mote of financial protection—three years of living expenses, or $375,000—in the stablest of the stable securities.
- Live – Earning her nickname, the Careful Client wants to populate her Live bucket with a lifetime’s worth of vehicles designed to create predictable cash flow, even if it invades the principal. It dedicates $3,750,000 to that cause, estimating a healthy, 30-year lifespan.
- Give – To reduce the tax burden of her entrepreneurial exit and support three causes that are near and dear, she slates $150,000 for a donor advised fund.
- Grow – That leaves $1,725,000 to be invested in an equity portfolio that is constructed specifically based on the Careful Client’s personal values. She sees this portfolio not so much as invested for her but for her two children and her chosen causes. If it only earned 7% per year and she lived out a full 30 years, it would be worth more than $13 million at the time of her passing.
The Generational Giver – Our last couple experienced more financial success earlier in life than they ever expected, retiring in their mid-50’s with $15 million after the company they both worked for went public. They have three children, two still in college. Still, otherwise, they live fairly frugally, their windfall considered, and they are intent on seeing their financial wherewithal do all the good it can *during* their lifetime. Their annual income need is $175,000.
- Protect – With two kids still in college and likely three weddings to come, they want to have two years’ worth of living expenses in their Protect bucket, plus $30,000 for a big family trip and $55,000 to buy a new car outright. Total needs are $435,000.
- Live – They’re not particularly skittish about market investing and know that it will be important to outpace inflation if they retire early, so they are comfortable having seven years of cash flow covered in their Live bucket, or $1,225,000 to start, with a plan to refill that bucket every seven years from the proceeds in their Grow bucket.
- Grow – That leaves a big number to invest in an equity-heavy portfolio—$13,340,000. If it earned 7% for seven years, it would spin off more than $7 million in growth, but the Generational Givers know the market is not always that predictable. Every seven years, they’ll peel off enough to replenish their Live bucket, but their growth plan, however, is really about their Give bucket.
- Give – It is important to the Generational Givers to be generous with their children, but they don’t want their inheritance to be a gaudy number in a portfolio that their kids won’t even see until they don’t need it anymore! Instead, they intend to be very intentional, providing gifts for their children and presumed grandchildren throughout life, both through funds and especially experiences that are designed to expand their horizons. Then, they plan to work with their children to determine a limited number of non-profit organizations with which they can all partner, fiscally AND physically, in relationship and throughout life such that they will be able to see the fruits of their collective investments.
For hundreds of years, the financial industry has required its customers and clients to invest their money through the lens of corporate speak and “financialese,” and I have no doubt that is one of the foremost reasons we see investors abandoning their plans all too often. Don’t you think it’s time that we translated investing into the language of life?
The housing market is out of whack.
The process of buying a home can be painful, and the unpredictable and counterintuitive dynamics of the current real-estate market don’t help.
Painful, in fact, might be an understatement.
“It was a hellish experience,” Odeta Kushi, who bought a home last year in the D.C. metro area with her husband. One of the homes she had bid on ended up receiving 19 other offers. “That was a house that I really loved,” she said.
When Kushi had begun looking for homes two years ago, she had the exact neighborhood she wanted pinned down. It had a semi-suburban vibe, was in D.C., and had a good school district in case she wanted to expand her family.
Kushi, deputy chief economist at First American, has spent a good portion of her career building a model that can estimate the value of homes, so she knew how much to offer and — crucially — when to step out of the bidding process.
At the time, mortgage rates were about half of what they are in 2023, which made homeownership an even more enticing prospect. And yet Kushi knew it would not be easy.
“I lost bidding war after bidding war,” she told MarketWatch, “because I knew exactly what I was going to pay.”
In 2021, interest rates were relatively low, and competition among buyers and sales prices were high. In 2023, interest rates are high, and yet so are sales prices — and there’s still fierce competition to buy homes.
Bidding wars are back in earnest. In fact, they’ve never really gone away. The housing market has slowed down in the last two years, but rising interest rates have not put a big dent in prices. So what gives?
Buying a house is an emotional experience, so it can be harrowing to pass up on a house you have set your heart on. “I had a lot of heartbreak in the housing search because you get attached to these homes,” Kushi added.
