October 05, 2023

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Good day. Tuesday's trivia revealed that current rates aren't actually that high historically speaking, but that doesn't mean homes aren't expensive. We see evidence of this in the average age of first-time homebuyers these days, a number that's risen noticeably in recent years. Can you guess the age? a. 26 b. 30 c. 33.

Here are the topics for today:

Housing Affordability Hits a New Low
Switching Your Mutual Fund to an ETF
High Rates + Savings Bonuses = A Saver's Dream

ECONOMY

Housing Affordability Hits a New Low

Home prices are a leading indicator of affordability, but there's a lot more that goes into the cost of owning a home. Among prices, insurance, taxes, and interest rates, the monthly mortgage payment on a median-priced home has increased about 55% to $2,774 in just two years.

How bad is it?

The Home Ownership Affordability Metric's calculations are centered around a few things — median household income, home prices, interest rates, and the rule of thumb that monthly housing costs shouldn't exceed 30% of gross monthly income.
100.0 is the affordability threshold, above which point the housing market is considered "affordable" by the median metrics utilized. The affordability threshold last clung to 100.0 in May 2021 and has been declining since March 2021. Presently, we sit at 69.5, a range not seen since 2006.

This affordability crisis is evidenced all around us, both statistically and anecdotally. Existing home sales have fallen drastically in recent years as Americans hold onto their low-rate mortgages. Anecdotally, we see news like — 40% of new homebuyers under 30 are getting family money to cover their down payment, and buying a starter home is far more expensive than renting in most cities.
Going forward, any resolution to the problem will be predicated on increasing supply, declining home prices, incomes keeping up, and mortgage rates normalizing over time.
A report recently released by the Mortgage Bankers Association is expecting mortgage rates to decline to about 6.2% by EOY Q4 2023 and down to 5% by Q4 2024. As for the supply and income aspects, much of the outlook remains a wait-and-see game.

Finding some shade — practical tips

Homes are shrinking, you might need to adjust your philosophy. Thanks to price increases, the average size of new home starts has declined by about 10% to 2,420ft over the last 5 years alone. The average "starter home" is no longer as big as it once was, and we'll have to either adjust our expectations or adjust our budget.
Focus on the monthly payment for your overall financial health. The total monthly housing cost including taxes and insurance (no PMI) on a median-priced ($416,100) home with a 30-year fixed-rate at 7% is now $2,729 — up 77% from around $1,539 just 3 years ago. That's a big hit to your monthly budget, and making sure to pick a home that fits reasonably within your monthly income is arguably the most important part of buying a home right now.
As boring as it sounds, you have to rate shop: While most lenders will offer similar rates based on your credit profile, shopping around always gives you some extra leverage. Ideally, start with your primary financial institution where you've already established a presence and a track record. Then, shop around and come back to your original source with any competitive offers you've received.

Buy vs Rent?

Housing

6 mins

INVESTING

How to Switch Your Mutual Fund to a Comparable ETF

Mutual funds and exchange-traded funds (ETFs) are two peas in a pod. They share a lot of similarities on their journey to achieve the same goal, but there are some important differences.

Their past and present

Mutual funds predate ETFs by almost 70 years, starting all the way back in 1924 with the $MITTX fund, whereas our first ETF didn't arrive until 1993 via the SPDR $SPY fund.

The long history of mutual funds is reflected in the number of funds they hold too, with US assets under management (AUM) totaling almost $27 trillion at the end of last year. ETFs still lag by a lot even after their recent boom as assets swelled to $7.1 trillion dollars held last year.

Their differences

Fees: Mutual funds are usually (not always) actively managed, and therefore carry higher fees. The average mutual fund fee for an active fund will run about 1.5%, whereas ETF fees average around 0.5%. But passive ETF fees go as low as 0.02% to no cost.
Prerogative: With mutual funds, most of the time their goal is to outperform the market, which makes them active strategies, whereas ETFs are often passive vehicles that track an index.
Price action: ETFs trade like any other stock and their price changes constantly intraday. Mutual funds calculate their net asset value, (NAV) and therefore price, at the end of each trading day.
Tax treatment: Unlike ETFs, mutual funds pass on capital gains to their shareholders who are taxed on those gains come tax time. Because mutual funds are often actively managed, this also means they're subject to higher asset turnover, generating even more gains. For most investors, this might be negligible, but it adds up, especially as your account grows. And we've seen how it can be a problem, especially when the time comes to start taking your required minimum distributions (RMDs).

Substitute your mutual fund with a comparable ETF

Because of their key differences, mutual funds may have shortcomings that aren't suitable for every investor. If that's you, it might be time to consider swapping out your mutual fund for a comparable ETF.

How do you go about doing so? It's fairly simple for the most part. For one, check with your existing mutual fund provider's website to see what comparable ETFs they have available.

For example, if you own $VTSAX in your retirement account and you'd prefer to keep your asset allocation about the same, the most logical choice to switch to would be something like $VTI, the ETF equivalent to your mutual fund.

What Are ETFs?

Investing Basics

6 mins

MONEY TIP

High Rates + Savings Bonuses = A Saver's Dream

Just like credit card companies offer cashback rewards and sign-up spending bonuses knowing that they'll sometimes be taken advantage of by savvy spenders, banks are doing the same thing with savings bonuses.

What's happening exactly? Bonus churners are earning thousands of dollars just by opening up new bank accounts at various banks simply to get new account sign-up bonuses, which are anywhere from $100 to $2,000 per bank.

To sweeten the pot even more, many banks are offering savings account rates north of 4% to 5% in the wake of the Fed's recent rate hikes.

How to make the most of these offers

Traditional brick-and-mortar banks may not offer competitive interest rates on your deposits, but they sure are stepping it up on the bank bonus front right now. It seems as if these traditional players (i.e., Citi, Chase, BofA, Capital One, etc.) have all decided to show a united front against the many neobanks that were born in the recent bull market.
Read the fine print: It should be known you can't just dine and dash for the bonus at these banks. Most of them will require a minimum balance, or at least that you keep the account open for a minimum period of time to avoid forfeiting your bonus. Reading the fine print on that offer is key.
Don't forget the taxes: Bank bonuses are taxed as earned income, so don't forget to check for and download your 1099 for your bonus cash come tax time.
As for the savings rates, online banks are the way to go. Online banks have the added benefit of reduced overhead compared to their traditional counterparts, and they pass on those savings to savers. For the month of October, there are dozens of great offerings out there, all north of 4% and 5%.
Reminders: With these offers, it's important to remember that these rates are sometimes only applicable to certain balance ranges, and often the more you hold, the lower your rate becomes—it's like the inverse of taxes. Additionally, the standard FDIC insurance amount is $250,000 per depositor, per insured bank, for each account ownership category.

Saving More

Budgeting & Saving

8 mins

🌊 BY THE WAY

🏠 Answer: 33. Compared to the median age of 29 back in 1981, first-time homebuyers are now about 13% older. (NAR)
🤖 Some investors are Ok with an AI advisor (CNBC)
👀 ICYMI. The 30% mortgage rule may be outdated (Finny)
💼 LinkedIn is finally cool — at least to some (Axios)
📚 Finny lesson of the day. For most, it's arguably never been more difficult to purchase a home — here are some major tips to become as viable of a buyer as possible:

Home Buying Power Tips

Housing

5 mins

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