The Week on Wall Street
Stocks traveled a volatile path last week as investors appeared concerned about the upcoming elections, an uncertain economy, and more delays with additional fiscal stimulus.
FACT OF THE WEEK
Founded by the General Court of Massachusetts in 1636, a local college officially became Harvard University on September 14 in honor of the late John Harvard, a clergyman from Charlestown, Massachusetts, leaving his library and half his estate to the newly established local college. Since its days as a single classroom, Harvard University has become the country's oldest and wealthiest higher learning institution.
The Dow Jones Industrial Average slid 1.66%, while the S&P 500 slumped 2.51%. The Nasdaq Composite Index plummeted 4.06% for the week. The MSCI EAFE index, which tracks developed overseas stock markets, rose 1.44%.
Stocks Continue To Slip
In a holiday-shortened week of trading, stocks resumed their slide from the prior week, with the technology-heavy Nasdaq slipping into correction territory spanning over three-days ended on Tuesday, September 8. (A correction occurs following a decline of at least 10% from a recent high.)
After staging a strong rebound on Wednesday, stocks once again headed lower as the Senate failed to pass another coronavirus stimulus bill. Mega-cap technology companies remained under pressure throughout the week.
Energy stocks added to investors woes, plunging on data showing an unexpected build-up in inventories. The market ended the week on a mixed note, as technology companies lost additional ground.
On Friday, the nation commemorated the tragic events of September 11, 2001.
We join all Americans in remembering the lives we lost that day and the profound impact on the victims’ families, reminder to all that it was the unity, kindness, and warmth that we collectively rediscovered in the wake of 9/11 that saw us through that difficult period.
FINANCIAL STRATEGY OF THE WEEK
BORROWING FROM YOUR 401K FOR A HOUSE DOWN PAYMENT
Last month's recent reports showed mortgage rates were at or near all-time lows across the US, and for many, work no longer requires a long commute or physical office in the city. Interest in home-buying has begun to skyrocket, particularly among first-time homebuyers.
While many individuals are considering the current incentives of buying a house now, we need to understand how the home-buying process works and how to begin planning for such a big financial step. The method of purchasing a home can undoubtedly get very complicated. Begin looking at your current situation and determine where and how much funds to withdraw to cover a down payment.
As a general rule, a 20% goal is best for a down payment, as this eliminates the need for you to purchase Private Mortgage Insurance (PMI) with your mortgage, which will save you from potentially hundreds of extra dollars each month in addition to your mortgage payment. Using 20% as an example, for a down payment and the median house price in the US is currently around $250,000, you're looking at a goal of saving $50,000 cash for a down payment, and may take years to accomplish for many of us.
Understandably, some may look for other sources like tapping into retirement savings, but there are some fundamental things to consider before taking that alternative route.
Potential for future risk
If you decide to pull funds from your existing retirement savings, it will cause the clock to reset on your investments' compound growth, and a substantial withdrawal today will become a much larger missing piece from your balance when you retire. Let's look at an example. Today, your 401k savings account has a balance of $100,000 with plans to take out $50,000 early withdrawal as a loan to put towards a house down payment. The remaining balance could grow to over $360,000 in 30 years, assuming a 7% annual return rate.
Alternatively, if you decide to leave the $100,000 balance to continue to compound and grow at that same 7% per year for 30 years, it could grow to over $760,000. By pulling $50,000 out early, creates a potential risk of losing close to $360,000 on future earnings. Also necessary to point out, any funds withdrawn from a retirement savings account will require payment on the amounts income tax.
Will this be a home or an investment?
New homeowners with expectations of reaping huge returns in a relatively short amount of time won't be feasible for most, requiring time and effort that many buyers and those with young children will likely not be able to commit to as a priority. Although individual markets can vary widely, US home prices have increased roughly 3-4% annually for the last 25 years.
According to the Case-Shiller Home Price Index, this is far less than the stock market's annual returns over the same period - that rate reflecting only the gross nominal price appreciation - which doesn't account for homeownership costs like taxes, interest on your mortgage, maintenance, and updates. Home prices have barely been able to outpace inflation nationally over time.
What are my alternatives?
If considering dipping into your 401k to purchase a house, you may not have enough cash available to put towards a down payment, another problem worth considering. A home will always have ongoing costs and, at times, can be substantial and unpredictable and require funds to be accessible, that you may not have access to without using your retirement funds.
Before you decide to move forward with a home purchase, it's essential that you have funds set aside to fall back on if and when an unexpected expense occurs. Emergency savings should be easily accessible and should be enough to cover at least three months of your current essential living expenses. Once you have enough in emergency savings, the next step is to open a savings account to begin depositing funds into as soon as possible to later use towards a down payment. While the 20% down rule is the model goal, it may not be a realistic goal for everyone.
With interest rates as low as they are today, homeownership is a highly attainable goal for those willing to plan a bit. If you are currently in the home-buying process and don't have the cash available to make the necessary down payment, you may want to weigh other alternatives before taking a withdrawal from your 401k. If you have a Roth IRA, you may be allowed to withdraw your contributions and up to $10,000 in earnings tax-free and penalty-free to purchase your first home, which may be a better option in the long run.
While purchasing a home is a big decision and a financial milestone, there is no reason to try to rush the process or put your future self and investments at risk. Take some time to weigh the immediate pros and cons, and think about both the timing and the long-term consequences.
As always, please contact my office with any questions or concerns about your financial situation.