A couple of times, when it looked like it was a done deal, a buyer swept in at the last minute and offered “something absurd above our asking,” Kushi said. “All’s fair in love and housing,” she added.
It’s been more than a year since she’s closed on — and moved into — her new home. Since then, the prospects for buyers have only gotten worse: The 30-year mortgage rate has doubled over the last two years, and is now marching towards 8%.
A stalemate between buyers and sellers
Putting aside homeowners, who either purchased a house with an ultra-low mortgage, or refinanced to secure that low rate, most Americans — from renters to investors to economists — are in equal parts baffled and frustrated with the trajectory of the U.S. housing market.
Home sales are falling, mortgage rates are at the highest level in 22 years, yet the market is still out of reach for many: Home prices are still high, with the median price of a resale home over $400,000.
The biggest problem for the housing market right now, however, is an imbalance between current homeowners and aspiring homeowners: There’s a severe mismatch of incentives and motivations.
Traditionally, the majority of home sales are of homeowners selling their houses to buyers. But homeowners today don’t feel the need to sell, unless they have to for personal reasons, as they probably have low mortgage rates.
Affordability has fallen. If they do move, they will find that — while they may be able to sell their home for a higher price than they bought it — they may only be able to afford a smaller house or a similar-sized house in a less desirable neighborhood.
Compounding that problem, buyers have fewer home listings to choose from. They turn to builders, who offer new homes and even mortgage-rate buydowns to make owning a home a little less expensive. But builders can’t meet all of the demand. They also don’t want to overbuild, having been bit once during the Great Recession.
Some renters have stuck it out, adopting a mentality of “date the rate, buy the house,” choosing to purchase a home that meets their criteria now and to refinance later on in their life.
But the math doesn’t make sense for many other renters. The median rent for a two-bedroom home in the U.S. was nearly $2,000 in July 2023, according to Realtor.com. The same month, the median list price of a home was $440,000 — or over $2,220 in just principal and interest payments.
Even though the real-estate sector has been profoundly impacted — sales are at “rock bottom,” Redfin CEO Glen Kelman told MarketWatch this month — home prices, to the frustration of many, haven’t budged.
Given that rising home values broadly affect how housing costs are calculated in the government’s inflation measures, some economists fear that the resilience in home prices mean that there’s still a long way to go before the U.S. economy cools off.
“We’re in uncharted waters,” Andrew Levin, a former Federal Reserve economist, told MarketWatch. “We’ve never had an increase in mortgage rates that’s been as sharp and sustained as we’ve had in the last year and a half.”
Even home builders, who have seen a sharp increase in demand from home buyers, are worried about high rates killing demand. They’re already seeing traffic of potential buyers drop, and some are building smaller, more affordable homes.
The bottom line: housing inflation will likely “run high for a long time,” Levin added.
Some analysts sound baffled and frustrated. “Housing should be repricing,” Drew Matus, chief market strategist at MetLife said on Bloomberg Surveillance in mid-August. “The fact that it is not, is not a sign of health,” he added. “It is a sign of dysfunction.”
Others have changed their minds about prices correcting, as home buying demand has remained stronger than expected despite higher rates. Goldman Sachs
in August said it expects home prices to rise in 2023 by 1.8%, revising a prior prediction of a drop of 2.2%.
One economist described the current situation as a “tale of two housing markets.” Michael Reid, U.S. economist at RBC Capital Markets, wrote in a note that the data shows a divergence between existing home sales, which have stalled and new home sales, which have surged.
The cost of “shelter” or housing is one of the key components the Federal Reserve uses to measure inflation. One of the Fed’s key tasks is to maintain inflation at a low and steady pace — it has a 2% target — so any major increase in the cost of living will provide more incentive to raise rates.
When the Fed raised interest rates last summer, that prompted mortgage rates to shoot up, and dampened home sales. After raising its benchmark rate in 11 of its last 12 policy meetings, most economists say it’s less likely to hike rates at its next policy meeting in September. In fact, financial markets put the odds close to zero.
Still, with inflation running at an annual rate of 3.2%, primarily driven by high housing costs, the Fed may not be done hiking interest rates and, by extension, mortgage rates may have some room to rise. That would be bad news for both the real-estate industry, and home buyers.
