What do North Bay wealth advisers see on horizon for 2023?

We asked a group of local financial advisers about the current economic climate and what they see developing over the next few months and into 2024, especially in the housing market.

Here are their answers, which have been edited for clarity and length.

Analysts are predicting the housing and real estate market will cool. Do you see it becoming more of a buyer’s market? What investment opportunities does this present?

Tom Hubert

Redwood Credit Union Wealth Management (CUSO Financial Services, LP); 3033 Cleveland Ave., Santa Rosa, CA 95403; 707-576-5040; redwoodcu.org/investment

Tom Hubert is senior vice president of wealth, insurance and auto services. He has more than 23 years of financial services experience. He holds an MBA degree and a Bachelor of Science degree in psychology from Cameron University. He also holds Financial Industry Regulatory Authority (FINRA) series 7, 9, 10, 24, 63 and 65 securities licenses; accredited investment fiduciary (AIF) designation; and California insurance licenses for life, health, and property and casualty.

Tom Hubert: Though housing in California can be difficult, there will always be opportunities. For instance, as legislators enact more flexible zoning rules to make it easier to build multifamily housing and for single-family homeowners to add ADUs to their property, it offers opportunities to fill in housing gaps.

Last year, Redwood Credit Union partnered with the Napa Valley Community Foundation and Napa Sonoma ADU to create a construction loan program specifically for accessory dwelling units, allowing homeowners in Napa and Sonoma counties greater access to capital needed to build the small, self-contained residence buildings on the lots of single-family homes. That opens the doors to thousands of fixed-income, middle-income and lower-income homeowners in the North Bay, who might not otherwise be able to invest.

Rupa Jack

Executive director, Napa Family Wealth Management Group at Morgan Stanley, 700 Main St., Suite 315, Napa, CA 94559; 707-254-4432; advisor.organstanley.com/napa-branch

Rupa Jack has 35 years of experience at Morgan Stanley. She is a Morgan Stanley family wealth director with demonstrated knowledge and experience across a range of wealth management disciplines. With this designation she gains full access to Morgan Stanley’s family office resources including family governance, business succession planning, and estate planning.

Rupa Jack: Morgan Stanley economists believe we are on the cusp of an important inflection point in the housing cycle, with interest rates peaking and a broadening housing recovery through 2024. They expect this housing recovery cycle to be driven more by activity in the single-unit housing market (given current low levels of supply) than by prices (as affordability has deteriorated to the worst levels since the Great Recession). This suggests a more favorable outlook for activity-linked sectors (homebuilders, developers) over price-exposed sectors (banks, REITs).

We think beneficiaries will include providers/manufacturers/installers of (a) energy efficient/ smart equipment (such as automation, heat pumps, LED lighting, and smart home solutions), (b) green building materials (green cement and green steel), and (c) residential clean tech equipment (solar panels, stationary batteries, and EV charging infrastructure). Growth in these markets is supported by the financial incentives provided in the Inflation Reduction Act (which included various tax credits, loans and grants to improve energy efficiency and climate resiliency of residential buildings), households' awareness of, and preference for, environmentally friendly options, and — in some cases — the declining cost of clean technologies.

Eric Keating

Wealth adviser, Willow Creek Wealth Management, 825 Gravenstein Highway N., Suite 5, Sebastopol, CA. 95472; 707-829-1146; willowcreekwealth.com

After graduating from college, Eric Keating became an institutional equities trader. He has recently obtained the certified financial planner (CFP) certification and manages investment portfolios. As a chartered special needs consultant (ChSNC) and father of two young boys with special needs, Keating helps families and individuals with disabilities navigate the added planning complexities specific to them.

Eric Keating: When analyzing a change in the economic environment, it is important to look at what is creating the potential opportunity. In this case, it is primarily due to the increase in interest rates. Keep in mind that just because home prices have gone down, it doesn’t mean they are less expensive to own. Unless you are a cash buyer, the cost of homeownership has almost certainly gone up (even if the sticker price is lower).

I will use two examples to help illustrate my point: a $500,000 mortgage at 3.5% and a $400,000 mortgage at 7.0%, both 30-year loans. The former has a monthly payment of $2,245 and the latter, $2,661. The amount of interest paid over the lifetime of the loan is a whopping $250,000 more! Cheaper house, higher cost.

