POP QUIZ

What is the homeownership rate in the U.S.? (Read to the end to see!)

IN THE NEWS

🏠 The $1.8 Billion Earthquake That Just Hit Real Estate

Photo by Tierra Mallorca on Unsplash

Relief for homebuyers: You might not have to pay excessive fees to real estate agents.

ICYMI: Last week, a federal jury ruled that the National Association of Realtors and several large brokerages had “conspired to artificially inflate the commissions paid to real estate agents, a decision that could radically alter the home-buying process in the United States.”

Woah. It seems big — well, because it is.

The group has been ordered to pay $1.8 billion in damages, possibly even more (up to $5 billion).

• The immediate impact: Moving homes could become less costly because of reduced commissions. (A home seller and buyer must pay commissions to the agent representing the buyer.)
• But under the verdict, sellers wouldn’t have to pay their buyers’ agents, and agents could set their own commission rates — which could be slashed in half or less.

How does this work? For instance, a home seller with a $1 million home could pay up to $60,000 just in agent commissions — $30,000 to their agent and $30,000 to the buyers’ agent.

How much the verdict changes the future of home buying remains to be seen. But what’s clear is that the verdict has thrust commissions into the spotlight, leading many buyers and sellers to question why it’s standard practice to set commissions between 5% and 6%.

• “Traditional brokers will undoubtedly now train their agents to welcome conversations about fees,” said Redfin’s CEO. “But it’s also possible that buyers will become the ones who decide how much to pay a buyer’s agent.”

The earthquake: More than 1.5 million real estate agents nationwide pay dues to call themselves “Realtors.” But between sexual harassment allegations against the National Association of Realtors president and questions around fees, some agents could abandon the group.

• “This is an earthquake,” said one veteran real estate agent with Compass. “I’m disappointed in today’s verdict, and I’m even more disappointed in N.A.R. This was their Super Bowl and World Series rolled up into one, and not even Taylor Swift could have saved them.”

From Bloomberg in 2021, near the housing market’s peak

But higher interest rates over the past 18 months, combined with limited supply and high prices, have created a standstill in many areas of the country.

• While few agents celebrated the verdict, some lawyers and analysts say reduced fees would be “extremely good news for Americans.”
• If commissions can be lowered, “the price of every home will come down, jobs and wages will go up, tax revenues will increase, people can easily move to better and more fulfilling jobs,” one lawyer said.

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💰 Berkshire Sitting on Record $157 Billion in Cash

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Talk about sitting on dry powder — Warren Buffett’s Berkshire Hathaway reported Saturday that it has $157.2 billion in cash, despite posting $23.5 billion in investment losses.

Oh, $157.2 billion, is all?

Other takeaways from Berkshire’s third-quarter earnings include:

• Berkshire slowed its stock repurchases, buying back $1.1 billion in the third quarter.
• Operating profit rose 41% to $1.76 billion from $7.65 billion a year earlier.
• Berkshire reported that revenues from its apparel and footwear businesses fell 11.2%, mostly because of a decline in customer demand, as echoed by large retailers worldwide.
• Berkshire’s insurance operations posted $4.89 billion in profit, as insurance benefited from rising rates — which boosted income from U.S. Treasuries — and a relatively quiet hurricane season, reducing catastrophe losses.
• Berkshire’s business in the railroad, BNSF, declined on lower volumes and higher expenses, while its housing businesses fell on rising mortgage rates and limited inventory.

The big picture: Buffett, 93, has run Berkshire since 1965. He’s worth $117.5 billion, which ranks fifth worldwide, even considering he’s donated over $50 billion to charity.

• Berkshire shares are up about 12% this year, slightly underperforming the S&P 500 after hitting an all-time high this summer. Its positions in Apple (down 12%), American Express (down 14%), and Coca-Cola (down 7%) all had shaky quarters.

Still, it’s generally a good idea to at least glance at Berkshire’s quarterly report, if for nothing other than to see how the results might reflect broader trends. Plus, many investors study Buffett’s every move, hoping to learn a thing or two for their own portfolio.

Why it matters:

Much of Berkshire’s cash is in short-term investments in U.S. Treasury bills, a stash that enables Buffett to pounce on an attractive opportunity when one arises.

• Charlie Munger, Berkshire’s vice chairman and Buffett’s longtime business partner, told the Wall Street Journal in a recent interview that the odds of another big acquisition under the pair were “at least 50/50.”
• “There’s certainly fuel there if they want to make a deal,” said one analyst.

As Buffett would say: “That’s what we look for — a fat pitch.”

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🔒 How to Lock In High Bonds Yields

Photo by Muhammad Zaqy Al Fattah on Unsplash

There are many cons of higher interest rates, but it’s not all bad. With yields on bonds so high, many see a chance to lock in higher returns for years.

To do that, folks are turning to a niche type of bond fund — “Defined-maturity exchange-traded funds (ETFs.)”

It’s a mouthful. The idea is simple: Invest in ETFs that function similarly to real bonds.

• See, regular bond investment funds have an important but technical difference.

Consider this example: An ETF tracking 10-year Treasury bonds must frequently trade to ensure that its portfolio accurately follows the performance of — no surprises here — 10-year Treasury bonds.

But the fund isn’t holding these bonds until they come due and are repaid.

• Instead, after a year, a 10-year bond is now a 9-year bond (its maturity date is in 9 years), so it might be sold and replaced with a bond that comes due in 10 years, matching the ETF’s stated strategy of investing in 10-year Treasury bonds.
• In other words, most bond funds continuously reinvest and, therefore, reflect current market conditions but don’t lock in yields.
• If you buy a 10-year Treasury ETF today, you’ll get a roughly 5% yield. But, if interest rates fall, and the yield on 10-year Treasury bonds sinks to 2%, so will the yield you earn on a regular 10-year Treasury ETF.

The question, then, is how to lock in those nearly 5% yields?

Why it matters:

Enter defined-maturity ETFs. Instead of tracking certain types of bonds and trying to capture their performance over time, these funds “mature” and liquidate on a specific date.

This allows investors to buy bonds at their current yields and hold them until they’re repaid, earning a set return, regardless of which direction interest rates generally move in.

• This is how investing in individual bonds directly works. However, with defined-maturity ETFs, the process is much easier and more accessible for most investors.

Yields on 10-year Treasuries, from the Wall Street Journal

Time to define: One popular choice is BlackRock’s iShares iBonds Dec 2033 Term Treasury ETF, where investors buying in now will earn a yield of around 4.7% per year through 2033, even if the Fed takes rates lower again next year (or at any point before 2033.)

• As the Wall Street Journal puts it, defined-maturity funds have “surged in popularity” and reduced “the risk of being trapped in a bond fund whose value has been pummeled by rising interest rates.”

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TRIVIA ANSWER

The homeownership rate in the U.S. is about 66%. In other words, two-thirds of people own their homes. The others rent. The peak came in 2004, right before the housing bubble burst when about 70% of Americans owned their home.