Interest rates for mortgage loans broke five straight weeks of declines caused by the bank crisis. This week, the 30-year fixed rate rebounded due to recent data indicating a still-resilient economy, the potential continuity of the Federal Reserve’s tightening monetary policy, and pressures in the secondary market.
“For the first time in over a month, mortgage rates moved up due to shifting market expectations,” Sam Khater, Freddie Mac’s chief economist, said in a statement. “Home prices have stabilized somewhat, but with supply tight and rates stuck above 6%, affordable housing continues to be a serious issue for many potential homebuyers. Unless rates drop into the mid-5% range, demand will only modestly recover.”
Freddie Mac’s Primary Mortgage Market Survey (PMMS) shows the 30-year fixed mortgage rate rose to 6.39% as of April 20, up 12 basis points from last week and 128 basis points from an average of 5.11% this time last year. The PMMS focuses on conventional, conforming loans for borrowers who put 20% down and have excellent credit.
At HousingWire’s Mortgage Rates Center, Optimal Blue’s30-year fixed conforming mortgage rate was 6.53% as of April 19, up compared to 6.33% the previous Wednesday. The rate is calculated using actual locked rates with consumers across 42% of all mortgage transactions nationwide.
“Mortgage rates are the product of the larger economic environment, including inflation and employment data as well as banking stability and the Fed’s actions,” Hannah Jones, economic data analyst at Realtor.com, said in a statement. “Recent data points to a still-resilient, though cooling economy, leading many to believe the Fed will elect to raise the target rate at next month’s meeting.”
Mortgage rates are following the gain in the 10-year Treasury, which moved from 3.2% in the first week of April to 3.6% this week, according to George Ratiu, the chief economist at Keeping Current Matters.
“Investors are weighing the softening consumer sector and inflationary pressures, along with the shifts in real estate markets, looking for more clarity on the outlook,” Ratiu said in a statement. “Inflation remains a concern, keeping the Fed in a hawkish position, poised to push the policy rate up by another 25 basis points at its May meeting.”
Logan Mohtashami, the lead analyst at HousingWire, said that the banking stress has “gone away” and the 10-year Treasury yield is now stuck at its technical level between 3.21% and 4.25%.
“We are just in a range with the 10-year yield until something breaks in the economy,” Mohtashami said during an interview.
Pressures from the secondary market
To Melissa Cohn, regional vice president of William Raveis Mortgage, the bank crisis still impacts mortgage rates, mainly through the secondary market.
On April 6, the Federal Deposit Insurance Corporation(FDIC) announced a “gradual and orderly” move to sell a portfolio of $114 billion in mortgage-backed securities (MBS) it retained after seizing control of failed regional banks Signature Bank and Silicon Valley Bank (SVB).
According to Cohn, the fact that MBS portfolios are “being dumped into the system” and the Fed is not acting as a buyer or seller is sending rates in the wrong direction.
“We’ve seen signs of a weakening economy, but we’ve also seen a couple of data points showing stronger than expected data,” Cohn said during an interview. “Combined with the fact that there’s so much mortgage debt being sold onto the market, that’s just pushed rates up.”
Cohn explained that it’s all about supply and demand in the secondary market: “If you have more sellers than you have buyers, then that’s going to push prices down and push yields up basically.”
The spring season
Higher rates in the housing market are reducing hopes for a productive spring season.
“While spring is typically a season marked by a lively housing market, this year is proving to be less energetic than previous ones,” Jones said. “Nevertheless, buyer demand shows signs of improvement with each gain in affordability. However, housing demand remains largely stifled as many buyers wait on the sidelines until the cost of purchasing a home becomes more doable.”
According to Jones, a recent Realtor.com survey showed that 82% of homeowners feel locked in by their current mortgage rate. These borrowers got mortgage loans when rates were 2-3% during the Covid-19 pandemic.
Another challenge to the market is the lack of inventory.
“The lack of housing inventory this spring buying season is also keeping many prospective buyers on the sidelines,” Bob Broeksmit, Mortgage Bankers Association (MBA) president and CEO, said in a statement. “While MBA expects mortgage rates to fall to around 5.5% by the end of this year, more housing supply is needed to improve affordability and meet demand.”
Government officials can’t predict exactly when inflation will go down, but representatives of the International Monetary Fund expect the U.S. inflation rate to reach its 2 percent target by the end of 2023.
The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.
Consumers around the world are currently grappling with rising costs, making many people wonder how long this high rate of inflation is going to last. Although the U.S. inflation rate has nearly quadrupled since 2020, inflation is even worse in other countries. In Israel, for example, the inflation rate has increased by 25 times in the last two years.
When inflation is high, consumers have less purchasing power, making it more difficult to afford housing, food, utilities and other necessities. Some consumers have even changed their spending habits to account for rising costs. So, how long will inflation last? No one knows for sure, but it’s possible to make an educated guess based on what the Federal Reserve is currently doing to reduce spending.
What is inflation, and how does it work?
The Federal Reserve defines inflation as an increase in the overall price level of an economy’s products and services. This refers to a general increase in prices, not an increase in a single product or service category. For example, it’s possible for the cost of dairy products to increase without the rate of inflation increasing.
When inflation is high, many consumers have less purchasing power. This is because their income doesn’t buy as many products and services as it did when inflation was low. Inflation also has a negative impact on banks that loan money at fixed interest rates. If a bank makes a loan at 6 percent interest, an inflation rate of 7 percent would reduce its real income, or the amount of money it earns after taking inflation into account.