What happened after rates hit 18% in 1981?
The fact that the housing market appears to be out of balance isn’t just due to first-time homebuyers — millennials and Generation Z — lamenting higher rates and home prices. Older generations may point to higher rates and shrug it off as something that younger generations just need to accept. A new normal, if you will. After all, mortgage rates peaked at 18% in 1981.
But Kushi said there’s something people need to remember about how the 1980s played out: monetary policy became extremely tight before inflation improved. “From December of 1979 to January of 1980, interest rates were soaring as the Federal Reserve was combating the ‘Great Inflation,’” she said. “As mortgage rates soared to levels unseen before or since, homes were becoming significantly less affordable and home sales and new construction was falling.”
But by October of 1982, inflation had fallen to 5%, she added. The Fed allowed the Fed funds rate to fall, and as a result the 30-year mortgage rate fell too.
Kushi’s analysis of the 1980s, which she considers a period when housing went into recession much like today, indicates that though the current housing market may be in a dark place, it will stay as such until the Fed hits its target inflation rate, or something else triggers the economy to slow even further.
Meanwhile, the typical home buyer may need to finally make peace with higher-than-normal interest rates. Reid, the RBC economist, noted that for a family earning median income, their monthly mortgage payment with current rates would be 28.5% of their total salary. “That is the highest share in the last 30 years,” Reid wrote, “and well above the sub-20% shares we saw in the previous decade.”
And the imbalance — or the dysfunction — that we’re seeing in the housing market may take a while to iron itself out. Given that the economy and the labor market is strong, it does not seem likely that the Fed will be cutting rates anytime soon, Levin said; the Fed may even need to raise them further.
“It doesn’t seem terribly likely to me that mortgage rates are going to come down very much anytime soon,” he added. “So the housing market we’re seeing now is probably the housing market we’re gonna be seeing for quite a while.”
For those still in the thick of house-hunting, meanwhile, Kushi had one piece of advice: Stick to your gut instinct. Hers was to not overpay for a home.
When Kushi was planning to buy a home, she had been gung-ho about her finances to estimate the couple’s budget. “I had spreadsheets on spreadsheets and spreadsheets, budgeted everything in, how it would impact this part of my discretionary spending, and what rate I was willing to,” Kushi said.
At certain points during a bidding war, she relied on “escalation clauses” to make sure they weren’t going over what she felt was comfortable. An escalation clause is a term used in real estate to specify how much more the potential home buyer is willing to pay than the highest offer and the amount they ultimately want to spend.
Kushi has since become the first homeowner in her immediate family. Although it was not an easy process, she held onto her nerve, stuck to her financial projections, and it paid off.
“I was not willing to budge on price,” she said.
- The outlook for residential mortgage REITs may soon perk up due to a slew of economic data pointing toward a so-called soft landing for the U.S. becoming more plausible.
- If the Fed can tame inflation without sparking a recession, interest rates will presumably begin to retreat in 2024.
- Here’s a look at two mortgage-backed REITs worth consideration.
Djelics | E+ | Getty Images
Income-hungry investors have long flocked to mortgage-backed real estate investment trusts — and why not? Many of them pay a handsome, double-digit dividend. But such vehicles haven’t done so well lately.
That’s because when interest rates rise and yields balloon, their valuations tend to suffer, which is what happened after it became clear in 2021 that the U.S. Federal Reserve would embark on an aggressive, multiyear tightening campaign. Many REITs experienced declines of more than 50% after that point.
Yet, unlike the commercial-focused portion of this market — which continues to face steep headwinds in the wake of pandemic-induced changes to the American workplace — the outlook for residential mortgage REITs may soon perk up. That’s due to a slew of economic data pointing toward a so-called soft landing, a slowdown in economic growth that avoids a recession, becoming more plausible.
Inflation is at its lowest level in more than two years. The labor market has settled into a Goldilocks zone — that is, one that is not too hot or cold, but just right — of slowing but still has solid job gains, with the unemployment rate at historic lows. Meanwhile, second-quarter gross domestic product figures blew past estimates and consumer sentiment last month notched its highest reading since October 2021.