For cash buyers, it is a different story and perhaps there is an opportunity. As many of us in Sonoma County have witnessed, renter costs have been skyrocketing. Could buying an investment property right now pay off in the long run? This is definitely possible. Now, there will be property taxes, insurance, vacancies, and all the headaches that come along with being a landlord. After these considerations, does your rental income beat the current risk-free rate of 4% — 5%? Because until the house is sold, that is your opportunity cost.

As boring as this sounds, an investment opportunity that has suddenly reappeared is in bonds. If inflation cools and you can lock in a 4.5% — 5.0% return, that can be considered a win for part of your portfolio. As always, we would highly encourage everyone to remain well diversified across all asset classes.

Ray Lent, RIA, CLU

Owner and wealth manager, The Putney Financial Group, 100 Smith Ranch Road, Suite 110, San Rafael, CA 94903; 415-460-1990; putneyfinancial.com

Ray Lent began his career in risk management, earned the prestigious chartered life underwriter (CLU) designation from the American College in Bryn Mawr, Pennsylvania. He is a wealth manager for The Putney Financial Group, which he founded. He has a passion for art, history and sailing, and has also sponsored numerous educational programs in the areas of economic literacy, art and history.

Ray Lent: Both the housing and real estate markets have been cooling off over the past year. Any realtor will tell you that the housing market is really about local markets and not national trends. With interest rates having risen so many times, people often feel they can afford less house. A tool that has been successful to the buyer and seller alike has been the seller buy down on the borrower’s mortgage rate. This affords the seller a chance to realize a higher asking price and the buyer an opportunity of refinancing when interest rates eventually go lower.

Jacob Margo

Private client adviser, Main Street Research LLC, 30 Liberty Ship Way, third floor, Sausalito, CA 94965; 415-426-4995; ms-research.com

Jacob Margo has served in client advisory positions at Merrill Lynch Wealth Management, JP Morgan Chase and Co., and Fisher Investments. He is a member of the Investment Policy Committee, where he helps navigate the ambiguity of the market from a macro and micro perspective, with a particular interest in the geopolitical climate that impacts today’s investors.

Jacob Margo: Resilient and in-demand housing markets like the Bay Area will likely remain a seller’s market for the foreseeable future. Though interest rates have put additional cost pressure on buyers, supply is still historically low, and there are still not nearly enough housing developments to cover the gap.

Though we have seen decreases in existing home prices, existing home sales have plummeted showing a reluctance for homeowners to sell with limited options to buy elsewhere at higher borrowing rates. A cool-off will take decreases in rates to increase seller mobility as well as lower borrowing costs for homebuilding firms. Homebuilders are the biggest beneficiaries of this huge supply shortage and have outperformed most other sectors in the stock market, hitting all-time highs.

William Ryan

Senior investment officer, Exchange Bank Trust and Investment Management, 454 Fourth St., Santa Rosa, CA, 650-549-1964; exchangebank.com

William “Bill” Ryan earned his bachelor’s degree in economics and philosophy from Boston College. He has over 30 years of experience in the investment services industry, having served as a senior investment strategist working with high-net worth families, an equity analyst, co-manager of a large-cap common trust fund for Comerica Bank, and as an independent market maker on the Pacific Stock Exchange.

William Ryan: All real estate is local. It’s true that heading into the year analysts had been predicting a slowdown in the national housing market. And that made sense given the backdrop of a Federal Reserve raising short-term interest rates by over 5% to combat inflation, mortgage rates more than doubling in less than a year, and the near consensus expectation that the economy would slip into recession.

While directionally correct, the reality so far this year is surprising. According to an August 2023 report by the National Association of Realtors Chief Economist Dr. Lawrence Yun, the median home price in the U.S. declined by only one percent on a year-over-year basis. Furthermore, he believes that we may have seen the lows for this cycle as month-over-month data shows a rebound in home prices.

Of the 11 counties that make up the Bay Area housing market, five counties (San Francisco, Alameda, Marin, San Mateo and Napa) have seen double-digit price declines, with the remaining counties (Contra Costa, Santa Cruz, Solano, Monterey and Sonoma) seeing mid to low single-digit declines.

