Welcome to the May edition of FAQ’s and RAQ’s!
Here we answer client questions -- some asked Frequently, and others asked Rarely.
FAQ: I’m a Millennial and can’t afford to buy a house. Will home prices ever fall?
Believe it or not, home prices fell more than 10% last year, the biggest annual drop in six decades. However, after home prices soared during the pandemic, this recent dip has hardly improved affordability.
Don’t count on a further decline. Even during the early 1980’s, when mortgage rates skyrocketed, home prices rose as the baby boomer generation came of age, boosting demand—much like the Millennial generation today.
If you’re not yet able to afford the home you want, here are three strategies to consider:
- Get a good rate on your savings. If you’re saving for a down payment and not getting a good return at your bank, consider a higher yielding money market mutual fund.
- Be prepared to be opportunistic. When home prices do decline, it’s usually during a recession. If you’re secure in your job and have savings, a recession might be a time to find a good deal.
- Be flexible on location. There’s a big difference today between the hot markets and less expensive markets. If you can work remotely or relocate, you might find a better deal by moving—potentially to a market that still has potential to appreciate.
FAQ: I’m Gen Z and based on how much I can save, growing my portfolio is a slow process. How long does it take to get ahead?
For young investors just starting out, it can feel like a marathon to see your account value grow. That’s because you haven’t yet reached the “tipping point.” That’s when the growth of your portfolio from market gains begins to exceed your personal contributions.
Here’s a hypothetical example:
- Current Portfolio: $25,000
- Annual Savings: $5,000
- 10% Market Gain
Your portfolio rises $2,500, which is less than your annual savings.
But here’s when your situation improves:
- Current Portfolio: $50,001
- Annual Savings: $5,000
- 10% Market Gain
Portfolio Gain: $5,000.10, which is MORE than your annual savings. Now your money’s really working for you! And if you keep saving and get a boost from the stock market, you could really start to see your money grow.
Your goal? Invest early and often to reach that tipping point as soon as you can.
RAQ: Why is the Fed intent on lowering inflation to 2% if it means harming the economy in the process? Why not let inflation remain higher and spare the economy?
The answer is the effects of compounding inflation rates on the economy. Over twenty years, a 2% inflation rate would see price rise 48%. That’s painful enough! At today’s 3.5% rate, prices would rise 98% over the same period.
That’s a dramatic difference, potentially eroding standards of living if wage growth or investment returns don’t keep pace.
In short, the Fed is willing to accept some short-term pain if it means long-term gain for the economy.
Have a question? Drop us a line at carlsongroup@rwbaird.com. We'd love to hear from you!
Investors should consider the investment objectives, risks, charges and expenses carefully before investing. Money Market Funds are not FDIC insured. Examples are purely hypothetical and for illustrative purposes and do not consider the costs of investing.