None of this is to say that a soft landing is a sure thing — far from it. Notably, inflation data will start to go against harder-to-beat annual comparisons beginning with the U.S. Department of Labor’s upcoming consumer price index report due out this week.
Also, keep in mind that it takes time for rate hikes to make their way through the system. The labor market has held up until now, but who is to say that cracks won’t emerge soon?
Still, were the Fed able to tame inflation without sparking a recession, interest rates would presumably begin to retreat in 2024. Importantly, that scenario would also help the residential mortgage REIT industry avoid what most at the beginning of the year thought was a certainty: widespread defaults.
Together, that sequence of events would initiate about an 18-month cycle where the book values of mortgage REIT companies spike, juicing their stock prices. What’s more, by getting in during the embryonic stages of this trade, investors can secure an opportunity to collect outsize income payments, just as other yield-producing investments may face challenges due to the prospect of declining rates.
To clarify, mortgage REITs don’t own the mortgages themselves. Instead, they invest in mortgage-backed securities, collect the interest and then return those income streams to investors. Two REITs to consider include AGNC Investment Corp (NASDAQ: AGNC) and Annaly Capital Management Inc. (NYSE: NLY).
Beyond the favorable dynamics described above, the two companies share several commonalities that make them potentially attractive:
- Each currently trades at a discount relative to their current book values.
- Both fell off a cliff in 2021, just as the Fed began to put an end to years of easy-money policies, giving them plenty of room to run.
- Each began to stabilize earlier this summer after the Fed opted against increasing rates in June and speculation began to ramp up that the tightening cycle could end soon.
- Both pay an enormous dividend. Annaly’s is 13.15%, while AGNC’s is 14.5%.
Investing has many hard and fast rules. One of the most important rules may be that there’s a time and a place for everything.
Over the past two years, residential mortgage REITs, despite the dividends, were not a great place to be. But if it becomes more apparent that the Fed can thread the needle and engineer a soft landing, it will be the right time to add mortgage REITs to your portfolio.
— By Andrew Graham, founder and managing partner of Jackson Square Capital
If you’re nearing retirement, one of the most important (and potentially stressful) questions you have to ask yourself is “do I have enough?“
One-third of Americans over 50 said their biggest retirement planning regret was not obtaining a lifetime income source, according to a Nov. 2022 study from researchers at the University of Pennsylvania and the Hebrew University of Jerusalem.
One way to help maintain a regular income during retirement is by buying annuities. These are complicated products that can come with high fees, but CNBC Select explains the basics so you can decide if annuities are worth a closer look.
An annuity is a contract between an investor and an insurance company. The investor, known as the annuitant, pays either a lump sum or a series of payments to the insurance carrier in exchange for guaranteed income payments, which can begin immediately or in the future. You can buy an annuity from insurance companies, banks, brokerage firms and online issuers.
Let’s imagine a 40-year-old woman invests a lump sum of $50,000 into a fixed annuity. She elects to begin receiving payments from that annuity when she is 65-years-old. Even if she adds no additional benefits to her annuity contract, she will receive upwards of $900 per month for the rest of her life after she turns 65.
Insurance companies invest your initial payment, exposing that lump sum to the market and allowing it to increase over time. Depending on the issuer and the type of annuity, your initial payment may be invested into stocks, bonds or money market funds.
At its core, an annuity can guarantee consistent payments back to the investor, which means you can potentially have guaranteed income for the rest of your life. This is why annuities are typically used to subsidize retirement expenses.
The biggest risk with retirement planning is outliving your savings, as you don’t know how long you are going to live, says Elle Switzer, the director of annuity product management at TruStage. “When you think about retirees of the past, many of them had pension plans from their employers, and, through that, they had a guaranteed income stream that doesn’t exist for most of us anymore,” she says.
Granted, an annuity payment alone may not be able to cover all of your monthly expenses, depending on the plan and how much you paid upfront. But the fact that annuitants can get consistent payments until they pass away makes them worthy of consideration for your retirement planning.
Here’s a snapshot of an annuity’s lifetime:
- You, the annuitant, choose an annuity type based on your retirement goals.
- You purchase that type of annuity plan through an insurance company.
- The insurance company invests your initial payment.
- Your annuity account earns interest from these investments.
- You elect to begin receiving payments from the annuity.
