In February 2020, Tenisha Tate-Austin and Paul Austin decided to erase all traces of their existence in the Northern California home the Black couple had created for themselves and their children.
They “whitewashed” their home by removing their family photographs and African art displayed around the house. They had a white friend place some of her own family photographs around the home and greet the appraiser as if she were the homeowner.
The couple wanted to see if they’d get a better home appraisal than the one they had received three weeks earlier.
The experiment worked. This time, the appraisal (by a different appraiser from the same appraisal management firm) was almost 50% higher. In three weeks, the value of their Marin City home, 11 miles north of San Francisco, had gone from $995,000 to $1,482,500.
In March, the Austins settled a fair housing lawsuit alleging race discrimination against the licensed real estate appraiser; they’d reached a settlement in October with the appraisal management company.
Sixty years after Martin Luther King Jr. delivered his most iconic speech calling for civil and economic rights and an end to racism, one of the biggest roadblocks to building wealth for Black Americans is still in place: The housing gap has widened from the time it was legal to discriminate based on race.
In 1960, eight years before the Fair Housing Act, which prohibits property owners, financial institutions and landlords from discriminating based on race, the homeownership gap between white (65%) and Black (38%) stood at 27 percentage points. In 2021, or 60 years later, that gap had grown: 73% of white households owned a home compared with Black homeownership at 44%, a difference of 29 percentage points, according to the Urban Institute.
“We missed out on a better interest rate because of the unfair appraisal we received,” Tenisha Tate-Austin said in statement through her lawyer. “Having to erase our identity to get a better appraisal was a wrenching experience. We know of other Black families who either couldn’t get a loan because of a discriminatory appraisal and therefore either lost the opportunity to buy or sell a home, or they had to sell their home because they had an unaffordable loan.”
Explore the series:MLK’s ‘I have a dream’ speech looms large 60 years later
Housing gap:‘We are a broken people’: The importance of Black homeownership and why the wealth gap is widening
King fought racist housing practices in ChicagoThough King knew housing was an important topic when he made his 1963 speech (it included the line “We cannot be satisfied as long as the Negro’s basic mobility is from a smaller ghetto to a larger one,” his focus was ending segregation in the South, said Beryl Satter, professor of history at Rutgers University in New Jersey and author of “Family Properties: Race, Real Estate, and the Exploitation of Black Urban America.”“The speech was about jobs and ending segregation of drinking fountains and restaurants, buses, trains, movie theaters and swimming pools to help pass the Civil Rights Act,” she said. Once that was accomplished, King trained his sights on housing in the North, particularly Chicago, where he focused on enforcing a pre-existing law on open housing, Satter said.The open housing laws in Chicago already forbade real estate agents from steering Black families into Black neighborhoods and dictated that housing should be made available regardless of race.“But like many such open housing laws, it was not enforced,” Satter said.In January 1966, King moved with his family into an apartment in North Lawndale on the West Side of Chicago to bring attention to the poor living conditions of Black families living without water, electricity and heat. He marched with Black and white supporters into segregated white neighborhoods to call for open housing.“And there he was met with the most violence he had ever been met with in any of his civil rights struggles. He said that the violence in Chicago made the whites in Mississippi look good,” Satter said. “He was hit with a stone while marching in Chicago, and he kept going.”Fair Housing Act became law after King’s deathFrom 1966 to 1967, Congress regularly considered a fair-housing bill, but it was ultimately defeated.“It was the first time that a Civil Rights Act had been defeated since the ’50s,” Satter said. “There was massive white resistance to any law or direct action that threatened racial segregation and housing. It was something that whites in the North fought to the death to keep.”After King was assassinated in 1968, President Lyndon Johnson pushed through the national Fair Housing Act as a memorial to King, whose name had become closely associated with the fair housing legislation.The undervaluation of homes in Black neighborhoods, decadeslong housing segregation, a systemic denial of loans or insurance in predominantly minority areas, a persistent income gap, and a historically limited ability of Black parents to leave their families an inheritance have contributed to the nation’s financial disparity, experts say.
During the housing boom of the early 2000s, Black Americans ages 45 to 75 disproportionately held subprime mortgages, loans offered at higher interest rates to borrowers characterized as having tarnished credit histories. Many of these mortgage holders lost their homes and have been unable to return to homeownership.
These trends will affect retirement prospects for Black Americans and their ability to pass down wealth to the next generation, making it not just one generation’s problems but an intergeneration disparity, experts say.
White wealth surpasses Black wealth
In 2016, white families posted the highest median family wealth at $171,000. Black families, in contrast, had a median family wealth of $17,600, according to the Federal Reserve. Homeownership has long been considered the best path to build long-term wealth, so increasing the rate of homeownership can play an important role in closing the wealth gap, experts say.
Over the past decade, the median-priced home in the United States gained $190,000 in value, making the typical homeowner 40 times wealthier than if they had remained a renter, according to a report released in April by the National Association of Realtors.
Some signs of hope emerged during the coronavirus pandemic, when mortgage rates were at historic lows.
During that time, Black homeownership rates increased by 2 percentage points, surpassing the white homeownership rate, which increased just 1 percentage point.
The historically low mortgage rates enabled high-earning, highly educated Black households to boost homeownership rates. Most high-income white households already were homeowners, which explains the smaller magnitude of growth, according to the analysis.
Black homeownership rate saw small improvements
From 2019 to 2021, the homeownership rate for Black households went from 42% to 44%; for white households it went from 72% to 73%.
After experiencing a continuous decline since the Great Recession, the Black homeownership rate finally made gains between 2019 and 2021. The reason was pent-up demand, said Jung Choi, a researcher at the Urban Institute.
“This suggests that affordability really matters,” Choi said. “Now, with the surge in interest rates, we are already seeing a sharp decline in Black homebuyers as well as younger homebuyers.”
Satter said King’s final book, 1967’s “Where Do We Go From Here: Chaos or Community?” cautions against complacency simply because there are laws on the books.
“He really understood that having a law in books was the beginning, not the end. Today we have the Fair Housing Act of 1968, and there are ongoing local, state and national laws that are supposed to stop housing discrimination,” Satter said. “I think King would have predicted that they would not be effective if there wasn’t a larger public will to enforce it and a strong political organization pushing to enforce it.”
Swapna Venugopal Ramaswamy is a housing and economy correspondent for USA TODAY. You can follow her on Twitter @SwapnaVenugopal and sign up for our Daily Money newsletter here.
Robo-advisors have barely been around for 10 years, but in the past couple of years several have been steadily expanding their investment menus, and even offering valuable add-on services. One of the leaders in this regard is Wealthfront. The robo-advisor has been growing its investment capability in every direction but is now even offering financial planning. The platform now bills itself as offering High-Interest Cash, Financial Planning & Robo-Investing for Millennials. If you’re looking for more than just investing, Wealthfront has it. And as has become their trademark, it’s all available at a low cost.
What is Wealthfront?
Based in Palo Alto, California, and founded in 2011, Wealthfront has about $25 billion in assets under management. It’s the second-largest independent robo-advisor, after Betterment. And while dozens of robo-advisors have arrived in recent years, Wealthfront stands out as one of the very best. There isn’t any one thing Wealthfront does especially well, but many. And they’re adding to their menu of services all the time.
Their primary business of course is automated online investing. You can open an account with as little as $500, and the platform will design a portfolio for you, then manage it continuously. Your money will be invested in a globally diversified portfolio of ETFs–just like most other robo-advisors. But Wealthfront takes it a step further, and also adds real estate and natural resources.
Like other robo-advisors, Wealthfront uses Modern Portfolio Theory (MPT) in the creation of portfolios. They first determine your investment goals, time horizon, and risk tolerance, then build a portfolio designed to work within those parameters. MPT emphasizes proper asset allocation to both maximize returns, and minimize losses.
But in a major departure from other robo-advisors, Wealthfront now offers the ability to customize your portfolio and get access to a variety of investment methodologies and portfolios, including Smart Beta, Risk Parity and Stock-Level Tax-Loss Harvesting. And more recently, they’ve also stepped into the financial planning arena. They now offer several financial planning packages, customized to very specific needs, including retirement planning and college planning.
If you haven’t checked out Wealthfront in the past year or so, you definitely need to give it a second look. This is a robo-advisor platform where things are happening–fast!
How Wealthfront Works
When you sign up with Wealthfront, they first have you complete a questionnaire. Your answers will determine your investment goals, time horizon, and risk tolerance. A portfolio invested in multiple asset classes will be constructed, with an exchange-traded fund (ETF) representing each.