In the United States, the Consumer Price Index (CPI) helps estimate inflation by tracking the average change of prices over time. This index doesn’t include the price of every good or service. Instead, it uses a market basket of goods and services typically purchased by consumers in urban and metropolitan areas. In July 2022, the U.S. Bureau of Labor Statistics reported that the CPI rose by 1.3 percent in June, bringing the total increase for the last 12 months to 9.1 percent.
Why is inflation so high right now?
Although many Americans are feeling the pinch of higher prices, inflation is a global problem. In response to the COVID-19 pandemic, government officials around the world implemented mandatory lockdowns to prevent the spread of the disease. With so many businesses closed, the demand for goods and services declined.
Once businesses started reopening, demand soared. With the unemployment rate falling to 3.5 percent in July 2022, job seekers have more bargaining power, driving up wages and giving many consumers more money to spend on goods and services. Consumers also saved more money than usual in 2021 due to concerns over how the ongoing pandemic would affect their finances.
Although demand has increased, many companies are unable to fill orders due to manufacturing and shipping backlogs associated with the pandemic. When demand exceeds supply, firms increase their prices, contributing to higher rates of inflation.
Finally, many consumers are spending more on services than goods, increasing demand in the service sector. As a result, it now costs more to rent an apartment, dine at a restaurant or hire someone to perform housekeeping or landscaping services.
The government’s response to inflation
The Federal Reserve is currently implementing contractionary monetary policy to reduce demand and give the economy a chance to cool off. This involves raising interest rates to decrease consumer spending and business-related investment spending.
The Biden-Harris administration is also focused on lowering costs for low-income and middle-class families. President Biden signed the Inflation Reduction Act of 2022 into law on August 16, 2022, and this act aims to reduce energy costs and make healthcare more affordable for Americans.
Because the current inflation rate is associated with high levels of demand, there isn’t much more the federal government can do to bring prices down. The plan is to continue raising rates until the inflation rate returns to 2 percent.
When will inflation go down?
Government officials can’t predict exactly when inflation will go down, but representatives of the International Monetary Fund expect the U.S. inflation rate to reach its 2 percent target by the end of 2023. To reach this target, analysts believe the Federal Reserve will need to raise rates by another 2 to 2.5 percent before then.
Are we in a recession?
Although government officials, consumers and business owners are concerned about the prospect of a recession, the United States hasn’t entered a true recession yet. A recession is characterized by rising levels of unemployment, lower retail sales and negative growth of the gross domestic product (GDP), among other factors.
In July 2022, the Bureau of Economic Analysis reported that the U.S. GDP declined by 1.6 percent in the first quarter of the year and 0.9 percent in the second quarter. Although GDP declined, retail sales increased by 1 percent between May and June 2022. The unemployment rate also fell from 5.4 percent in July 2021 to 3.5 percent in 2022. Therefore, the United States doesn’t yet meet all the criteria for an economic recession.
Where is inflation the worst in the United States?
In the United States, cities tend to have higher inflation rates than suburbs and rural areas, due in part to their higher housing costs. On July 13, 2022, Bloomberg reported that several American cities had crossed the 10 percent mark. Urban Alaska is at 12.4 percent, the Phoenix-Mesa-Scottsdale metro area in Arizona is at 12.3 percent and the Atlanta-Sandy Springs-Roswell metro area in Georgia is at 11.5 percent. Baltimore, Seattle, Houston and Miami also have inflation rates above 10 percent.
Inflation isn’t quite as bad in the New York-Newark-Jersey City metropolitan area, which had a 6.7 percent inflation rate in June 2022. Overall, inflation tends to be higher in the South and Midwest regions than it is in the Northeast region of the United States.
How will inflation affect my 2022 and 2023 taxes?
Take a look at the top ways your upcoming taxes might be affected by inflation.
Taxable income
Federal tax brackets are adjusted for inflation, which means you may drop to a lower tax bracket in 2022 even if your income doesn’t decrease. If high rates of inflation persist, you may get the same tax benefit when you file your 2023 return.
The standard deduction is also adjusted for inflation, so high inflation rates may help you reduce your taxable income even more than in previous years. In 2021, the standard deduction for a single filer was $12,550; for the 2022 tax year, it’s $12,950. If the economy doesn’t cool down quickly, the standard deduction may be even higher in 2023.
Health savings accounts
The annual HSA contribution limit is adjusted for inflation, so high rates of inflation allow you to put aside more money for medical expenses each year. The limits have already been increased for 2022, allowing individuals to contribute $3,650 per year and families to contribute $7,300 per year. In 2023, the limits will increase even more, to $3,850 for individuals and $7,750 for families.
HSA contributions are deducted on a pre-tax basis, so higher contribution limits may leave you with less taxable income, reducing your tax burden.
Retirement contributions
High levels of inflation can even help you save a little more money for your retirement. The contribution limits for 401(k) accounts and individual retirement arrangements (IRAs) are adjusted for inflation, so you can typically save more when inflation is high. For 2022, the 401(k) contribution limit is $20,500, an increase from the $19,500 limit for 2021. The IRA contribution limit didn’t increase for 2022, but it may go up in 2023 if the inflation rate continues to be high.
Although you can’t save more in your IRA this year, the income limit for 2022 was increased to keep up with inflation. As a result, you can now participate in a Roth IRA if your income doesn’t exceed $144,000 ($214,000 for married couples filing jointly).