- You are paid back your original investment plus interest (minus the insurance company’s fees).
The time during which your investment earns interest is known as the accumulation phase. The time during which you receive payments is known as the annuitization phase. Depending on the type of annuity you are investing in, your annuitization phase may begin immediately.
Unless your annuity plan has contractual withdrawal amounts, you usually can’t access the money until your payout period begins, and in other instances, you may be charged a penalty for withdrawing money before the end of your surrender period — the duration of time during which you cannot withdraw funds from the annuity.
Most annuity surrender periods are between two and eight years, but some can last as long as 10 years. Still, even if your surrender period has expired, you will receive a 10% IRS penalty if you make a withdrawal before age 59½.
When you reach your payout period, you’ll likely begin receiving monthly payments as you would from a pension or a paycheck during working years. Any interest earned on a deferred annuity won’t be taxed until you make a withdrawal. This allows your investment to grow even faster.
You can legally opt-in to these payments any time after your surrender period is up. However, if you do so before age 59½ you’re going to encounter that 10% additional tax penalty. Most financial advisors recommend leaving these annuities untouched for a while and start receiving payments in your late 60s or early 70s. Like most long-term investment accounts, it’s generally a smart idea to leave them alone and allow them to generate as much interest as possible, making your payments higher when they begin.
If you’re interested in calculating your potential annuity payout, Charles Schwab offers a helpful Income Annuity Estimator.
Annuity investment returns depend on a number of factors, including the performance of the index it’s invested in, the cap on potential interest it can earn, the type of annuity and more. But you can usually expect to see a 4% – 6% annual return on some annuities and as much as an 8% annual return on others. So, if these investments are left alone for extended periods, they can be extremely lucrative in retirement.
Different types of annuities have varying levels of risk, but annuities as a whole can typically withstand economic downturns. Of course, every investment comes with some sort of market risk, but you can reduce that risk by adding a rider to your annuity contract (for an additional cost), which can protect you from the losses of the annuity investment underperforming.
These benefits can make annuities a safer investment than owning common stock for example, but the more lucrative your annuity’s benefits (or riders) the more expensive your annuity’s fees will be.
Do you pay fees on annuities?
An annuity fee is an additional cost associated with purchasing an annuity. These fees are usually deducted from the balance of your investment. Annuity fees typically run between 1% and 3% of your account’s balance annually.
The types of fees you encounter depend on the company you purchase the annuity fee from. Some companies, like USAA, charge no upfront fees except the 10% IRS penalty for those who make withdrawals before age 59½. Some companies charge fees that may be administrative, like commission fees and maintenance fees.
Make sure you understand and are financially prepared for the fees associated with an annuity before purchasing it. The more complicated an annuity, the more expensive its fees are. For example, a variable annuity, which requires more investor oversight, will typically cost more than a simple fixed annuity.
However, the most common fees are charged for optional benefits called annuity riders.
Minimums range from $20,000 to $50,000 to open a Fixed Guaranteed Growth annuity, and the minimum to open a single premium immediate annuity is $20,000.
USAA offers Retirement Income Specialists who can provide complimentary retirement income planning.
What is an annuity rider?
Annuity riders are like add-on benefits that can be purchased and are separate from the base contract that you sign when you take on an annuity. By paying an additional fee, you can eliminate some of the risks associated with annuities and make them a more attractive investment.
Switzer says examples of annuity riders include
- An enhanced death benefit: This could make your contract pay out the maximum of its value when you die.
- A guaranteed minimum income: This prevents your income from dropping below a certain threshold regardless of what type of annuity it is. This rider might guarantee that you will receive a payment based on the value of your initial investment compounded at 6% interest annually, at minimum, or it might guarantee that you receive a payment based on the highest market value that your investment ever achieved.
- A guaranteed lifetime withdrawal benefit: This allows you to have access to your account value at all times, bypassing a deferral period and letting you use your annuity account as an emergency fund.
Certain companies offer other benefits like long-term care riders that match payments for medically required long-term care, a cost-of-living rider that adjusts your payments for inflation, or an impaired risk rider that can essentially fast-track your annuity payout should you be given a life-shortening diagnosis.
It’s important to remember that (in general) the more value a rider adds to your annuity, the more expensive it will be.