The advantage of ETFs is that they are low-cost, and enable the platform to expose your portfolio to literally hundreds of different companies in each asset class. With your portfolio invested in multiple asset classes, it will literally contain the stocks and bonds of thousands of companies and institutions, both here in the U.S. and abroad.
Wealthfront offers tax-loss harvesting on all portfolio levels. But they’ve also added portfolio options for larger investors, that include stocks as well as ETFs. The inclusion of stocks gives Wealthfront the ability to be more precise and aggressive with tax-loss harvesting.
Each portfolio also comes with periodic rebalancing, to maintain target asset allocations, as well as automatic dividend reinvestment. As is typical with robo-advisors, all you need to do is fund your account–Wealthfront handles 100% of the investment management for you.
More recently, Wealthfront has also added external account support. The platform can now incorporate investment accounts that are not directly managed by the robo-advisor. This will provide a high-altitude view of your entire financial situation, helping you explore what’s possible and providing guidance to optimize your finances.
And much like many large investment brokers, Wealthfront now offers a portfolio line of credit. It’s available only to investors with $25,000 or more in a taxable account, but if you qualify you can borrow money against your investment account and set your own repayment terms in the process
Wealthfront Features and Benefits
Minimum initial investment: $500
Account types offered: Individual and joint taxable accounts; traditional, Roth, rollover and SEP IRAs; trusts and 529 college accounts
Account access: Available in web and mobile apps. Compatible with Android devices (5.0 and up), and available for download at Google Play. Also compatible with iOS (11.0 and later) devices at The App Store. Compatible with iPhone, iPad and iPod touch devices.
Account custodian: Account funds are held in a brokerage account in your name through Wealthfront Brokerage Corporation, which has partnered with RBC Correspondent Services for clearing functions, such as trade settlement. IRA accounts are held with Forge Trust.
Customer service: Available by phone and email, Monday through Friday, from 7:00 AM to 5:00 PM, Pacific time.
Wealthfront security: Your funds invested with Wealthfront are covered by SIPC, which insures your account against broker failure for up to $500,000 in cash and securities, including up to $250,000 in cash.
Wealthfront uses third-party providers to maintain secure, read-only links to your account. The providers specialize in tracking financial data, as well as employ robust, bank-grade security, and in general, they follow data protection best practices. In addition, Wealthfront does not store your account password.
Wealthfront Investment Methodology
For regular investment accounts, Wealthfront constructs portfolios from a combination of 10 different specific asset classes. This includes four stock funds, four bond funds, a real estate fund, and a natural resources fund.
Each portfolio will contain various allocations of each asset class, based on your investor profile as determined by your answers to the questionnaire. The one exception is municipal bonds. That allocation will appear only in taxable accounts. IRAs don’t include them since the accounts are already tax-sheltered.
Notice in the table below that most asset classes have two ETFs listed. This is part of Wealthfront’s tax-loss harvesting strategy. In each case, the two ETFs are very similar. To facilitate tax-loss harvesting, one fund position will be sold, then the second will be purchased at least 30 days later, to restore the asset class. (We’ll cover tax-loss harvesting in a bit more detail a little further down.)
The ETFs used for each asset class are as follows, as of December 29, 2018:
Specific Asset ClassGeneral Asset ClassPrimary ETFSecondary ETF
US Stocks
Stocks
Vanguard CRSP US Total Market Index (VTI)
Schwab DJ Broad US Market (SCHB)
Foreign Stocks
Stocks
Vanguard FTSE Developed All Cap ex-US Index (VEA)
Schwab FTSE Dev ex-US (SCHF)
Emerging Markets
Stocks
Vanguard FTSE Emerging Markets All Cap China A Inclusion Index (VWO)
iShares MSCI EM (IEMG)
Real Estate
Real Estate
Vanguard MSCI US REIT (VNQ)
Schwab DJ REIT (SCHH)
Natural Resources
Natural Resources
State Street S&P Energy Select Sector Index (XLE)
Vanguard MSCI Energy (VDE)
US Government Bonds
Bonds
Vanguard Barclays Aggregate Bonds (BND)
Vanguard Barclays 5-10 Gov/Credit (BIV)
TIPS
Bonds
Schwab Barclays Capital US TIPS (SCHP)
Vanguard Barclays Capital US TIPS 0-5 Years (VTIP)
Municipal Bonds (taxable accounts only)
Bonds
Vanguard S&P National Municipal (VTEB)
State Street Barclays Capital Municipal (TFI)
Dividend Stocks
Bonds
Vanguard Dividend Achievers Select (VIG)
Schwab Dow Jones US Dividend 100 (SCHD)
Wealthfront’s historical returns are as follows (through 1/31/2019). But keep in mind these numbers are general. Since the portfolios designed for each investor are unique, your returns will vary.
Specialized Wealthfront Portfolios
As mentioned in the introduction, Wealthfront has rolled out several different investment options, in addition to its regular robo-advisor portfolios. Each represents a specific, and generally more specialized investment strategy, and is typically available to those with larger investment accounts.
Smart Beta: You’ll need at least $500,000 to be eligible for this portfolio. Smart beta departs from traditional index-based investing, which relies on market capitalization. For example, since Apple is one of the most highly capitalized S&P 500 stocks, it has a disproportionate weight in strict S&P 500 index funds. In a smart beta portfolio, the position in Apple will be reduced based on other factors.
In general, under smart beta, the weighing of stocks in the fund uses a variety of factors that are less dependent on market capitalization. There’s some evidence this investment methodology produces higher returns. This portfolio is available at no additional fee.
Wealthfront Risk Parity Fund: This is actually a mutual fund–the first offered by Wealthfront. It involves the use of leverage with some positions within the portfolio. It attempts to achieve higher long-term returns by equalizing the risk contributions of each asset class. It’s based on the Bridgewater Hedge Fund, and requires a minimum of $100,000, with an additional annual fee of 0.25% (0.50% total). This is the only Wealthfront portfolio that charges a fee over and above the regular advisory fee.
Socially responsible investing (SRI): Wealthfront just recently began to offer a specific SRI portfolio option. Once you sign up, you’ll be able to customize your portfolio and add socially responsible ETFs.
Sector-specific ETFs: If you want to invest in a particular portion of the market, such as technology or healthcare, Wealthfront gives you the option to build a portfolio that focuses on certain industries to portions of the stock market.
Customized Wealthfront Portfolios:
Wealthfront also lets investors build their own portfolios, which is somewhat uncommon among robo-advisors.
Most robo-advisors will build your portfolio automatically based on your risk tolerance and goals. If you like that service, Wealthfront can do it. However, more hands-on investors are free to make tweaks to the automatically designed portfolio by adding or removing ETFs.
You can also build a portfolio entirely from scratch if you’d rather. You can choose which ETFs to invest in and how much you want to invest in them. You can then let Wealthfront handle things like rebalancing and tax-loss harvesting while maintaining the portfolio you desire.
Wealthfront Tax-loss Harvesting
If there’s one investment category where Wealthfront stands above other robo-advisors, it’s tax-loss harvesting. Not only do they offer it on all regular taxable accounts (but not IRAs, since they’re already tax-sheltered), but they also offer specialized portfolios that take it to an even higher degree.
Wealthfront starts with a tax location strategy. That involves holding interest and dividend-earning asset classes in IRA accounts, where the predictable returns will be sheltered from income tax. Capital appreciation assets, like stocks, are held in taxable accounts, where they can get the benefit of lower long-term capital gains tax rates.
But for larger portfolios, Wealthfront offers Stock-level Tax-Loss Harvesting. Three specialized portfolios are available, using a mix of both ETFs and individual stocks. The purpose of the stocks is to provide more specific tax-loss harvesting opportunities. For example, it may be more advantageous to sell a handful of stocks to generate tax losses, than to close out an entire ETF.
Given that Wealthfront puts such heavy emphasis on tax-loss harvesting, it’s not surprising they’ve published one of the most respected white papers on the subject on the internet. If you want to know more about this topic, it’s well worth a read. The paper concludes that tax-loss harvesting can significantly increase the return on investment of a typical portfolio.
US Direct Indexing
US Direct Indexing is an enhanced level of tax-loss harvesting that Wealthfront offers to people with account balances exceeding $100,000.
Instead of building a portfolio of ETFs, Wealthfront will use your money to directly purchase shares in 100, 500, or 1,000 US companies. By buying shares in so many companies, Wealthfront can emulate an index fund in your portfolio while owning individual shares in the businesses.
Owning individual shares in hundreds of companies makes tax-loss harvesting easier as it lets Wealthfront’s algorithm trade based on movements in individual stocks rather than in funds. This can increase the number of tax losses that Wealthfront harvests each year, reducing your income tax bill.