Social Security
If you have combined income of more than $25,000 in a year as a single filer, your Social Security benefits are subject to federal income taxes; the limit increases to $32,000 for married couples filing jointly. Combined income includes half your Social Security benefits, your adjusted gross income and your tax-exempt interest income. These income limits aren’t adjusted for inflation, but Social Security benefits are.
For 2022, the federal government implemented a 5.9 percent cost-of-living increase for Social Security beneficiaries, and the 2023 adjustment could be as high as 10 percent, or even slightly more—we’ll know for sure in October 2022. This increase could push your combined income above the $25,000/$32,000 limit, making your Social Security benefits taxable for the first time.
Capital gains taxes
When you sell certain assets, you must pay capital gains tax on your profit. If you sell when inflation is high, you could end up with a profit on paper even if the sale results in a real loss. This typically happens when high rates of inflation erode your purchasing power over time.
If you made a $100,000 investment in 1980 and sold it for $200,000 today, it would look like you made a profit of $100,000. The truth is that $100,000 in 1980 dollars is equivalent to about $359,600 today. Although you made a profit on paper, you really lost a significant amount of purchasing power. Unless you qualified for some type of exemption, you’d have to pay capital gains tax since the purchase price of assets isn’t adjusted for inflation.
How can I save money while inflation is high?
You can’t control the national economy, but there are a few things you can do to strengthen your financial position while inflation is high.
Eat more meatless meals. Meat, poultry and eggs are among the food products with the highest price increases in 2022. To lessen the effects of rising costs on your budget, try adding a few meatless meals to your weekly menu.
Track your spending. If you don’t keep track of your spending, it’s easy to spend much more than you realize. Keep a record of how much you spend on necessities as well as extras like streaming subscriptions and movie tickets.
Start meal planning. If you spot a good deal at the grocery store, you can take advantage by planning several meals around that ingredient. For example, if a store is advertising chicken for $2.49 per pound, you may want to plan on eating chicken salad sandwiches for lunch each day that week.
Cancel unused subscriptions: In June 2022, Sarah O’Brien of CNBC reported that more than 40 percent of consumers were paying for at least one subscription they didn’t use. Unused subscriptions leave you with less money in your pocket, so canceling them can help you weather this period of high inflation.
Maintain a high credit score. When you have good credit, you typically qualify for lower interest rates and other favorable loan terms. If you have to borrow money while inflation is high, maintaining a healthy score can help you save money.
Keep the faith
Inflation makes it a little tougher to meet your financial goals, but that doesn’t mean you should give up on managing your finances responsibly. You can save money by tracking your spending, canceling unused subscriptions and planning your meals according to what foods are on sale each week.
Maintaining good credit can help you save money in the long run if you have to take out a loan or otherwise buy on credit. If your credit is lower than you’d like it to be, work with the credit repair consultants at Lexington Law to identify inaccurate negative items on your credit reports and make sure outdated information isn’t being held against you.
Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.
Reviewed By
Brittany Sifontes
Attorney
Prior to joining Lexington, Brittany practiced a mix of criminal law and family law.
Brittany began her legal career at the Maricopa County Public Defender’s Office, and then moved into private practice. Brittany represented clients with charges ranging from drug sales, to sexual related offenses, to homicides. Brittany appeared in several hundred criminal court hearings, including felony and misdemeanor trials, evidentiary hearings, and pretrial hearings. In addition to criminal cases, Brittany also represented persons and families in a variety of family court matters including dissolution of marriage, legal separation, child support, paternity, parenting time, legal decision-making (formerly “custody”), spousal maintenance, modifications and enforcement of existing orders, relocation, and orders of protection. As a result, Brittany has extensive courtroom experience. Brittany attended the University of Colorado at Boulder for her undergraduate degree and attended Arizona Summit Law School for her law degree. At Arizona Summit Law school, Brittany graduated Summa Cum Laude and ranked 11th in her graduating class.
Check out the best cities for remote work to ensure all of your lifestyle needs are met when living and working remotely.
Since 2020, work-from-home (WFH) has become the new normal in the workplace. While some companies are pushing for a return to office, others are embracing remote work indefinitely. When the world is your oyster, where should you go to live and work remotely?
Well, the team at Rent. did our research to put together a list of the best cities for remote work. So, if you’re ready to explore the country while working remotely, consider any one of these top best cities for remote work.
The 10 best cities for remote work
As a remote worker, your physical location hardly matters. As long as you have a productive workspace and a strong internet connection, you can pretty much work wherever your heart desires. Do you enjoy sitting on a patio while you take your Zoom calls? Well, as long as your connection is strong you’re good to go!
We looked at a few things to make our recommendations:
Median rent and rent change year-over-year
Access to the internet and average internet speeds
WFH population and number of coworking spaces
If you’re a digital nomad who wants to fully embrace WFH, consider these top 10 locations across the country that have been named the best cities for remote work.
Median rent: $2,075
Average Mbps: 83.46
Number of coworking spaces: 68
% of population WFH: 19 percent
Orlando is the number one best city for remote work based on our ranking methodology. With a population of 309,154 people, it’s a perfect mid-sized city in the sunny state of Florida.
You’ve got well-known amusement parks. You’ve got crystal blue beaches and sunny skies. And, you’ve got a solid environment for remote work. Retirees and young professionals alike are flocking to Orlando and it’s easy to figure out why. Consider this city if you want to be a remote worker.