Annuities come in many shapes and sizes. Some are purchased as a one-time payment, and some are purchased through a series of payments. Annuities also vary in how they pay out, with some giving you a lump sum while others make a series of payments.
Evan Potash, an executive wealth management advisor at TIAA, says there are two general categories of annuities: immediate annuities and deferred annuities.
- Immediate annuities are opened with a lump sum investment and result in immediate, guaranteed income payments. These are sometimes referred to as income annuities. These are smart investments for late savers or those close to (or already in) retirement, since they start paying out immediately. However, unlike deferred annuities, they don’t have as much time to accumulate interest, so payments are usually lower.
- Deferred annuities, by contrast, have a deferral period that focuses on wealth accumulation before payout. This is the most common category of annuities, especially for those saving for retirement. This allows your capital investment more time to accrue interest, resulting in higher payments than an immediate annuity would. Think of deferred annuities like a private form of social security. And unlike immediate annuities, these annuities usually offer a death benefit, which transfers your remaining assets to a beneficiary should you die before the end of the annuity contract. However, deferred annuities have long surrender periods, making your investment non-liquid usually for two to eight years.
Regardless of whether an annuity plan is immediate or deferred, Potash says an annuity can be structured in one of three ways: as a fixed, variable or indexed annuity. Some companies, like Fidelity, offer all three types of annuities and have financial advisors who can help you choose which is best for you.
Depending upon the plan, fees can range from around 0.25% to 1.9%. If you invest more than $1 million in a Fidelity Personal Retirement Annuity® then the fee can be as low as 0.10%. These are relatively low fees in comparison to other fees on the annuity market.
Depending upon the plan, the minimum investment ranges from $5,000 to $50,000.
Fidelity offers a team of financial professionals that can assist you with planning and advice, and access to The Fidelity Insurance Network® which helps you compare products from reputable providers who offer competitive products. Fidelity also offers several tools that can help you determine what annuity best suits you.
What is a fixed annuity?
A fixed annuity is one that delivers you payments with a flat rate of return, regardless of inflation or market changes. While fixed annuities provide peace of mind and typically have little-to-no fees attached, they usually don’t pay out as much money as a variable annuity.
What is a variable annuity?
A variable annuity gets invested in stock funds that typically keep pace with inflation – think real estate or bond funds. With variable annuities, you can assume that these investments will keep your cash as valuable as or more valuable than it was when you first invested it.
With this type of annuity, you run the risk of the market going down and your monthly payment decreasing. While you will contractually receive payments for life, they may decrease substantially, and it may take decades for your payments to equal your initial investment.
“You’re not going to run out of money, but it can continue to go lower if the market continues to go lower,” says Potash. “But over the long term, if you look at markets, they tend to go up much more than they go down.”
If you opt for a variable annuity, you should have a backup plan or a flexible budget so you can still afford all your expenses in case your payouts decrease over time.
What is an indexed annuity?
An indexed annuity is one that is invested in indexes, like the S&P 500 or the Dow Jones. Because these stocks represent a considerable number of America’s top companies, they generally reflect the economy as a whole. Like a variable annuity, an indexed annuity is designed to keep pace with inflation and secure your purchasing power for life.
But indexed annuities are not foolproof. You’re likely to have lower returns than you would with a fixed annuity should you encounter a bad market year, as your investment is exposed to an index stock or index-linked bond. However, this type of annuity usually guarantees that the least amount of interest you can earn annually is 0%. So if the index goes up, you’ll earn a percentage of those gains and if the index goes down, you may not earn anything — but you also won’t lose any of the money you put in the annuity.
You don’t have to be planning for retirement for annuities to be a good idea. Though some annuities have $100,000 buy-ins, some have a low minimum initial investment of $5,000. The higher your investment, the higher your monthly payments, generally speaking.
For example, consider a 40-year-old woman who invests $100,000 into an annuity to be left untouched for 20 years at an annual rate of return of 8%. According to Bankrate’s annuity calculator, her monthly payments will be around $830. Under the same circumstances, an annuity with a $5,000 initial investment would yield monthly payments of around $41.55.