Other Wealthfront Features
Wealthfront Cash Account
Wealthfront offers acash account where you can safely and securely store your money for anything–emergencies, a down payment for a home, or to later invest. By working with what they call Program Banks, Wealthfront has quadrupled the normal FDIC insurance on this account, so you’re protected for up to $5 million.
There’s also no market risk since it’s not an investment account and the money isn’t being invested anywhere. You can make as many transfers in and out of the account as you’d like, and it only takes $1 to start.
So what’s the catch?
There really isn’t one. Wealthfront will skim a little off the top to make some money before giving you an industry-leading 4.30% APY, but other than that, you’re just giving them more financial data. Since we’re doing this all the time with technology anyway, it shouldn’t make that big of a difference.
I see no downside, especially if you’re already a client of Wealthfront.
They’re really making a play to be your all-in-one financial services provider, too.
A new feature, just launched, is the ability to use your cash account as a checking account. This includes the ability to access your paycheck up to two days early when you set up a direct deposit. Additionally, you can invest in the market within minutes using your Wealthfront Cash account. Put the two together and you give yourself the ability to invest more than 100 days more in the market. The account also allows you to auto-pay bills and use apps like Venmo and PayPal to send money to friends or family. Account-holders also get a debit card to make purchases and get cash from ATMs. And you can use the account to organize your cash into savings buckets – like an emergency fund, down payment on a house, or other large purchase – and use Wealthfront’s Self-Driving Money offering to automate your savings into those buckets.
If you have cash that’s getting rusty in a traditional bank account and you want to earn more, the Wealthfront Cash Accountis a great place to keep it.
Read more about the cash account in our Wealthfront Cash Account full review.
Wealthfront Portfolio Line of Credit
This feature is available if you have at least $25,000 in your Wealthfront account. It allows you to borrow up to 30% of your account value, and currently charges interest rates between 3.15% and 4.40% APR depending on account size. You can make repayments on your own timetable, since you’re essentially borrowing from yourself. And since the credit line is secured by your account, you don’t need to credit qualify to access it.
Wealthfront Free Financial Planning
This is Wealthfront’s entry into financial planning. But like everything else with Wealthfront, this is an automated service. There are no in-person meetings or phone calls with a certified financial planner. Instead, technology is used to help you explore your financial goals, and to provide guidance to help you reach them. And since the service is technology-based, there is no fee for using it.
The service can be used to help you plan for homeownership, college, early retirement, or even to help you plan to take some time off to travel, like an entire year!
Simply choose your financial objective, enter your financial information, and Wealthfront will direct you on how to plan and prepare.
Self-Driving Money
One of the biggest and largely unrecognized obstacles for most investors is something known as cash drag. That’s when you have too much of your portfolio sitting in cash, which may earn interest, but it doesn’t provide the investment returns you can get in a diversified investment portfolio.
Wealthfront has addressed the cash drag dilemma with their newly released Self-Driving Money features. It’s a free service offered by the robo-advisor that essentially automates your savings strategy. It does this by automatically moving excess cash to help meet your goals, including into investment accounts where it will earn higher returns. And in the process, it eliminates the need to make manual cash transfers, and the judgment needed to decide exactly when to make that happen.
Our vision of Self-Driving Money is going to be a complete game-changer for people’s finances, said Chris Hutchins, Head of Financial Automation at Wealthfront. We want to completely remove the burden of managing your money so you can focus on your career, your family or whatever is most important to you.
You can take advantage of Self-Driving Money from the Wealthfront Cash Account. You’ll set a maximum balance for the connected account, which should be an amount that’s more than you expect to spend or withdraw on a monthly basis.
How It Works
When Wealthfront determines you’re over your maximum balance by at least $100 it will schedule an automatic transfer of the excess cash based on your goals. For example, you can tell Wealthfront you want to save $10,000 in an emergency fund, then max out your Roth IRA, then put the rest toward saving for a down payment on a house. Once you set the strategy, Wealthfront will automate the rest.
And before it happens, you’ll receive an email alert, then always have 24 hours to cancel the transfer if you need to cover unexpected expenses. You’ll also be able to turn on and off your Self-Driving Money plan at any time.
It’s usually possible to set up automated transfers from external accounts into most investment accounts. But what sets Wealthfront apart is the fact that it will make those transfers automatically. They will make sure you always have enough cash to pay your bills, then automatically transfer any excess into your savings buckets or investment accounts to improve the return on your money.
The strategy is designed to optimize your money across spending, savings, and investments, and to make it all flow with no effort on your part. You can simply have your paycheck direct deposited into your external checking account or Wealthfront Cash Account, cover your expected monthly spending, then have excess funds automatically transferred into the Wealthfront account of your choice.
By delivering on its Self-Driving Money vision, Wealthfront is taking the robo-advisor concept to a whole new level. Not only do you not need to concern yourself with managing your investments, but now even funding those investments will happen automatically. The result will be near complete freedom from the financial stresses that plague so many individuals.
Wealthfront Fees
Wealthfront has a single fee structure of just 0.25% per year for their advisory fee. That means you can have a $100,000 portfolio managed for just $250, or only a little bit more than $20 per month.
The one exception is the Wealthfront Risk Parity Fund, which has a total fee of 0.50% per year.
How to Sign Up with Wealthfront
To open an account with Wealthfront, you’ll need to be at least 18 years old, and a U.S. citizen.
You’ll need to provide the following information:
Your name
Address
Email address
Social Security number
Date of birth
Citizenship/residency status
Employment status
As is the case with all investment accounts, you’ll also be required to supply documentation verifying your identity. This is usually accomplished by supplying a driver’s license or other state-issued identification.
As mentioned earlier, you complete a questionnaire that will be used to determine your investment goals, time horizon, and risk tolerance. Your portfolio will be based on your answers to that questionnaire, and will be presented to you upon completion of the questionnaire.
For funding, you can use ACH transfers from a linked bank account. You will also have the option to schedule recurring deposits, on a weekly, biweekly, or monthly basis. The platform can even enable you to set up dollar-cost averaging deposits.
If you already have a brokerage account with another company, Wealthfront makes it easy to transfer your funds to your new account. If you’re invested in ETFs that Wealthfront supports, Wealthfront will assist with an in-kind transfer.
That means that you won’t have to sell your shares before transferring funds, which lets you avoid capital gains taxes that would be triggered by a sale.
Wealthfront Alternatives
Wealthfront’s closest competitor, and the robo-advisor that offers the most comparable services, is Betterment. They also have an annual advisory fee of 0.25%, but require no minimum initial investment. That could make it the perfect robo-advisor for someone with no money, who plans to fund their account with monthly deposits. Read the full Betterment review here.
Related: Wealthfront vs. Betterment
Another alternative is M1. Also a robo-advisor, M1 enables you to invest your money in what they call “pies”. These are miniature investment portfolios comprised of both stocks and ETFs. You can invest in existing pies, or create and populate pies of your own design. Once you invest in one or more pies, the platform will automatically manage it going forward. What’s more, M1 is free to use. Read more about M1 here.
Related: Wealthfront vs. Vanguard
Read More: The Best Robo Advisors – Find out which one matches your investment needs.
Wealthfront Pros and Cons
Investment options: Wealthfront offers more investment options than just about any other robo-advisor, particularly for investors with at least $100,000.
Reasonably priced: The annual fee of 0.25% is extremely reasonable, especially when you consider the degree of sophistication offered by Wealthfront’s investment methodology.
Tax-loss harvesting: This is available on all accounts, and Wealthfront is probably better at this investment strategy than any other robo-advisor.
Portfolio credit line: Gives you the ability to borrow against your portfolio with ease, and represents a form of margin investing.
Financial planning feature: The financial planning service is free to use and is available to all investors.
Limited access for smaller investors: Some of the more advanced investment portfolios and services are available only to investors with $100,000 or more to invest.
$500 minimum initial investment: It’s a minor issue, though some competitors require no funds to open an account.
FAQs
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Should You Sign Up for Wealthfront?
In a word, absolutely! Wealthfront is one of the very top robo-advisors, and you can’t go wrong with this one. Not only do they offer far more services than most other robo-advisors, but they also allow you to grow along the way. For example, as your account increases in value, you can take advantage of more sophisticated investment strategies, including advanced tax-loss harvesting.
That Wealthfront offers its portfolio line of credit and free financial planning services only makes the platform a bit more attractive, But the real benefit is the actual investment service. Wealthfront’s investment service comes extremely close to that of traditional human investment advisors, but at only a fraction of the annual cost.
Average mortgage rates for a 30-year fixed mortgage increased to 2.87% this week, the second-lowest on record, rising one basis point from last week’s all-time low of 2.86%, while the less-popular 15-year rate fell to a new low of 2.35%, Freddie Mac said on Thursday.