Here in Sonoma County, the housing market has been surprisingly resilient. According to a report from Compass Realty, home prices have declined by only one percent from one year ago, which happened to mark the high in Bay Area real estate. There are approximately 1,200 active listings which is 1.5 months’ worth of inventory, and homes are taking an average of 32 days to sell.

The median sales price for homes in Sonoma County for the second quarter of 2023 was $850,000, and bids over the asking price are the norm with well over 55% of all offers averaging 102% of asking price. With limited inventory, sales activity has declined over 30% from the year earlier; however, prices remain firm as demand continues to soak up the limited supply of homes. It remains very much a sellers’ market and there is little indication conditions will change at any time in the near term beyond the seasonal ebbs and flows of the market.

The lone bright spot for those looking to purchase a home is that it appears that the Federal Reserve is closer to the end of this current hiking cycle. This is important because as the Fed was hiking interest rates, mortgage rates were also rising, but by much more than the impact Fed’s increase in rates.

Mortgage spreads — the difference between a 30-year fixed rate mortgage and the benchmark 10-year U.S. Treasury — are at a historically wide 3 percent. Since 1990, mortgage spreads averaged 1.7%, and if it becomes clear that the Fed is finished with its hiking regime, we expect this spread to tighten and mortgage rates to decline in kind providing much needed relief to homebuyers.

Steven Townsend

Vice president and senior financial consultant, Charles Schwab, 200 Fourth St., Suite 100, Santa Rosa, CA 95401; 707-569-7819; schwab.com

Employed at Charles Schwab since 2000, Steven Townsend, CFP, earned his B.A. degree in economics at Sacramento State University and has 28 years of professional experience. He is a certified financial planner certificant, with FINRA series 7 and 63 securities licenses and life-and-variable annuity insurance license.

Steven Townsend: One of our central theses for the better part of the past year is that the economy has been plagued by rolling recessions — bouts of weakness that weren't powerful enough to bring the entire economy down. The first sector of the economy to fall into its own recession, however, was housing. Proxied by the National Association of Homebuilder (NAHB) index, housing took a deep dive throughout 2021 and 2022, but has since started to show signs of life.

Given homebuilder sentiment is a leading economic indicator, one would expect a material turn in higher home sales to follow the recent return of optimism. That has happened to some extent, but not evenly.

With demand for homes still relatively strong, some buyers in the existing market have been pushed into the new market. As many homebuilders have been offering incentives like premium finishes, mortgage rate buydowns, and other concessions, the process has looked relatively more attractive for buyers. Plus, high mortgage rates are not yet scarring the process, given all-cash deals are still around.

Unfortunately, the decline in home prices hasn't been enough to counteract other headwinds that are facing would-be buyers. Individuals and/or families in the market for a house are facing some of the worst affordability dynamics in over a decade. We were starting to see some relief as mortgage rates eased at the beginning of the year, but that has vanished of late.

The Fed addressed inflation by pushing up interest rates, with more adjustments expected this year in the hopes of staving off a recession. Is that the right approach?

Tom Hubert: At RCU, we have seen that the rise in the fed rate has had some impact on the lending market and people’s willingness to invest. But we’re optimistic that the federal corrections will curb inflation. And we’re also optimistic about the ability of our businesses and individuals to overcome whatever is thrown at them. We have all become adept at pivoting to survive tough times, and we will continue to do that, no matter what happens with interest rates. Redwood Credit Union will continue to be here to assist our Members in every way we can to lead successful financial lives as individuals and businesses.

Rupa Jack: A cadre of dovish Fed governors, including Chair Powell, keep suggesting monetary policy is restrictive. This seems hard to square with historical data, as in every other tightening cycle fed funds were set meaningfully above core personal consumption expenditures (PCE). Despite that spread having turned positive only recently, the U.S. labor market is at full employment, with July data revealing a falling unemployment rate. Additionally, only a modest amount of demand has been destroyed by the Fed.

Most amazingly, financial conditions — a measure of the degree to which liquidity is ample — are at the same level as in March 2022. The Fed may want to declare victory for its tightening campaign, but a premature shift toward accommodation risks reigniting inflation in an economy that at worst has only now come into better balance.