Median rent: $1,528
Average Mbps: 117.89
Number of coworking spaces: 78
% of population WFH: 38 percent
Austin is the second-best city for remote workers. It’s a hopping metro with a young millennial crowd. The rent is reasonably priced and there is no state income tax, which is a bonus for remote workers and residents alike. Austin is particularly appealing to the IT sector and is commonly called “Silicon Hills.”
So, if you’re a remote IT worker, this city is even better for you! But if IT isn’t your field of work, don’t fret: You can still live in Austin and enjoy the benefits of remote work in your chosen industry.
Median rent: $1,339
Average Mbps: 80.71
Number of coworking spaces: 11
% of population WFH: 13.2 percent
Ranking third on our list is the city of North Charleston in South Carolina. With a smaller population just shy of 120,000 people, this city is the perfect place to settle down to get a mix of big-city life with small-town charm.
People rave about the dining scene, so you can work remotely from a coffee shop or restaurant! This city is full of history and has a diverse cultural scene and stunning scenery. If you’re looking for a place that seemingly has it all, check out North Charleston.
Median rent: $1,338
Average Mbps: 76.26
Number of coworking spaces: 23
% of population WFH: 15.7 percent
Grand Rapids is a great city for outdoor recreation and beer scene. If you’re a digital nomad who wants to flex the Midwestern value of “work hard, play hard,” this is the city for you.
The city alone has over 40 breweries. You’ll be able to go on a nice trail walk and cool down with a beer. Additionally, it’s one of the largest office furniture-making cities in the U.S. So, you can definitely find yourself a sweet office set up for your remote work office here.
Median rent: $977
Average Mbps: 129.12
Number of coworking spaces: 7
% of population WFH: 12 percent
Columbus, GA, is the fifth city on our list of best cities for remote work. If you’re looking for a family-friendly place to live, consider Columbus. This city is rising in popularity as it’s an easy-going town with friendly people.
There are lots of parks, restaurants and bars so you’ll have a good mix of outdoor and indoor activities when you’re not working. One thing to note is that you may experience severe weather in this pocket of the country.
Median rent: $2,220
Average Mbps: 92.68
Number of coworking spaces: 92
% of population WFH: 38 percent
Because it’s a large metro, Atlanta is a great place to live and work remotely — or to look for an in-office job if you tire of the WFH life. You also have several large corporations headquartered here, such as Delta and Coca-Cola, so job options are plentiful and rent reasonable compared to similar-sized metros.
Median rent: $1,183
Average Mbps: 55.53
Number of coworking spaces: 15
% of population WFH: 12 percent
You don’t have to be a Packers fan to live in Green Bay (although it wouldn’t hurt!) People love this family-friendly city and rave about the small-town community traditions and vibe you experience living here.
Ranking seventh on our list of best places for remote workers, Green Bay has affordable living and is recently experiencing an influx of people moving here. Enjoy football games or farmer’s markets when you’re not working from home.
Median rent: $1,444
Average Mbps: 94.95
Number of coworking spaces: 128
% of population WFH: 15.6 percent
Houston is another Texas city that made our list of the best places for remote workers. It’s a larger city, compared to Austin, so if you’re looking for a big metro area in Texas, consider the nation’s fourth-largest city.
This metro is known for its diverse food and entertainment scene. Since it’s a huge city, you pretty much have a good mix of everything to do. Plus, rent is fairly inexpensive, making the cost of living affordable.
Median rent: $1,613
Average Mbps: 119.41
Number of coworking spaces: 26
% of population WFH: 33.1 percent
Another southern city makes our list of the top 10 best places to work remotely. Raleigh has great weather, so if you’re looking for a beautiful and mild place to live, this is for you.
Additionally, it’s known to be a great city for small businesses and entrepreneurs, which is good news for remote workers hoping to branch out on their own and network. It’s also been ranked as the most climate-resilient city, the best for work/life balance and one of the best places for college students to live.
Median rent: $1,041
Average Mbps: 82.95
Number of coworking spaces: 9
% of population WFH: 16.7 percent
Last but not least is Appleton, WI. With a population just shy of 75,000 people, Appleton is the smallest town on our top 10 list. So, if you’re looking for a quiet, small city to live and work remotely, this is the place for you.
Residents like the mix of outdoor activities and in-town activities. It’s also been named one of the best places to raise children. Check out Appleton if you’re wanting a great city to be a remote worker and raise a family.
Other cities to consider when working remotely
We’ve listed the cities that rank in the top 10 best places for remote work, but there are several other places across the U.S. that made our list, as well. Check out the top 100 cities in the nation that remote workers can call home.
Daytona Beach, FL
Savannah, GA
Rapid City, SD
Greenville, SC
San Fransisco
Chicago
Pittsburgh
South Bend, IN
Dallas
Waukesha, WI
Fort Lauderdale, FL
Chattanooga, TN
Greensboro, NC
San Antonio
Shreveport, LA
Interesting findings from the top 25 best cities for remote work
While looking at the data, we found some interesting highlights that are worth calling out.
24 of the 25 best cities for remote work are in the South or Midwestern United States.
Only one of the top 25 best cities for remote work is on the West Coast. San Francisco is the only West Coast city to make our list.
Florida, Georgia and South Carolina all rank well for remote workers with three cities in each state making the top 25 best cities for remote work.
The majority of the best cities for remote work have populations under 250,000 residents. While there are a few outliers, the best cities to WFH are generally smaller cities compared to large metro areas.