The 30-year rate has broken records nine times since March because of a Federal Reserve bond-buying program that has poured about $1 trillion into the mortgage markets. The central bank resurrected a program it first used during the financial crisis a dozen years ago to create competition for bonds and cause the yields that influence mortgage rates to shrink.
The Fed issued a statement on Wednesday after the end of a two-day meeting that said it would likely keep its benchmark overnight lending rate near zero through 2023, and would continue purchasing mortgage-backed securities “at least at its current pace” for as long as necessary.
Mortgage lending volume this year is likely to break records as homeowners refinance and new buyers scramble to take advantage of some of the cheapest financing costs history, Fannie Mae said in a forecast on Tuesday.
Originations this year are expected to reach an all-time high of $3.9 trillion, boosted by $2.4 trillion in refinancings, the highest level since 2003 and more than double the volume seen in 2019, the mortgage giant said.
“We continue to believe that a low-rate environment will support refinance demand over the forecast horizon,” Fannie Mae said in the forecast. “At the current interest rate of 2.86%, we estimate that nearly 69% of outstanding first-lien loan balances have at least a half-percentage point incentive to refinance.”
The annual average U.S. rate for a 30-year fixed mortgage will be 3.1% in 2020 and 2.7% in 2021, the forecast said, matching Fannie Mae’s prior monthly projection. Both would be the lowest annual averages on record.
The Compass Cares program is the charitable arm of Compass, a real estate brokerage making big waves in the market. Compass was recently honored as a 2023 “Game Changer” by RealTrends. Compass isn’t only focused on national real estate sales, it is looking to make an impact at the local level. For every transaction completed by a Compass agent, the company pledges money to a corresponding Compass branch. At the end of the year, the agents and brokers at that location are able to donate the funds to an organization in their community and affect real, local change.
When the initiative was announced in 2018, CEO Robert Reffkin said, “I want clients to know that when they are working with Compass, they are working with a company that gives back.” Compass Cares has given back over $2.6 million to local charities since 2019. One of the most prominent events to come out of the Compass Cares program is the organization’s annual Compass Cares Classic, Charity Golf and Tennis tournament. In 2021, over 400 Compass agents and leadership team members attended, and they raised over $100,000. These donations were given to Ladders for Leaders, Young Voices of Austin and Foundations Communities.
Now in its third year, the tournament will be held in San Diego, California. Funds raised from the event will go toward Feeding San Diego, Monarch School and Rancho Coastal Humane Society.
Below, John Bilek, the national head of sales management and regional vice president of Compass, shares his insights on the program with HousingWire.
HousingWire: What is the origin story of the Compass Cares Classic? John Bilek: Each year, Compass hosts a national retreat for approximately 2,000 of our real estate agents to network, educate themselves and learn new ways to grow their business. On the last day of the Miami event in 2019, I noticed that many of our attendees came in a day early or stayed a day later to enjoy the local golf courses. We felt there was a huge opportunity to leverage this incredible gathering to foster giving back to the communities that host the annual event. We put together a small, but scrappy, committee made up of Compass staff and agents, and held our first event in Austin, Texas, in 2021.
HW: How do the donations from the Classic impact local charities each year? JB: We work as a group to determine which three local organizations we can support each year, placing an emphasis on finding groups that drive impact in housing for the underprivileged, career development and leadership opportunities for youth. 100% of the funds we raise go directly to the charities, and they use it in ways they deem best. We try to find organizations that truly need the resources for their current operating budgets and sustainability.
HW: What are your hopes for the future of the event? JB: Our long-term goal with the Compass Cares Classic was to design a sustainable networking event for our agents that also benefits the communities that they serve. Over the first two years, we’ve been able to donate $160,000 to seven organizations, spanning from Colorado, Georgia and Texas. We would like to hit $1 million by our fifth anniversary, and grow the impact and size of the event each and every year. Ultimately, we can impact every one of the dozens of markets that Compass calls home to.
This was originally featured in the August/September Issue of HousingWire Magazine. To read the full issue, click here.
Last year, amid a drum-tight rental market, Sydney Wright pondered leaving California.
With her $72,000 salary, the 30-something from La Crescenta said the only one-bedroom apartments she could find were either too pricey, too run-down or in neighborhoods she felt were unsafe.
Then Wright had a change of fortune. She moved into the Hudson, a luxury apartment complex in downtown Pasadena that has a swimming pool, two gyms and in-unit washers and dryers. Wright got a relative deal and signed a lease for just above $2,300, almost $200 less than what similar units there averaged a year before even though rents in Pasadena had soared.
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But it may be too good to be true.
The discount was the result of a unique program catering to middle-income earners in a state trying to chip away — project by project, program by program — at its housing crisis.And the legal knot it is tied in reflectsthe difficulties in taking even small steps forward.
In this program, government agencies known as joint powers authorities, or JPAs, partner with private companies to purchase apartment buildings and lower the rent. The agencies say this works because, as the government, they don’t need to pay property tax, allowing them to pass along that savings to tenants.
But, under an obscure tax rule, thousands of tenants like Wright may need to cough up some of the lost revenue and pay individual tax bills upwards of $1,000 a year.
Tenants said leasing agents never disclosed such a possibility prior to moving in, and backers of the program say they didn’t anticipate it either.
“It just seems kind of ridiculous to me that you would have this crisis going on and then turn around and punish the people you are supposedly trying to help,” Wright, 32, said.
John Drachman, co-founder of Waterford Property Co., which runs the Hudson and 14 other properties on behalf of a JPA, put it more succinctly: “It’s just insane.”
The fact tenants may need to pay extra for living in subsidized housing centers on an arcane concept in tax law known as possessory interest.
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Though government owned property usually is exempt from property taxes, if the government leases part of its property to a private entity, then that entity can have a “possessory” interest that must be taxed.
Examples include a rental car company at the airport, or a restaurant in a public park.
Joint powers authorities first started buying apartment complexes for middle-income housing in 2019, and one acquired the Hudson in 2021.
Attorney John Bakker represents three JPAs with such projects.
He said the agencies didn’t anticipate tenants would face possessory taxes because at the time they relied on existing guidance from a state board that he argued should be interpreted as exempting any person receiving rent breaks at the projects.
Last year, several assessors were less sure and specifically asked the state board if such projects created a taxable “possessory interest.”
In October 2022, they received a response from the California State Board of Equalization, which promotes uniformity in property tax law.
In a letter, the board said residents at JPA properties do have a taxable possessory interest, but assessors should refrain from taxing it only if tenants are low-income, as defined by California law.
The board characterized its guidance as “longstanding,” which Bakker disputes.
The ultimate decision on the taxes lies with county assessors, but evidenced by their original request, assessors turn to the board for guidance and there’s no argument that the recent opinion does not offer an exemption for most residents at JPA projects.
Typically, one third of units at the projects are reserved for people making the legal definition of low-income: 80% or below area median income. The remaining two-thirds are usually set aside for households making between 81% and 120% area median income — individualswho can still struggle to find a nice home in some of the country’s most expensive markets.
Two county assessors with projects in their jurisdictions, Los Angeles and Alameda, said they don’t want to tax middle-income residents and are investigating the issue further after receiving the board’s guidance. But if the state Legislature doesn’t step in, they caution, they may ultimately decide the law requires them to tax tenants.
Los Angeles County Assessor Jeff Prang estimated annual taxes for individual tenants could range from $500 to $1,500. Initial bills may be higher since tenants would be charged for each year they’ve lived there.
If taxes go unpaid, residents would face a lien that could make it more difficult to qualify for mortgages and other loans.
For Wright, the prospect of paying an extra $1,500 a year, the equivalent of $125 extra a month, presents yet another obstacle.
Despite the rent discount at the Hudson, she said she lives paycheck to paycheck and will soon have an added expense when student loan payments resume, one Wright estimates will be more than $300 a month.
“I don’t even know how I would make it all work,” she said. “Honestly, the thought of that makes me want to cry.”
JPA projects rely on a complex framework, but in general, backers say they work like this.
Joint powers authorities issue bonds to purchase a building and, with the property off the tax rolls, they use that money to reduce rent. After 15 years, the local city, which must approve the initial JPA purchase, can direct a sale of the property or take out a loan on the building to recoup lost tax revenue.
To run the deals, JPAs partner with private real estate firms that set up the bond financing and manage the projects.
The deals are not without controversy, and some cities and affordable housing consultants see the programs as risky and not worth it. In particular, the JPAs and the private real estate managers, known as project administrators, have faced criticismthat their fees are excessive and thus limit the rent reductions a project can offer.