Eric Keating: The inflation we endured in 2022 was the worst we have seen since 1978-1982. An uneasiness was felt by investors considering many of them had not experienced inflation at this level before. You might be looking back on the 80s and thinking, “Wasn’t that a booming economic period?” Yes, it was. It didn’t start out that way, however.

Early inflation battles were combated with strategies such as controls on supply, wages, and prices. This provided temporary relief. When the controls were lifted, however, there was a slingshot effect in pricing which brought us back to square one.

In the early 80s, Fed Chair, Paul Volcker, introduced a new way to fight inflation. Moderate increases in interest rates through the late 70s were not having much effect, so they took extraordinary measures with massive hikes. This caused two recessions and it took a toll on many people, but the economic run that almost immediately followed shows it was effective.

The Fed is currently acting in a similar manner, just on a much smaller scale. This will almost certainly have a short-term effect on our economy, but letting inflation get out of control would be disastrous. The ultimate goal is a soft landing and avoiding a prolonged recession.

Ray Lent: It’s been a difficult balancing act for the Federal Reserve to tamp down inflation rates that reached 40-year highs. To do so, they steadily raised interest rates, yet didn’t want to run the risk of unemployment rising dramatically. To date, unemployment is still low, modest growth continues in spite of a run up in rates. What I believe is we can see this higher level of rates last longer than originally expected.

Jacob Margo: We’ve historically seen success from the Federal Reserve’s monetary policy of reducing inflation by limiting the money supply. That means increasing interest rates to lower corporate and household expenditures in the form of debt (corporate bonds, private credit, home and car loans, credit card debt, etc.). The biggest argument against the policy is the precipitous rate at which they are hiking at currently. That being said, anticipated increases in government spending create an additional headwind for the Fed, which justifies aggressive action from their committee.

William Ryan: The Federal Reserve has a dual mandate of full employment and price stability. While unemployment remains at or near historic lows, inflation due to a variety of factors caused by the Covid-19 pandemic became a concern in late summer and early fall of 2021. The Federal Reserve began its interest rate hiking regime in March of 2022 and continued to raise the Federal Funds Rate as inflation eventually soared to a cycle high of 9% in June of 2022. To date, they have raised interest rates 11 times and the Fed Funds rate currently stands at 5.5 percent.

Most analysts and experts, even the Federal Reserve itself, agreed that this rapid increase in interest rates would accomplish two things: the economy would slow to the point that there would be negative growth, and unemployment would undoubtedly increase. In other words, the U.S. would experience a recession and with any luck it would be mild and short-lived. And that would move inflation back closer to the Federal Reserve’s inflation target of 2 percent.

Then a funny thing happened; unemployment remained low, the economy continued to grow, and inflation fell from a high of 9% in June of 2022 to the most recent reading of 3% in June of this year. That would be a textbook definition of a ‘soft landing’ for the economy. Few believed this would be the outcome of such an aggressive policy response from the Federal Reserve, yet here we are.

6.2 million jobs have been added since the Federal Reserve began hiking rates in March 2022, the unemployment rate currently stands at 3.5%, second quarter GDP growth was 2.4% (initial reading), and early indications suggest that third quarter GDP growth will be even stronger. The S & 500 is up +20 percent this year as of July — within shouting distance of all-time highs. Consumer and corporate balance sheets are strong and credit markets are well behaved, despite hiccups with a few banks in March.

It’s still too early to declare victory, and it wouldn’t be a surprise to see inflation rise slightly over the next quarter or two; however, the odds of the Federal Reserve threading the needle and engineering a soft landing for the economy isn’t out of the question at this point. In short, the Federal Reserve’s approach appears effective so far.

Steven Townsend: In the statement released after the May meeting, the Fed hinted that its aggressive rate-hiking cycle is on hold as it assesses the outlook for growth and inflation, but left the door open to further tightening, citing ongoing high inflation as its primary concern.

In our view, the evidence suggests that the Fed's tightening has gone far enough to bring inflation down in the longer term. The next move will likely be a cut in rates rather than a hike. The timing is unclear, with the Fed indicating it is likely to hold rates at the current level this year, but it all depends on inflation. We expect the Fed to hold rates through the remainder of the year, and then rate cuts will likely occur in Q1 of 2024.

How else are you approaching inflation concerns?