What to consider when working remotely
Regardless of where you choose to live to work remotely, there are a few common things you must consider to be a successful WFH employee. Here are a few considerations and questions to ask yourself when choosing a city for remote work.
How much internet speed do you need? Depending on your location — rural, suburban, or urban — your internet needs will vary. Having a strong internet connection and the right internet speed is crucial for success as a remote worker.
Do you have the right office set up? Relaxing poolside while responding to emails is appealing, but there are times when you’ll need a physical office or desk set up. Make sure you have the right desk, chair and computer equipment
How long do you plan to stay in your location? Some people choose to settle down in one place and others move frequently. Your choice will determine the length of your lease. You’ll want to consider if a fixed lease or month-to-month is better for your lifestyle.
Is your job remote-first indefinitely? Before you pack up and hit the road, ensure that your job is going to be WFH long-term. You don’t want to make a cross-country move only for your company to demand a return-to-office six months later.
Find the right city for you
With so many WFH options available, you really can go anywhere in the U.S. or the world, for that matter. We hope our data and insights on the best cities for remote work help you as you decide where to move and pursue a WFH lifestyle.
Remember, these are the best cities for remote work according to our methodology; however, there are several places in the country that may work for you. Do your research before moving and you are bound to find an apartment and place to live that fits all of your lifestyle needs.
Methodology
Cities were ranked and scored based on the following:
Rents: 30 points
Median Rent: 20 points
Rent Change YoY: 10 points
Internet Speed and Access: 40 points
Num. Int, Providers, 100mbps: 10 points
Avg. Mbps.: 20 points
Lowest Cost Int. Plan: 10 points
WFH Population and Coworking Spaces: 30 points
% Population WFH: 10 points
Coworking per 1,000 WFH: 20 points
Our rent prices and changes are from Rent.com’s Rent Report. Internet speed and access numbers are from Broadband Now.
The number of coworking spaces is from FourSquare. Population numbers and proportion of people working from home is from the Census’ American Community Survey (ACS).
Cities with insufficient data were excluded.
The rent information in this article is used for illustrative purposes only. The data contained herein do not constitute financial advice or a pricing guarantee for any apartment.
A pension plan is a retirement plan offered by employers that guarantees income to workers after retirement. Pension plans are also known as defined-benefit plans because the monthly benefits the worker will receive during retirement is defined.
When defining those benefits, a pension may offer an exact dollar amount to be paid in retirement, such as $100 per month. But more often, the benefit involves calculating a number of factors, including how much the worker earned while working, how long they served the company, and how senior they were when they retired.
How to Get a Pension Plan
Unlike other different types of retirement plans, such as IRAs and Roth IRAs, an investor who wants to save for retirement can’t just go out and invest in a pension. Like 401(k)s, pensions need to be offered by an employer.
While pension plans were once a mainstay of how companies took care of their workers, they’ve become increasingly rare in recent decades. Only a small relative percentage of private sector employers offered some form of pension to their employees as of 2023.
The biggest reason why companies no longer offer pensions is that it’s cheaper for them to offer defined contribution plans, such as 401(k) or 403(b) plans. But if an American works for the federal, state or local government, there’s a good chance that they may qualify for a pension. Among state and local government workers who participate in a retirement savings plan, a majority are in a pension plan.
How Pension Plans Differ from Other Retirement Plans
The key difference between pension plans and other retirement plans comes down to the difference between a “defined benefit” plan like a pension, and a “defined contribution” plan.
In a defined benefit plan, such as a pension, it’s clear how much workers will receive. In a defined contribution plan, it’s conversely clear to employees how much they put into it. Unlike a pension, a defined contribution plan doesn’t promise a given amount of benefits once the employee retires.
There are some plans, such as a 401(k) plan or 403(b) plans, in which an employer has the option to contribute. They are not, however, required to. In these plans, the employee and possibly the employer will invest in the employee’s tax-advantaged retirement account. At the time of the employee’s eventual retirement, the amount in the fund can depend heavily on how well the investments in the account performed.
There are still other retirement plans, like IRAs and Roth IRAs, which a worker can also fund. Like 401(k) plans, the ultimate payout often depends largely on the performance of the investments in the plan. But unlike 401(k)s, an employer isn’t involved or required to sponsor an IRA.
One big advantage that pensions have over defined contribution plans is that pensions are guaranteed by the federal government through the Pension Benefit Guaranty Corporation. It effectively guarantees the benefits of pension-plan participants. But the PBGC does not cover people with defined contribution plans.
Recommended: What Is a Money Purchase Pension Plan (MPPP)?
What to Do If You Have a Pension Plan
Workers with pension plans should talk to a representative in their human resources department and find out what the plan entitles them to. Every pension plan is unique. An employee may benefit from looking into the specifics, especially in terms of how much the plan might pay, whether it includes health and medical benefits, and what kind of benefits it will offer a spouse or family members if the worker dies first.
For someone just starting in their career, they may also want to ask when their pension benefits vest. In many plans, the benefits vest immediately, while others vest in stages, over the course of as many as seven years, which could affect their plans to move on to a new job or company.
One way to get a better handle on what a pension may pay over time is to inquire about the unit benefit formula. Utilizing that formula is how an employer tallies up its eventual contribution to a pension plan based on years of service.
Most often, the formula will use a percentage of the worker’s average annual earnings, and multiply it by their years of service to determine how much the employee will receive. But an employee can use it themselves to see how much they might expect to receive after 20 or 30 years of service.