At least two county assessors, those in Orange and San Diego counties, have taken the positionthat project administrators, not tenants, should pay possessory interest taxes.
“These guys are making money and … they don’t want to pay any taxes, but you got to pay your taxes,” said Orange County Tax Assessor Claude Parrish, arguing project administrators control the buildings and thus have a possessory interest.
One project administrator, Waterford Property Co., received possessory tax bills for multiple projects it runs in Orange and San Diego counties. The company is appealing, arguing it doesn’t meet the qualifications to have a possessory interest.
If the taxes ultimately go through, the middle-income projects would cease to exist, according to Waterford’s Drachman.
Despite concern over its fees, which Waterford disputes as being excessive, the annual possessory taxes are more than what the company makes each year to run the buildings, Drachman said.
One example, he said, is the Parallel apartments in Anaheim, where Waterford faces a $1.2-million annual tax bill and earns roughly $700,000 a year.
Rather than lose money, Drachman said, the company would walk away from the projects and since no one would likely run the properties at a loss, they would be sold to real estate firms that would charge market rent and erase all savings.
If instead tenants get the bill, Waterford said no future deals could be done. That’s in part because investors who buy the bonds that fund the deals do so because they think rental discounts will keep occupancy high — and their income assured.
“The group they are going to hurt the most by their actions is the renters,” Drachman said of assessors. “Ultimately whether they go send them a possessory interest bill or whether they come after us and are successful.”
Prang said he doesn’t want to be an “obstacle” to creative solutions but has to follow the law, and criticized the JPAs for not consulting assessors before.
Prang said he is waiting on an opinion from county counsel about whether taxing project administrators is an option, but warned the County Board of Supervisors in March that he may have to tax middle-income tenants.
“We are trying to find a solution” to not do that, Prang said in an interview. “But one of the things slowing that down is having a firm legislative proposal and a legislator that is willing to run with it.”
The California Assessors’ Assn. recently agreed to ask state legislators to clarify that project administrators — not tenants — have a possessory interest, according to the group’s president, Kristine Lee.
So far Sacramento’s efforts to exempt middle-income tenants have stalled. Two bills aimed at doing so, Assembly Bill 1553 and Senate Bill 320, are dead for the year after failing to meet legislative deadlines.
Alternatively, a third bill that specifically leaves middle-income tenants open to possessory taxation passed its first house unanimously.
The bill, Senate Bill 734, codifies existing Board of Equalization guidance by exempting only low-income tenants.
According to a bill analysis, author Sen. Susan Rubio (D-Baldwin Park) said the bill is necessary because despite the tax board’s guidance, “existing law is ambiguous” as to whether low-income tenants actually are exempt.
The bill, which must pass the Assembly by mid-September, is supported by the Board of Equalization and opposed by some cities that have middle-income housing projects.
In a letter to Rubio, Pasadena Mayor Victor Gordo said the city has nearly 1,100 units in its JPA housing projects and rent has been reduced by an average of 20%.
“If SB 734 passes as drafted, 60% of the tenants in these units are eligible to receive possessory interest tax bills, which we do not believe is in the best interest of housing policy in California,” Gordo wrote.
Overall, Bakker said JPAs own about 14,000 units across California, with around 9,000 currently home to middle-income families or reserved for such households in the future.
Rubio’s office declined to answer several specific questions about the bill, including why it does not exempt middle-income tenants. In a statement provided by her spokeswoman, the senator said she is trying to “keep families housed” and is working closely with the Board of Equalization on the measure.
BOE Chairman Antonio Vazquez said he doesn’t support extending an exemption to middle-income individuals, at least for now.
“I think we have to be careful, because that would create a huge hit financially for cities and counties who depend on the revenue [from property tax],” he said.
Waterford executives dispute that taxing individual tenants would recoup a sizable amount of revenue, but Vazquez’s concern echoes long-running criticism of the JPA housing model, specifically that rent reductions are too modest to justify the loss in property tax.
For example, the JPAs have frequently purchased newer, luxury apartment buildings and, though they’ve lowered rent, there’s often cheaper, older housing nearby.
Wright now pays just over $2,400 in rent at the Hudson after receiving the allowable annual increase in the program.
That’s far less than the roughly $2,800 to $3,000-plus that similar, nearby buildings typically charge. But on a recent day, there were 53 older one-bedroom apartments in Pasadena listed for rent on Zillow that were at least $200 cheaper than what Wright pays.
If Wright gets hit with possessory taxes, she doesn’t see those older units as a simple solution.
For one, she said, she doesn’t have enough money to cover upfront moving costs.
She also chose the Hudson for a reason.
The program is supposed to keep rent in line with her income. And when the tax preparer works late into the night during tax season, she doesn’t need to hunt for street parking when she comes home. She can pull into her own secure spot and do the next day’s laundry in the comfort of her apartment.
Older units she saw seemed like temporary landing pads with broken sinks, worn carpets and shoddy paint jobs, but the Hudson feels more permanent.
“I deserve to have a place to call home and not constantly be in flux,” Wright said. “This felt like somewhere I could see myself living.”
In the world of sports, only a handful of names can rival the legendary status of Lionel Messi.
Known as the Messi-ah of soccer, the Argentinian athlete has racked up countless achievements and awards, including the elusive World Cup in 2022, which took him 16 years to finally win.
When he’s not busy scoring goals and making defenders question their life choices, Leo Messi is living it up in his seriously swanky mansions and condos. He has a net worth of around $600 million, so it comes as no surprise that Messi would splurge on his homes.
With properties in different parts of the world, many fans wonder – “Where does Leo Messi live now?”
The star athlete has been busy growing his real estate portfolio since 2017, so it can be hard to keep up with his whereabouts. But, as he is currently playing for Inter Miami, he has now settled in Vice City.
And while he’s still keeping things under wraps — until he finds the right mansion to put down roots in Miami — we’ve put together a list of Lionel Messi’s houses and condos in recent years, to give you an idea of the soccer star’s options when it comes to housing.
Lionel Messi bought a couple of million-dollar condos in Miami
Back in 2019, before his MLS move to Inter Miami, Messi dropped $5 million to buy an oceanfront condo unit at Porsche Design Tower in Sunny Isles Beach.
His unit totals 3,555 square feet and has three bedrooms and four-and-a-half bathrooms (swipe for pics).
The 60-story luxury condominium offers ultra-luxurious amenities, including a car elevator that allows residents to drive their cars straight to their apartments, providing privacy for high-profile celebrities and billionaires. Messi reportedly sold his unit for $7 million in 2021.
Later, he purchased another luxe Miami penthouse at the Regalia Residences, just 10 blocks away from his first condo.
Messi decided to go big on the upgrade and purchased the whole ninth floor for $7.3 million.
The four-bedroom penthouse has lots of living space, with floor-to-ceiling glass windows that framed the scenic beach views perfectly. Seven months after he closed the deal, Lionel Messi’s condo was relisted and ended up back on the market.
He lived in a lavish mansion in Barcelona
Prior to his move to the States, Messi’s primary residence was a lavish mansion in Barcelona.
He built the property in the upscale Bellamar neighborhood in Castelldefels. According to reports, he bought the house in 2009 for $2 million and spent millions more on renovations. It is rumored that he bought the adjacent lot as well, just because the neighbors were too noisy and he wanted some privacy.
The mansion features modern architecture and Mediterranean-themed indoors, with hardwood floors and spacious living areas.
Outdoors, there’s a large garden, a barbeque pit, a pool, and a small playground for Messi’s kids. To keep himself in good shape, Messi also had a small football field installed on the side of his house.
Messi, along with his wife Antonela Roccuzzo and their three sons, stayed in this mansion for over a decade while he was still playing for Barcelona. It remains unclear if he still owns this property or if he sold it after he switched teams.
Reports say that Lionel Messi also purchased a property near his childhood home in Rosario, Argentina, so he can visit his hometown whenever he wants. Details of this home have been kept secret to protect his family’s privacy.
Leo Messi also has a growing hotel portfolio
Messi doesn’t hold back in his pursuits and this extends to his ventures in the realm of real estate.
He entered the hotel business in 2017 and acquired MIM Hotels, managed by Majestic Hotel Group, run by his brother Rodrigo.
Over the past years, the footballer-turned-hotelier has been adding more properties to his hotel chain. Now, the group owns six hotels with locations in Sitges, Ibiza, Majorca, Baqueira, Sotogrande, and Andorra.
Many football fans can’t help but compare Messi to his rival Cristiano Ronaldo, who also runs a chain of hotels. The two superstar athletes can’t seem to shake off the competition even off the field. Messi, however, leads the business game with his expanding luxury hotel chain.