Tom Hubert: Inflation reduces the real rate of return on investments, plus it puts purchasing power at risk. First, we suggest working with one of our CFS Financial Advisors to help create a strategy using the individual’s risk tolerance that utilizes multiple possibilities. Second, we’d make sure to understand the amount of current debt. That can help in considering options like locking in fixed rates or paying down balances on credit cards. Third, it’s important to take advantage of the higher savings rates. This may help offset cost-of-living increases. Finally, we review and adjust the budget. Regularly recalculating and adjusting for changes will help ensure expenses remain within expectations. In summary, there’s no single tactic that solves everything, but there are several tactics someone can take to help remain on track financially.

Rupa Jack: While core inflation has declined gradually, headline inflation has fallen quickly, aided by supply chain curing, commodity price declines and U.S. dollar strength. The better-than-forecast growth and inflation have buoyed corporate profits, and, despite 525 basis points of rate hikes, liquidity has actually improved. Finally, asynchronous manufacturing and services recoveries have supported labor markets. With P/E multiples having expanded to 20 times on earnings expected to grow to $246 per share in 12 to 18 months, how much more can go right? Anything is possible, but economic strength suggests rates will be higher for longer, likely rendering rich multiples unsustainable based on anything other than trough earnings. Furthermore, 2023’s tail winds may reverse, as excess savings are exhausted, demand cools, fiscal spending decelerates and liquidity shifts. Consider preparing for higher-for-longer rates, powered by real and inflation-expectation components. That means trimming exposure to the most richly valued U.S. stocks and rotating toward those with growth at a reasonable price or value attributes and visible earnings achievability.

Eric Keating: My clients have all had different experiences with inflation. Some younger clients, for example, have had trouble maintaining their savings rate goals due to the increase in the cost of living. There are also retired clients who have had to increase their monthly withdrawals to keep up with increased expenses. I also have a significant number of clients who have even seen benefits from inflation — higher income from bonds and substantial increases in Social Security checks, for example.

In a general sense, I try to inform my clients of investments that are now becoming more attractive such as short-term bonds, and the benefits of investment vehicles such as Treasury inflation protection securities (TIPS). I also explain that even though bonds are paying a nice return at the moment, you still should not reduce your long-term stock allocation. Inflation might remain high. Is 5% really a good return if inflation is 7%? In order for their dollar to outpace inflation, equities are still an important component for almost all investors. History has shown that stocks have been a great hedge against inflation over the long term relative to other assets.

Ray Lent: Our firm has sought out companies that could enhance productivity without raising labor costs. This often occurs through prudent use of technology. Simultaneously, we’re adding modestly to our commodity positions which typically react well during times of inflation.

Jacob Margo: Financial planning is paramount to ensure that you are spending, investing, and borrowing prudently at a time when costs remain high across the board. We review the financial picture of our clients, revisit and adjust investment strategies, and engage in scenario planning and stress testing to illustrate the current and future impacts of inflation.

William Ryan: Inflation is insidious by nature. It silently erodes purchasing power over time. We work with clients whose time horizons often extend years and even decades. As we help them plan financial futures in which they are able to maintain their lifestyles over the long haul, inflation is very much top of mind and is factored into planning.

Even for the most conservative client, we recommend that they maintain some exposure to growth assets (read: stocks) to counter the deleterious effect of inflation. Holding real assets — real estate, commodities, and precious metals — can also act as a hedge against inflation, as well as Treasury inflation protected securities (TIPS).

Steven Townsend: Now that short-term Treasury yields have reached 5%, further upside is likely to be limited. Although the economy has remained resilient in the face of the most rapid pace of rate increases since the late 1970s, inflation is cooling. Moreover, the Fed is likely near the end of the rate-hiking cycle, which would allow intermediate- to long-term yields to move lower over the next year. Ten-year Treasury yields have tended to peak within about six months of the peak in the fed funds rate in past cycles. If that pattern holds, then current yields may be near their highs.

For investors, current yields present an opportunity to extend the average duration in portfolios and lock in the highest yields in a decade for long-term cash flows. However, given the risk that the Fed overdoes its tightening and tips the economy into recession, higher-credit-quality bonds — like investment-grade corporate and municipal bonds — look more attractive than lower-rated bonds. In addition, Treasury inflation protected securities (TIPS) provide an opportunity to lock in positive real yields and mitigate the impact of inflation.