Pros of a Pension Plan
Perhaps the biggest pro of a defined-benefit plan is the guarantee of predictable income from the day a worker retires until the day they die. That’s the core promise that the PBGC protects.
Many pension plans also include related medical and other benefits for the employee, as well as related benefits for surviving spouses. Those benefits vary widely from plan to plan and are worth investigating for workers with a pension. Employees who are considering a new role in an organization that offers a pension should also research such features.
A defined contribution plan can also motivate the worker to regularly calculate the amount they’ll have to live on after they retire, and when they can retire. That can open up questions about what they’ll do if they get sick or need at-home care. And by asking those questions, they can look into things like supplemental medical insurance or long-term care insurance, in order to better protect themselves down the road.
Cons of a Pension Plan
But the greatest strength of a pension plan — its reliability and its guarantee — can also be its biggest weakness from a planning standpoint. That’s because a pension can give would-be retirees a false sense of security.
A pension, with its well-insured promise of income, can lead people to ignore important questions and avoid strict budgeting for basic living expenses. That flat monthly income can also lead people to believe that their expenses will be the same each month.
And that can lead retirees to avoid planning for increased overall living expenses due to the effects of inflation or sudden, unexpected expenses that inevitably crop up. There’s also the likelihood that their expenses later in life could be significantly higher, as they’re able to accomplish fewer daily necessities themselves.
That’s why, regardless of how thorough a pension plan is, it can pay to save for retirement in other ways, including through a 401(k), IRA or Roth IRA. Just because a worker has a pension, that doesn’t mean that it’s the only retirement plan that’s right for them. And employees will benefit from preparing for retirement early.
The Takeaway
Pension plans are a type of savings plan that are offered by employers, potentially guaranteeing income to workers after they retire. Pension plans are defined-benefit plans, and differ in some key ways from IRAs or 401(k)s. Pensions have become less common in recent decades, and they have their pros and cons, like any other financial product or service.
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Leasing momentum continues Across the portfolio, leasing momentum continued: “We signed more than 1,200 leases for more than 5.9 million square feet in the quarter,” Simon said. “We have an additional 1,500 deals in our pipeline, including renewals for approximately $570 million in gross occupancy cost. More than 25% of our leasing activity in the … [Read more…]
“Mortgage credit availability declined in April to the lowest level since January 2013, reflecting the tightening in broader credit conditions stemming from recent banking sector challenges and an uncertain economic outlook,” said MBA deputy chief economist Joel Kan. “The contraction was driven by reduced demand for loan programs such as certain adjustable-rate mortgage loans, cash-out and streamline refinances, and those with lower credit score requirements.”
The index for conventional home loans ticked up 0.5%, while the government MCAI fell 2.1%. Of the component indices of the Conventional index, the jumbo MCAI saw a 1.5% rise, while the Conforming MCAI experienced a 1.1% decline during the period.
“Government credit supply decreased for the third consecutive month, as industry capacity continues to adjust to significantly reduced origination volume, along with the expectations of a weakening economy later this year,” Kan noted. “Even with high mortgage rates and reduced credit availability, the lack of for-sale inventory continues to be the biggest hurdle to more home purchase growth this year.”
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“I haven’t seen a dry spell like this in the time I’ve been in business,” Bob Yopko, president of First Equity Residential Mortgage, said of this year’s spring homebuying season.
The purchase market is locked up with a lack of inventory thanks to elevated rates and homeowners already having secured low mortgage rates during the pandemic years. This, in turn, has made business brutal, Yopko explained.
The still-high mortgage rates that have been killing Yopko’s business averaged 6.39% as of May 4, a decline from last week’s 6.43%, according to Freddie Mac’s primary mortgage market survey (PMMS). Rates averaged 5.27% during the same period a year ago.
“This week, mortgage rates inched down slightly amid recent volatility in the banking sector and commentary from the Federal Reserve on its policy outlook,” Sam Khater, Freddie Mac’s chief economist, said in a statement.
Mortgage rates tend to align with the 10-year U.S. Treasury yield, which traded at 3.38% on Wednesday compared to 3.43% about a month ago.
“Mortgage rates spreads are bad now, meaning mortgage rates should be a lot lower today versus the 10-year yield,” Logan Mohtashami, lead analyst at HousingWire, said.
With financial credit getting tighter and the Fed no longer buying mortgage-backed securities (MBS), it has been hard for the spread to get better in this environment, Mohtashami explained.
“Mortgage rates should be 5.55%, not 6.5%,” he said.
Slower housing market
With mortgage rates remaining elevated, many sellers feel locked in by their current low mortgage rate. As a result, swaths of homeowners are planning to wait until rates come down before selling, leading to fewer newly listed homes compared to a year ago.
“The housing market is moving slower this spring. In a typical year, we would expect to see the number of homes for sale begin to increase more significantly from this point forward,” Jiayi Xu, an economist at Realtor.com, said.
Buyers who are still interested in buying in the busiest season for the residential housing market are acclimating to the current rate environment, Khater noted, but the lack of inventory remains a primary obstacle to affordability.
Due to limited options available on the market, buyers are increasingly turning to newly constructed homes, Xu added.
Another source of frustration for buyers are the new Federal Housing Finance Agency (FHFA) loan-level price adjustments (LLPAs) that went into effect May 1. The FHFA’s “revamped” LLPA matrix differentiates pricing by loan purpose, with grids for purchase loans, limited cash-out refinance loans, cash-out refinance loans and additional LLPAs by loan attribute.