Loving life in Miami
While there have been no reports on where Leonardo Messi lives in Miami, it looks like he and his family have settled into their new life in the US. They were spotted shopping for groceries in the local supermarket, all in casual clothing, looking cheerful and perfectly at ease.
In an interview, Messi shared how happy he is with his decision to move to the States.
“I came here to play and to keep enjoying soccer which is what I loved my whole life and I choose this place because of all those things,” he said.
“I can tell you that I am very happy with the decision I made and for how my family and I live our day-to-day lives and how we enjoy the city and this new experience and how the people received us from the first day, from the people of Miami and the people of the US in general.”
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Mortgage rates only kept climbing in the last week. Buyers in this real estate market notice these affordability changes, and so we can see in the data fewer home purchase offers, slightly climbing unsold inventory, and slightly more price reductions for the homes that are on the market. This is the same pattern as we talked about last week. The first half of the year had surprisingly resilient sales, but that is slowing again. Mortgage rates are at their highest level in 20 years because the economy just keeps reporting strong data. And every uptick in mortgage rates leads to a downtick in the number of home buyers in the market.
Rising rates make more inventory. So how much inventory will we add this fall? Well as of now, these slowing signals are subtle. This housing market is much different from last year at this time. Last year, rates climbed dramatically and so did inventory. Now rates are inching up, and so is inventory. If mortgage rates jump to say 8%, that’s when we’d see big changes in inventory and home prices. Keep watching these numbers here.
Inventory
Inventory of unsold homes on the market is ticking up. It now doesn’t look like next week will be the peak of inventory for the season. It looks like inventory will keep climbing into September. There are now 495,000 single-family homes unsold active on the market. Inventory rose by just under 1% again this week.
This inventory climb at the end of August is not unusual. It’s not a rapid rise, but it also doesn’t appear to be leveling off. Inventory often peaks the last week of August, the fall has fewer sellers and it keeps shrinking through the holidays. Now because mortgage rates have been notably climbing for the last several weeks, we also expect inventory to keep climbing into September as fewer buyers make offers on the existing inventory.
There are 10% fewer homes on the market now than last year at this time. Last year inventory spiked from March through July with spiking mortgage rates. Then it leveled off a bit. So this week inventory lost ground on last year. The inventory gain week to week was more than it was last year at this time. That’s the first time this happened in many months. Last week there were 10.5% fewer homes on the market, this week that’s only 10% fewer. This is one of the subtle signals that higher mortgage rates have slowed this year’s home buyers again.
To understand the future of housing inventory in this country remember the Altos Rule. The Altos rule says that the more available inventory of homes to buy is the result of higher mortgage rates. If rates climb, so does inventory. If rates fall, inventory will fall.
There are 365,000 single-family homes in contract now. That’s up a fraction from last week and 10% fewer than last year at this time. New pending sales of single-family homes going into contract this week came in at 63,000 vs 70,000 last year. In this chart, the height of each bar is the total number of homes in contract that week. The light red portion of the bar represents those newly in contract. The sales rate has slowed since rates did their latest jump of over 7%. In fact, I’d expect the NAR headlines to keep falling on the pending sales measure as well. We could see the sales rate tick down to four million annually on their seasonally adjusted annual rate in the next couple of months.
I’m looking forward to the time when the real-time data starts to grow and the sales rates look more bullish than the headlines, but that’s not happening yet. As we watch the new pending home sales data each week, the next trend we’ll be looking for is how quickly the new pending sales rate shrinks this autumn. See in the chart how the light red portion of each bar shrank so quickly last fall. We had some recovery in the first half of this year. We started the year with 30% fewer homes in contract.
That gap narrowed to just 10% fewer. But we’ve been unable to get closer than that. The market was accelerating this spring, but it is not doing so now. I suppose these negative swings are the other side of the coin for what I’ve called a soft landing in housing. Housing demand cratered, but home prices didn’t crash. Home prices declined in July and September last year, and recovered a bit in the first half of this year. Now demand is softening again and that will keep home prices from appreciating much from here.
American homebuyers are very sensitive to mortgage interest rates. And while higher mortgage rates have hurt affordability for so many, it’s really the change in rates that spur changes in demand. Early this year we had more home buyers than sellers, even with rates in the six-percent range. When rates jump to 7.2% that’s when we see the demand data react accordingly. So it’s not the absolute level, it’s the change in rates that we should be paying attention to.
Price
And we can see it in the home price reduction data too. Price reductions are about to inch above 2018 and 2019 again. 35.5% of the homes on the market have had price reductions. Price cuts always tick up late in the summer, and this year’s seasonal increase is speeding up just a bit with the recent higher mortgage rates. Each week we have slightly fewer buyers, making slightly fewer offers, so slightly more sellers cut their asking prices.
Watching this price reduction curve has been so valuable lately. So insightful. In this chart, each line is a year. You can see last year’s light red line started climbing in March. That told us the pandemic frenzy was over. In September last year, price reductions spiked again with mortgage rates. This year, the dark red curve showed us how rapidly the market was recovering. That told us there was a floor on how far home prices could fall. It really highlights how effective this stat is for understanding the future of home sales prices. Right now 35.5% of the homes on the market have had a price cut.
This is a totally normal level. It is rising, not rising fast, it’s not a strong signal, but it is rising faster than in recent years for August. That tells us that sellers are seeing fewer buyers than they anticipated. This buyer slowdown means any home price appreciation we’ve had year over year is weakening and may be in jeopardy.
Tracking price reductions on the listed homes on the market is really insightful at the local level too. Right now we can see for example that Austin Texas has the most price reductions of any big market and that seems to be climbing. You can use the Altos data to understand local differences which are so important right now.
The median price of single-family homes right now across the country is $449,900. That’s basically unchanged from last week and from last year. Prices tend to cluster around the big round numbers, in this case, $450,000, with a big group priced just under that for search purposes. So home prices are at this $450,000 plateau for a while. That’s the dark red line on this chart. See at the far right end the little plateau. Home sales prices in the future are falling because we can see the ask prices are very stable. Much more stable than they were last year at this time.
The median price of the newly listed cohort this week is $399,000 again that’s also unchanged from last week. That’s the light red line on this chart. The price of the newly listed homes is 1.3% higher than last year at this time. This is when homes go on the market, the sellers and the listing agents know where the demand is, where the buyers are and they price accordingly. So the price of the new listings is an excellent leading indicator of where home sales prices will be out in the future.
We’re in this tricky space looking at year over year home price changes now. Last year the market was slowing so quickly that the comparisons now to last year start to look easier. Prices were falling last year with frozen demand. This year the market is slowing gradually. You can expect that the annual home price appreciation would continue to improve even though the momentum is a bit negative right now. It looks like we’ll end 2023 with home prices up a few percent over where 2022 ended.
And when we look at the price trends for the homes going into contract, we can see the earliest proxy for the sales which will actually close and get recorded in September and October. You can see that the last several weeks have put a little downward pressure on what home buyers are willing to pay. See how the dark red line was above last year for a few months and then in recent weeks, the dark red line is compressing closer to the light red line. That’s sales prices giving up their annual gains with higher mortgage rates.
The median price of the homes that went into contract this week is $378,000. That’s up a tick from last week and over last year, but you can see in the chart the dark red line is drifting lower. Now, the sales comparison gets a lot easier in September when we had that big rate spike in 2022. So assuming we don’t have another mortgage rate spike, the annual price appreciation will continue to improve. On the other hand, if we see 8% mortgage rates, there’s no reason to believe that home prices can’t gap down again like they did last year.
Again this is a very clear reaction to the latest surge in mortgage rates. We have fewer buyers and those buyers are willing to pay just a little bit less. The opposite is true too. If rates were to drift lower, you can expect more buyers, less inventory, fewer price cuts and higher prices in data measures like this one the price of the newly pending sales each week. The data is very clear right now.
From a distance, the building under construction at 843 N. Spring St. in Chinatown might seem like many of the commercial structures popping up around L.A.: four stories of open-plan offices rise above ground-level retail spaces that one day will house restaurants and shops. But move in closer and you’ll find some surprising details‚ including a ground-level arcade dotted with rough tree ferns and a rooftop patio planted with foxtail agaves and purpletop vervain. What is most notable, however, is wood — which is everywhere.
Look up and you’ll find that the building’s floor plates are partly supported by broad panels of mass timber, the generic term used to describe a variety of industrial, engineered woods. 843 N. Spring is part of a wave of such structures springing up around the United States. In Milwaukee, you can find a new 25-story mass timber residential tower, and a forestry college in Oregon now inhabits a pair of graceful mass timber buildings.