There’s no perfect age or perfect money market for buying an annuity. Switzer and Potash agreed that annuities can be a smart idea for newly working savers building financial independence, though they’re not a great idea for people who need fast and easy access to cash. CNBC Select recommends having your other financial ducks in a row before investing in annuities. It’s more important to establish an emergency fund, max out employer 401(k) contributions and reduce high-interest debt before considering tying up your cash into this kind of investment.
Make sure to read and understand all the information and terms associated with an annuity before purchasing it. Not only can taking the time to understand your annuity protect you from a bad deal, but it can also help you get the most value out of that annuity.
Switzer says annuities are best as one component of an entire retirement portfolio, and you should not invest everything you have saved into annuities.
“Annuities can really just be another investment vehicle, and it’s an investment that has some guarantees, and that can work very well for some people,” says Switzer.
Investing all of your retirement savings into annuities leaves you with a lump sum of potentially interest-accruing value, but you can’t access a majority of it at once. If you encounter a financial emergency and need lots of cash quickly, you will likely be out of luck.
Potash recommends having about a third of your savings readily accessible and about two-thirds of your money in a guaranteed account of some kind, like an annuity, pension or social security.
What other options do I have for retirement?
There isn’t one right way to fund your retirement. Depending on your employer, your income and your lifestyle, you have plenty of options for smartly saving for your golden years.
Employer-sponsored plans include 401(k) and 403(b) accounts, which are tax-advantaged retirement plans. Roth 401(k)s are slightly different, as they’re an employer-sponsored after-tax plan.
Individual plans include IRAs, Roth IRAs and simple IRAs. These investing tools allow individuals to earmark their retirement savings by making individual contributions. These plans are not tied to your employer, so anyone can open an individual retirement account. Further, you don’t have to pay taxes on withdrawals from Roth IRAs since you’ve paid taxes upfront.
For unsure retirement investors, CNBC Select recommends robo-advisors like Betterment and Wealthfront, which allow you to indicate factors like risk tolerance, time horizon and financial goals so the platform can invest your money in a portfolio that aligns with your needs. These platforms make it easy to invest your money on auto-pilot and prepare for retirement in a hands-off manner.
Minimum deposit and balance
Minimum deposit and balance requirements may vary depending on the investment vehicle selected. For example, Betterment doesn’t require clients to maintain a minimum investment account balance, but there is a ACH deposit minimum of $10. Premium Investing requires a $100,000 minimum balance.
Fees may vary depending on the investment vehicle selected. For Betterment Digital Investing, 0.25% of your fund balance as an annual account fee; Premium Investing has a 0.40% annual fee
Up to $5,000 managed free for a year with a qualifying deposit within 45 days of signup. Valid only for new individual investment accounts with Betterment LLC
Stocks, bonds, ETFs and cash
Betterment offers retirement and other education materials
Terms apply. Does not apply to crypto asset portfolios.
Minimum deposit and balance
Minimum deposit and balance requirements may vary depending on the investment vehicle selected. $500 minimum deposit for investment accounts
Fees may vary depending on the investment vehicle selected. Zero account, transfer, trading or commission fees (fund ratios may apply). Wealthfront annual management advisory fee is 0.25% of your account balance
Stocks, bonds, ETFs and cash. Additional asset classes to your portfolio include real estate, natural resources and dividend stocks
Offers free financial planning for college planning, retirement and homebuying
If you are self-employed or work freelance, you should consider an SEP (simplified employee pension) plan, which may also have provisions for guaranteed lifetime income.
You could also consider investing your money in a high-yield savings account or investing in stocks and bonds.
Regardless of how you prepare for retirement, you should still maintain cash reserves separate from investments. Having a diverse portfolio, one that includes a sure-fire cash tap, is always a smart approach to retirement.
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Annuities offer retirees another steady income stream to help keep them financially secure and comfortable. Make sure you fully understand the terms of an annuity before purchasing it as an annuity can only be a useful tool when you understand its limitations.
Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
Zhiqiang Su, 50, and Yuping Liang, 50, moved from China to Chicago in 2020, seeking a life with better education opportunities for their now 21-year-old daughter and more freedom.
They have been renters since they immigrated, living in a single-family, two-bedroom home in Bridgeport for $1,200 a month, never having missed or been late on a payment.