One goal for the changes was to make homeownership accessible for first-time homebuyers and those with low and moderate incomes. But the new changes have faced pushback from the industry, with opponents claiming that the LLPA adjustments are penalizing middle-class American families by raising fees on good-credit borrowers while lowering fees for higher-risk borrowers.
“According to this new policy, well-qualified borrowers with scores ranging from 680 to above 780 may need to pay slightly more than before to offset the reduction in fees charged to buyers with low credit scores,” Xu said.
In the weeks ahead, the Mortgage Bankers Association(MBA) expects the ongoing uncertainty in the financial markets to keep mortgage rates volatile, but expects rates to ultimately fall below 6%-levels.
“We still anticipate they will fall, ending the year closer to 5.5%,” MBA President and CEO Bob Broeksmit said.
The Federal Reserve announced another 25 basis point rate hike last week, bringing the federal funds rate to its highest level since 2007. But according to DoubleLine Capital Founder Jeffrey Gundlach, this should mark the end of the U.S. central bank’s hawkish stance.
“The Fed will not raise rates again,” he said in a tweet.
This is not the first time for Gundlach to predict that the Fed will pivot.
“I predict the Federal Reserve will be cutting rates substantially soon,” he said in a tweet in March. “I am wrong about 30% of the time so factor that into any decision-making.”
Nevertheless, a success rate of 70% is still pretty astounding in the investing realm. Over the years, Gundlach’s uncanny ability to predict trends and make profitable decisions in the bond market has earned him the moniker of Bond King.
If the billionaire investor is right this time, it could be good news for investors in these sectors.
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Technology
Tech stocks have been the go-to choice for growth investors. But because of their growth potential, these companies actually got punished as interest rates went up.
To give you an idea, the S&P 500 has fallen about 13% since the beginning of 2022. The tech-centric Nasdaq Composite, on the other hand, plunged by a more painful 22% during the same period.
There are several possible explanations behind the phenomena.
Increasing interest rates can lead to higher discount rates used in valuation models, causing multiples to shrink — that’s bad for all stocks. But high-growth tech stocks usually have a larger portion of their value tied to future earnings and cash flows. As the discount rate used to value these future earnings and cash flows go up, these companies’ valuations can get hit particularly hard.
At the same time, tech companies in their growth phase often rely on borrowed money for research, development and expansion. High borrowing costs as a result of rate hikes can impact the profitability and growth prospects of these companies.
Tech moguls have been calling for rate cuts. Back in November 2022, Tesla Inc. CEO Elon Musk said the Fed “needs to cut interest rates immediately” or risk “massively amplifying the probability of a severe recession.” Ark Invest’s Cathie Wood — whose funds invest heavily in the tech sector — recently said that rising interest rates have hit her company’s strategy “like an earthquake.”
If the Fed pivots as Gundlach predicts, the sector would finally breathe a sigh of relief, and tech stocks could make a comeback.
Investors can access the sector through exchange-traded funds such as the Technology Select Sector SPDR Fund (NYSEARCA: XLK) and the iShares U.S. Technology ETF (NYSEARCA: IYW). You can also purchase shares of individual technology companies if you are willing to do thorough research and due diligence.
Real Estate
Real estate is another sector that’s sensitive to interest rates, and it’s easy to see why.
When the Fed raised interest rates aggressively to tame inflation, mortgage rates also shot up. And people found it more difficult to afford a property because of increased costs of borrowing. This dampened the demand for real estate.
Publicly traded real estate investment trusts (REITs) have long been a popular option for investors looking to tap into real estate. And their performance has been impacted by this rate hike cycle as well.
In 2022 — when the Fed announced seven rate hikes — the MSCI U.S. REIT Index tumbled 24.5%.
Rising interest rates increase REITs’ borrowing costs, reducing their profitability. At the same time, the increased competition from bonds and other interest-sensitive securities can make REITs less attractive to income investors.
If this rate hike cycle comes to an end, the real estate sector could see better days ahead.
Like most publicly-traded assets, REITs can be volatile. If you want to collect passive income from real estate but don’t want exposure to the stock market’s volatility, there are crowdfunding platforms that allow retail investors to invest directly in real estate with as little as $100 through the private market.
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This article ‘The Fed Will Not Raise Rates Again’: Bond King Jeffrey Gundlach Says Rate Hikes Are Done — Is It Time For These 2 Sectors To Shine? originally appeared on Benzinga.com
The first week of any given month tends to have the highest concentration of economic data with the power to influence the bond market, and thus interest rates. This week was no exception.
In addition to the scheduled economic data, there was unscheduled drama in the banking sector. This involved the orderly failure of First Republic Bank, rumors of other imminent bank failures, and a run on various bank stocks that ultimately required multiple “circuit breakers” (temporary halts to trading due to the size and speed of price changes).
Bank drama coincided with lower job openings on Tuesday morning to send bond yields lower on Tuesday morning. This was easier to see in 2yr Treasury yields compared to the 10yr Treasuries that we typically follow because shorter-term bonds have more in common with the Fed Funds Rate.
A day later, we heard from the Fed itself with the widely anticipated 0.25% hike to the Fed Funds Rate. Despite the hike, interest rates continued broadly lower into mid week (Mortgage Rates in Weeks After Fed Hikes Rates. Here’s How That Works…” data-contentid=”6452c40c9d238671bb2d6f63″ data-linktype=”rateupdate” rel=”noopener”>here’s why) before bouncing after Friday’s stronger jobs report.