It may seem counterintuitive, but mass timber can match or exceed the strength of concrete and steel. Also counterintuitive: The material performs well in a fire. (In much the same way a large log will fail to ignite in a campfire, mass timber’s solidity is not conducive to rapid fire.) And, in fact, it has been subjected to a battery of testing both in the U.S. and abroad, including blast tests that have allowed for its use by the military.
Thomas Robinson, co-founder of Lever Architecture, a firm with offices in Portland, Ore., and L.A. that has helped pioneer the use of mass timber in the U.S., says, “It’s very different from what you buy at Home Depot.”
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Among Lever’s projects are mass timber buildings for Adidas and the Oregon Conservation Center in Portland. The team is also behind the thoughtful design at 843 N. Spring, which includes landscape design by James Corner Field Operations (the studio behind the remarkable Tongva Park in Santa Monica).
At the moment, 843 N. Spring is probably the largest structure employing mass timber in Los Angeles, though it could soon be outdone by a mixed-use development at the border of Culver City and West Adams designed by Shop Architects. Whatever its scale, the building is an intriguing example of the possibilities of the material.
Trees, for one, sequester carbon, and unlike concrete and steel they don’t require intensive fabrication processes — they just grow. A study published in 2019 in the Journal of Building Engineering, which examined the use of mass timber from harvest to construction, found an average reduction of 26.5% in global warming potential. Mass timber is also produced in prefab panels, which means it can be milled to the specific dimensions of a project, thereby limiting waste, staging and construction times. If a mass timber building is torn down, wood can be reused. Concrete is not nearly as flexible: When it meets the wrecking ball, it generally ends up as landfill.
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Certainly, just because it’s wood doesn’t make it environmental. Clear-cutting, for example, is devastating to local ecologies. “Part of our job is to ask the right questions,” Robinson says. “You’re really trying to identify forests that are managed in a way that really thinks about sustainable forest practices for the long term.”
Lever prefers wood that has received sustainability certifications from the Forest Stewardship Council, which includes the timber used in the Spring Street project. Transport to the site is also key. Wood for the building was harvested in British Columbia and transferred to L.A. by ship, which is less carbon intensive than trucking it in overland.
The Spring Street building is a hybrid structure, meaning it still employs steel and concrete. But this is mitigated by other elements in the design.
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Rather than tear out the vacant big-box store that inhabited the site, the architects built on top of it, thereby avoiding additional emissions and demolition waste. In the existing underground lot, they added stacked parking, which made room for additional cars without more digging, and — more important — added generous bicycle storage. (The building practically sits on top of the Chinatown stop of the A Line, making it an ideal hub for multimodal transit.) Unusual for a commercial building, the design also prioritizes fresh air: Each unit has operable windows and sliding doors that allow for passive ventilation.
No building can be carbon-zero — construction consumes resources. But the process can be far less carbon intensive. And, as 843 N. Spring also proves, it can look really good.
During the initial wave of the banking crisis in March, I published “Truist: Immense Unrealized Bond Losses Threaten Core Equity Stability.” At the time, Trust Financial Corp. (NYSE:TFC) had suffered the most significant drawdown among the top-ten US banks. Roughly five months ago, I was among the few analysts with a definitively bearish outlook on the bank, while many had viewed it as a dip-buying opportunity. My perspective was that although TFC’s “bank run” risk was low, the vast extent of its off-balance sheet losses left it with little safety for a potential rise in loan losses. Further, I expected that growing net interest margin pressures would substantially lower the bank’s income over the coming year, potentially compounding its risks.
Since then, TFC has declined by an additional ~11% in value and recently retraced back near its May bottom, associated with the failure of the Federal Republic. I believe the most recent wave of downside in at-risk banks is a notable signal that the market continues to underestimate systemic US financial system risks. Of course, following TFC’s most recent bearish pattern, I expect many investors to increase their position, viewing the company as significantly discounted. Accordingly, I believe it is an excellent time to take a closer look at the firm to estimate better its discount potential or the probability of Truist facing much more significant strains.
Estimating Truist’s Price-to-NAV
On the surface, TFC appears to have considerable discount potential. The stock’s TTM “P/E” is 6.3X compared to a sector median of 8.7X. Its forward “P/E” of 7.7X is also below the banking sector’s median of 9.3X. TFC’s dividend yield is currently at 7.2%, nearly twice as much as the sector median of 3.7%. Finally, its price-to-book is 0.66X, considerably lower than the sector median of 1.05X. Based on these more surface-level valuation metrics, TFC appears to be around trading around a 25% to 35% discount to the banking sector as a whole. Of course, we must consider whether or not this apparent discount is pricing for the bank’s elevated risk compared to others.
Importantly, Truist is one of the most impacted banks by the increase in long-term securities interest rates, giving the bank huge unrealized securities losses. Based on its most recent balance sheet (pg. 12), we can see that Truist has about $56B in held-to-maturity “HTM” agency mortgage-backed-securities “MBS” at amortized cost, worth ~$46B at fair value, giving Truist a $10B loss that is not accounted for in its book value. That figure has remained virtually unchanged since its Q4 2022 earnings report through Q2 2023; however, it will rise with mortgage rates since higher rates lower the fair value of MBS assets. Truist’s Q2 report also notes that all of its HTM MBS securities are at due over ten years, meaning they’re likely ~20-30 year mortgage assets that carry the most significant duration risk (or negative valuation impact from higher mortgage rates).
Significantly, the long-term Treasury and mortgage rates have risen in recent weeks as the yield curve begins to steepen without the short-term rate outlook declining. See below:
From the late 2021 lows through the end of June, the long-term mortgage rate rose by around 4%, lowering Truist’s MBS HTM assets fair value by ~$10B, while its available-for-sale securities lost ~$11.9B in value (predominantly due to MBS assets as well). Accordingly, we can estimate that the duration of its securities portfolio (almost entirely agency MBS) is roughly $5.5B in estimated losses per 1% increase in mortgage rates. Since the end of June, mortgage rates have risen by approximately 35 bps, giving TFC an estimated Q3 securities loss of ~$1.9B. Around $1B should show up on TFC’s balance sheet and income, while ~$900M will remain unrealized based on its current AFS vs. HTM portioning.
For me, we must value TFC accounting for both. Total unrealized losses and estimated losses based on the most recent changes in long-term interest rates. That said, should mortgage rates reverse lower, Truist should not have that $1.9B estimated securities loss in Q3; however, should mortgage rates continue to rise, the bank should post an even more considerable securities loss. At the end of Q2, Truist had a tangible book value of $22.9B. After accounting for unrealized losses, that figure would be around $12.9B. After considering the losses associated with the recent mortgage rate spike, its “liquidation value” is likely closer to $11B. Of course, Truist has a massive ~$34B total intangibles position due to goodwill created in its acquisition spree over the past decade. Although relevant, I believe investors should be careful in accounting for goodwill due to the general decline of the financial sector in recent years.
While much focus has been placed on unrealized securities losses, the risk associated with those losses is vague. Truist can borrow money from the Federal Reserve at par against those assets, partially lowering the associated liquidity risk. However, the Fed’s financing program is at a much higher discount rate (compared to deposit rates) and only lasts one year, so it is not a permanent solution. Further, the unrealized securities losses are on held-to-maturity assets, meaning it will recoup the losses should the assets be held to maturity. Of course, that means it may take 20-30 years, and Truist may need that money before then.
Further, Truist has a substantial residential mortgage portfolio at a $56B cost value at the end of Q2 (data on pg. 48). Those loans had an annualized yield of 3.58% in 2022 and 3.77% in 2023; since the yield did not rise proportionally to mortgage rates, we know the vast majority of those loans are likely fixed-rate long-term. Since they’re not securities positions, Truist need not publish their changes in fair value; however, should Truist look to sell its residential mortgages, they would almost certainly sell at a similar total discount to its MBS assets, considering its yield level is akin to that of long-term fixed-rate mortgages before 2022. I believe the unrealized loss on those loans is likely around $10B.
The rest of Truist’s loan portfolio, worth $326B at cost, is predominantly commercial and industrial ($166B), “other” consumer ($28B), indirect auto ($26.5B), and CRE loans ($22.7B). Excluding residential mortgages, all of its loan portfolio segments have yields ranging from 6-8% (excluding credit cards at 11.5%), with those segments’ total yields rising by around 3-4% from June 2022 to 2023. Accordingly, it is virtually certain that most of its non-mortgage loans are either short-term or fixed-rate since their yields rose with Treasuries, meaning they do not likely face unrealized losses based on the increase in rates.