In addition, investing in companies that are able to maintain their pricing power and grow their earnings and dividends as inflation subsides, as well as considering international stocks for lower valuations and higher dividends, are viable strategies longer term.

What is your No. 1 tactic or No. 1 financial advising trend?

Tom Hubert: Financial planning. Although it’s not new, our philosophy is that it’s not really about money; it’s about the opportunities that money provides the individual and family. Goals can include living a comfortable lifestyle in retirement, sending children to college, or leaving behind a legacy. To accomplish those goals, we focus on financial planning approaches that help meet whatever the long-term goals may be. We believe that education through planning is the key to being financially successful.

Rupa Jack: Investing is the ultimate exercise in patience. The passage of time has historically delivered, on average, positive returns for major equity and bond markets, and over the years, the compounding of these returns has proven a tremendous creator of wealth. While investing for the long term requires patience, a disciplined approach to rebalancing can help create value beyond the cyclical trends of the market.

Eric Keating: The biggest trend I am seeing in the financial advisory field is the utilization and focus on comprehensive financial plans. One of the key benefits of working with an advisor is helping answer questions you may have, while also uncovering questions you didn’t know to ask: How much do I need to save to retire at age 65? Can I retire in three years? Can we purchase a vacation home? How much of an inheritance will I be able to leave to my kids or to a charity? Financial plans offer clarity so clients can enjoy a sense of calm around all things “financial.” When plans are updated and reviewed on a continuous basis, clients get validation that all is on track or an early warning that things might not be going as planned.

Over the past 12-18 months, clients’ plans have been affected by inflation and the stock market drop of 2022. Over the past several years, it has been items such as longer life expectancy and financial reform resulting from the Tax Cuts and Jobs Act, CARES Act, and SECURE Act. In all these situations, when doing planning, clients can see instantaneous updates of how they are personally affected. Financial planning software has become very interactive. We are able to run through various scenarios that a client might want to see, such as early retirement, delaying Social Security, etc.

Overall, financial plans — or retirement projections as they are sometimes referred to — have become a useful foundation for financial decisions that a client will need to make. The number one trend I am seeing is the shift from advisors being seen as asset managers to being seen as goals-based life planners. It is amazing how clients initially come to us for help with their investments, and within just a few meetings working together, the questions usually shift away from investments to more meaningful discussions about financial goals.

Ray Lent: The Putney Financial Group’s approach to financial advising is to accurately gauge a client’s risk tolerance by balancing sustainable growth with wealth preservation. We employ a holistic wealth planning process that focuses on the selection of quality companies and doesn’t rely on the hope that rising tides will lift all boats.

Jacob Margo: Proactively managing risk is crucial for investors, successfully achieving financial goals in all market conditions. Our adaptable asset allocation adjusts to market cycles, reducing risk during downturns and positioning for growth. Sector rotations align with economic shifts and stop-loss measures protect principal and capital appreciation. Risk management provides the advantage of safeguarding investments and financial goals. It ensures stability during market fluctuations, promotes informed decision-making, and enhances the potential for long-term growth.

William Ryan: What we have learned and is the single most effective tactic we employ is our commitment to building relationships with our clients. At Exchange Bank, we spend a significant amount of time getting to know and understand each client — their priorities, their values, their hopes. We get to know them, so we clearly understand how they live and want to live in the future. Our job is to help them navigate the investment journey toward their vision of the future.

When we meet clients and start to ask questions about their lives and aspirations, we are often amazed those previous advisors presented them with recommendations for investment without first understanding the client’s unique life, priorities, and goals.

Steven Townsend: Financial planning helps investors understand where they are today and create a road map to get them where they want to be. However, according to Charles Schwab’s 2023 Modern Wealth Survey, only 35% of Americans have a documented financial plan. Planning is personalized to investors — whether they’re saving for a single goal, like retirement, or need comprehensive planning and wealth management.

Financial planning helps investors take control of their financial futures and:

  • Feel more confident about reaching financial goals
  • Save for milestones like college and retirement
  • Build an investment portfolio tailored to goals
  • Know where investors want to go and stay on track

Planning is key when it comes to managing your money, and working with a financial consultant can help.

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