All told, 10yr yields traded a range of roughly 0.25% whereas 2yr yields saw a range closer to 0.50%. That’s a volatile week by any standard, but it nonetheless failed to blaze any new trails with respect to the range we’ve been following in the 10yr. One might have argued that yields were pushing the lower boundary of the range had it not been for NFP (“nonfarm payrolls,” the main component of the jobs report) on Friday.
Mortgage rates haven’t necessarily been keeping pace with Treasuries, but they’ve been just as sideways. In fact, rates have been consolidating in a narrower pattern surrounding a conventional 30yr fixed rate of 6.5%.
Whereas this week’s volatility was well-distributed across multiple days and events, next week’s potential volatility is highly concentrated on Wednesday morning. That’s when the latest monthly installment of the Consumer Price Index (CPI) will be released.
CPI is the biggest market mover among the various inflation reports that come out each month. It’s the only report that could legitimately challenge NFP as THE most important monthly data over the past few years. Every new update on inflation is particularly interesting right now because the market is actively trying to determine if inflation in check and declining, or if it is persistent enough as to require more rate hikes from the Fed. This indecision is what the consolidation pattern in mortgage rates is all about.
The most important figure in the CPI data is the monthly “core” reading which excludes more volatile, less elastic food and energy prices. It topped out at 0.8% at the highest levels and although it has come down a bit, it’s still well above the target range.
It will take 12 months of 0.167% core inflation to hit the 2% target. Obviously, there’s a long way to go, but if the market is convinced that we’re headed in that direction, rates would be much lower than they are now. The year-over-year chart is still anything but convincing.
Job growth surprised again in April, this time rising more than expected. Total nonfarm payroll employment rose last month by 253,000 jobs, compared to March, according to data released Friday by the Bureau of Labor Statistics.
“Job growth for the prior two months was revised downwards, but on net, the labor market is stronger than expected, including wage growth up 4.4% over the past year,” Mike Fratantoni, the Mortgage Bankers Association’s chief economist, said in a statement. “This rate of growth is likely faster than would be consistent with the Federal Reserve’s 2% inflation target.”
The unemployment rate also fell slightly to 3.4%, with 5.7 million persons unemployed at the end of the month. Overall the unemployment rate has shown little net movement since early 2022.
“The unemployment rate fell and is now lower than it has been since 1953,” Lisa Sturtevant, Bright MLS’chief economist, said in a statement. “The strong employment report adds to the complicated labor market picture, as it comes on the heels of this week’s JOLTS report that showed that the number of overall job openings fell as fewer people were switching jobs.”
With the resiliency of the job market and the continued wage growth, experts believe the Federal Reserve may not be done hiking interest rates just quite yet.
“The April data suggests that the Fed may not be able to pause interest rate hikes when they meet next month,” Sturtevant said. “And while the risks of a 2023 recession have increased, it is very likely that a downturn later this year would be mild, without significant job losses that often accompany economic recessions, given the current strength in the labor market.”
Sturtevant also said that she does not expect the housing market to take a major hit if labor market conditions weaken.
“The strength of most local housing markets is highly dependent on the local employment situation, and we’ve been seeing that relationship play out over the past several months,” Sturtevant said. “Even if the Fed increases the federal funds rate again next month, it is possible that mortgage rates could come down, with lingering uncertainty in the banking sector and declining consumer confidence pushing investors to safer investments, like U.S. Treasuries. Falling mortgage rates would provide more juice to the U.S. housing market, which has been relatively subdued this spring.”
The construction sector added 15,000 jobs in April, thanks to a large uptick in the specialty trade contractors segment of construction, which gained 26,700 jobs, with residential specialty trade contractors gaining 16,700 of those jobs. Meanwhile, residential construction of buildings lost 1,800 jobs and heavy and engineering construction lost 8,100 jobs, month over month.
““Despite declines in the number of single-family homes under construction, residential construction labor demand remains strong. Building a home does not readily lend itself to outsourcing and automation. Home building still requires manual labor as a key input into the production process,” Odeta Kushi, First American’s deputy chief economist, said in a statement. “There are still a near-record number of homes under construction, and you need more hammers at work to build these homes. Additionally, builders have had trouble attracting and retaining skilled construction workers, making them less likely to part with skilled workers.”
The real estate, and rental and leasing sector gained 9,800 jobs in April, with real estate gaining 8,700 jobs, and rental and leasing added 1,100 jobs.
In February 2020, a combined 300,000 were employed in “real estate credit” and as mortgage and non-mortgage loan brokers. As of March 2023, there were roughly 340,800 people in those jobs, suggesting that the industry still has a large number of cuts to make in the coming months as the housing market remains at a much cooler level than a year ago.
The lion’s share of the job growth in April came from gains in the professional and business services sector (up 43,000 jobs), the leisure and hospitality sector (up 31,000 jobs), the social assistance sector (up 25,000 jobs), and the health care sector (up 40,000 jobs).
“As was the case in recent months, job growth remains concentrated in just a few sectors, particularly health care and hospitality. Although we have seen several public layoff announcements, the job growth in these few sectors continues to offset losses in technology and other industries, including the mortgage market,” Fratantoni said. “A solid job market will provide support to the housing market. However, the inflationary pressures from this strong wage growth will likely prevent the Federal Reserve from cutting rates any time soon, even if they now are at the peak for this rate cycle.”