Overall, I believe that if Truist were to liquidate its assets, its net equity value for common stockholders would be roughly zero, technically $1B. That figure is based on its current tangible book value, subtracting known unrealized losses on securities (~$10B), estimated recent Q3 realized and unrealized losses (~$1.9B), and estimated unrealized mortgage residential loan losses (~$10B). While the bank does have some MSR assets, worth ~$3B, that are positively correlated to rates, I do not believe that segment will offset unrealized losses in any significant manner. Together, those figures equal its tangible book value and would lower the total book value to about $34B. However, in my view, intangibles are not appropriate to account for today because virtually all banks have lost value since its 2019 merger, making its goodwill an essentially meaningless figure.
From a NAV standpoint, TFC is not trading at a discount and is most likely trading at a significant premium. Further, based on these data, Truist is, in my view, seriously undercapitalized. Although TFC posts a CET1 ratio of 9.6%, which is also relatively low, its common tangible equity would be essentially zero if its loans and securities were all accounted for at fair value. To me, that is important because most of its losses are on ultra-long-term assets so it may need that lost solvency sometime before those assets’ maturity. Further, even its 9.6% CET1 ratio is close to its new regulatory minimum of 7.4%, so a slight increase in loan losses or a realization of its estimated ~$22B in unrealized losses would quickly push it below the regulatory minimum.
Truist Earnings Outlook Poor As Costs Rise
To me, Truist is not a value opportunity because it is not discounted to its tangible NAV value. Even its market capitalization is around 65% above its tangible book value, which does not account for its substantial unrealized losses. However, many investors are likely not particularly concerned with its solvency, as that could not be a significant issue if there are no increases in loan losses, declines in deposits, or sharp NIM compression. If Truist can maintain solid operating cash flows, that could compensate for its poor solvency profile.
Of course, TFC cannot continue to try to expand its EPS by increasing its leverage since it is objectively overleveraged, nearly failing its recent stress test. On that note, poor stress test results are essential, but “passing” is somewhat inconsequential, considering most of the recently failed banks would have passed with flying colors, as the test does not account for the substantial negative impacts of unrealized losses on fixed-income assets. That is likely because, when “stress testing” was designed, it was uncommon for long-term rates to spike with inflation as it had, and banks had much lower securities positions compared to loans. Thus, it is quite notable that TFC nearly failed a test that does not account for its substantial unrealized losses.
Looking forward, I believe it is very likely that Truist will face a notable decline in its net interest income over the coming year or more. Fundamentally, this is due to the decrease in Truist’s deposits, total bank deposits, and the money supply. As the Federal Reserve allows its assets to mature, money is effectively removed from the economy; thus, total commercial bank deposits are trending lower. Truist’s deposits are trending lower in line with total commercial banks. I expect Truist’s deposits to continue to slide as long as the Federal Reserve does not return to QE. As Truist competes for a smaller pool of deposits, its deposit costs should rise faster than its loan yields. Today, we’re starting to see the spread between prime loans and the 3-month CD contract, indicating that bank NIMs are declining. See below:
Truist’s core net interest margin has slid from 3.17% in Q4 2022 to 3.1% in Q1 2023 to 2.85% in Q2. Truist’s deposits (10-Q pg. 48) have generally fallen faster than its larger peers, so it needs to increase deposit costs more quickly. Over the past year, its total interest-bearing deposit rate rose from 14 bps to 2.19%, with the most significant rise in CDs to 3.73%.
Notably, Truist has increased its CD rate to the 4.5% to 5% range to try to attract depositors. However, the bank continues not to pay any yield on the bulk of its savings account products, causing a sharp increase in customers switching toward the many banks which pay closer to 5% today. Over the past year, the bank saw around $10B in outflows for interest-bearing deposits and about $25B from non-interest-bearing deposits, making up for those losses with new long-term debt and CDs. Problematically, that means Truist is rapidly losing more-secure liabilities to more fickle ones like CDs and the money market. While this effort may slow the inevitable decline of its NIMs, it will also increase Truist’s solvency risk because it’s becoming more dependent on less secure liquidity sources as people move money between CDs more frequently than opening and closing savings accounts at different banks.
Truist also faces increased expected loan losses due to a rise in late payments last quarter. That trend is correlated to the increase in consumer defaults and the sharp decline in manufacturing economic strength. See below:
Consumer defaults remain normal, but I believe they will rise as consumer savings levels continue to fall and should accelerate lower with student loan repayments. The low PMI figure shows many companies face negative business activity trends, increasing future loan loss risks on Truist’s vast commercial and industrial loan book. Of course, Truist also has a notable CRE loan portfolio, which faces critical risks associated with that sector’s colossal decline this year.
The Bottom Line
Overall, I believe Truist has become even more undercapitalized since I covered it last. I also think Truist faces an increased risk of recession-related loan losses and has a more sharp NIM outlook. Even more significant increases in mortgage rates recently exacerbated strains on its capitalization, while its low savings rates should cause continued deposit outflows. Further, its increased CD rates should create growing negative net interest income pressure.
If there was no recessionary potential, as indicated by the manufacturing PMI, then TFC may manage to get through this period without severe strains; however, its EPS should still decline significantly due to rising deposit costs. That said, if Truist’s loan losses continue to grow due to increasing consumer and business headwinds, its low tangible capitalization leaves it at high risk of significant downsides. If its loan losses grow or its deposits decline, it will need to realize more losses on its assets, quickly pushing its CET1 ratio below its new regulatory minimum. Personally, I strongly expect TFC’s CET1 ratio will fall below the 7.5% level over the next year and could fall even lower if a more severe recession occurs.
I am very bearish on TFC and do not believe there is any realistic discount potential in the stock besides that generated by speculators. Since there is a significant retail speculative activity in TFC and some potential for positive government intervention due to its larger size, I would not short TFC. Although TFC downside risk appears significant, many factors could create sufficient temporary upside that it is not worth short–selling. That said, I believe Truist may be the most important financial risk in the US banking system due to its solvency concerns combined with its size and scope. Accordingly, regardless of their position in TFC, investors may want to keep a particularly close eye on the company because it may create more extensive financial market turbulence than seen from First Republic Bank should it continue to face strains.
Entering 2023, the U.S. housing market found its footing across many regions, achieving a semblance of stability after weathering a mild price correction in the second half of 2022. A combination of factors, including mortgage rates slipping below the 6.5% mark, a shortage of available homes for sale, and the seasonal uptick in demand during the early spring months, contributed to this newfound equilibrium.
However, just as the housing market braces itself for the traditionally subdued fall and winter period, real estate professionals are closely watching the reemergence of a familiar threat: 7% mortgage rates.
On Tuesday, the average 30-year fixed mortgage rate ticked up to 7.13%. This figure stands in stark contrast to the sunnier days in February when the average 30-year fixed mortgage rate got as low as 5.99%. This latest jump puts mortgage rates just below the peak of 7.37% witnessed last October.
When considering current house price and income levels, researchers at the Federal Reserve Bank of Atlanta estimate that affordability, or rather the lack of affordability, reaches levels comparable to the peak of the housing bubble whenever mortgage rates approach the 7% range.
This sudden resurgence of 7% mortgage rates prompts a pressing question that now hangs over the housing market: Are we poised for a resumption of month-over-month home price declines, particularly as the market enters the historically subdued fall and winter? After U.S. home prices, as tracked by the Case-Shiller National Home Price Index, dipped 5.1% between June 2022 and January 2023, the index rebounded with vigor, showcasing a 4.2% surge from February 2023 to May 2023.
Housing economists are fairly divided as to whether the recent uptick in mortgage rates puts the housing market at risk for further house price declines. Economists at firms like Morgan Stanley, Moody’s Analytics, and Freddie Mac expect national house prices will decline enough in the second half of 2023 to wipe out all the national gains notched in the first half of the year. Property economists at Capital Economics also believe month-over-month house price declines are about to resume.
Meanwhile, housing economists at AEI Housing Center, Zillow, and CoreLogic believe U.S. home prices have bottomed. In their eyes, the lack of homes for sale—which according to Realtor.com in June 2023 was 49.7% below June 2019 levels—will be enough to prevent further house price declines even if mortgage rates do remain elevated for a prolonged period of time.
And while housing affordability has deteriorated significantly, economists at AEI Housing Center say onlookers should remember that the resilient labor market—which boosts a historically low 3.6% unemployment rate—also acts as support for national home price growth.
Keep in mind that whenever a group like Morgan Stanley or CoreLogic says “U.S. home prices,” it’s talking about a national aggregate. On a regional level the story might vary, with some overheated markets like Austin continuing to fall while relatively more affordable markets like Scranton keep inching higher.
Want to stay updated on the housing market? Follow me on Twitter at @NewsLambert.
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