Robinhood IPO Is No Giveaway | Sidnaz Blog

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Robinhood Markets likes to give away free shares to attract new customers. Its public offering to investors is a different matter.

The offering bears some similarity to recent IPOs such as

Coinbase Global

and

Rocket Cos.,

which made their debut in the midst of crypto and mortgage booms, respectively. Investors had the challenge of trying to chart out a normalized earnings and revenue path. So far, neither of those prior examples have worked out for initial public investors.

Robinhood derives the vast majority of its revenue from trading by its customers, including in cryptocurrencies like Dogecoin. In this topsy-turvy market, it will be quite difficult to forecast what that activity level looks like a year from now. Plus, its primary trading revenue source is payment for order flow, one of the most hotly debated topics in finance and in Washington.

Amid that uncertainty, there is one measure that cuts through a lot of the noise: how much an investor would be paying at the IPO valuation per funded account. That is a way to benchmark Robinhood to established peers in the retail brokerage business.

At the proposed IPO price range set on Monday, a funded Robinhood customer account is worth about $1,500 to $1,600. Contrast that to a long-term average of about $2,000 for E*Trade over the past 15 years, before it was acquired for about $1,800 by Morgan Stanley, according to figures compiled by Christian Bolu of Autonomous Research. Charles Schwab, a much broader wealth- and asset-management business, has traded around $3,600 historically, and is closer to $4,000 today.

Vlad Tenev, co-founder and chief executive officer of Robinhood Markets. It will be Robinhood’s broad appeal that is most vital to justifying the IPO price.



Photo:

Daniel Acker/Bloomberg News

So that multiple isn’t by itself wild and suggests that, even if Robinhood has to alter its revenue model, it could still be a viable business just by virtue of the number of customers it has. But it also is giving Robinhood credit for a lot of growth it has yet to achieve. Consider that Robinhood’s typical funded account had about $4,500 worth of assets in custody at the end of the second quarter. The established retail brokers’ typical accounts are well into the six figures.

Yes, Robinhood’s accounts on average trade more. But overall, Robinhood still generates much less revenue out of its customers, in part because they are smaller. In the first quarter, average revenue per user was $137 at Robinhood. By contrast, TD Ameritrade and E*Trade were generating more than $500 around the time they were acquired, according to Autonomous. Charles Schwab was above $600 in the first quarter.

So the per-account price implies that Robinhood will either far better monetize its customers in the future, grow them at a much faster rate, or some combination thereof. Faster growth is much more likely, based on recent history: Schwab added 1.7 million net new brokerage accounts in the second quarter, while Robinhood added 4.5 million funded accounts on net. “Expanding the universe of investors has been, and we expect will continue to be, a significant driver of our market-leading growth,” Robinhood writes in the IPO prospectus.

Meanwhile, per-user revenue trends are already slowing. Preliminary second-quarter results given by Robinhood imply a drop-off in average revenue per user to under $120, with Robinhood noting that, while cryptocurrency and options trading are growing, equities trading activity in the second quarter was lower than it was a year ago.

The company can build on other revenue streams, which include margin loans to customers and cash management. But low pricing is a vital part of the company’s mission to expand its customer base. The company is still building out its securities lending platform, which could generate incremental revenue. In the face of slowing trading activity, though—and that includes crypto in the third quarter, according to the company—it is hard to bank on significant per-user revenue growth in the near future.

So it will be Robinhood’s broad appeal that is most vital to justifying the price. That makes the IPO itself a pivotal moment. Robinhood will be distributing potentially over 20 million shares to its own customers via its own platform. If the deal doesn’t perform well out of the gate for any reason, that could frustrate some of its most engaged customers.

Investors might have to wait for the dust to settle on this offering before thinking about nabbing any Robinhood stock for themselves.

The brokerage app Robinhood has transformed retail trading. WSJ explains its rise amid a series of legal investigations and regulatory challenges as it looks forward to its IPO. Photo illustration: Jacob Reynolds/WSJ

Write to Telis Demos at [email protected]

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Whatever Their CEOs Say, Banks Are Wary About the Office | Sidnaz Blog

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Some bank chiefs, like JPMorgan’s

Jamie Dimon,

talk as if the office will soon look more or less as it did before. Their real estate lending teams seem less sure.

Banks on both sides of the Atlantic are becoming more selective about which offices they will lend against. Pockets of the market have been resilient during the pandemic: The rate banks charge for mortgages on the best central London offices was 1.65% in the first quarter of 2021, more or less where it was before the crisis, data from real-estate company CBRE shows. But U.K. lending margins for older, less central offices are close to historic highs, based on the Cass Business School’s commercial real estate lending report.

In the U.S., the value of new office loans issued by banks in the first quarter of this year was just 35% of levels in the same period of 2019, according to Trepp data—a sharper pullback than for unloved retail assets such as malls. The spread between office mortgage rates and 10-year Treasurys also has widened from precrisis levels.

The value of new office loans issued by banks in the first quarter was just 35% of levels in the same period of 2019.



Photo:

Amir Hamja/Bloomberg News

The rise in debt costs is notable because default rates on existing office loans are currently below 1%. Corporate tenants locked into leases are continuing to pay the rent, so landlords have met their mortgage payments. But that could change once existing contracts roll off and white-collar employees spend more time at home. Companies ranging from tech giant

Facebook

to global bank

HSBC

plan to let some staff work remotely on a permanent basis.

Oversupply is already an issue in San Francisco, leading to big falls in rent and high vacancy rates. Lenders are also watching New York closely. In the mid-Atlantic region, which includes the troubled Manhattan market, almost one-third of banks’ outstanding office loans now fall into the riskier “criticized” category, up from 6% before the pandemic, survey data gathered by Trepp shows.

The pandemic also has accelerated the pre-Covid trend toward more energy-efficient offices with strong communal areas, good ventilation and natural light. Expensive improvements are needed both to entice workers back and to meet growing expectations for businesses to disclose and reduce their carbon footprints. Unfortunately for landlords, green credentials seem set to become a requirement to let rather than the basis for charging tenants a premium.

All of these factors make it tough to predict where office valuations are headed and therefore to underwrite loans. In central London, the best offices are still changing hands at high valuations that give rental yields of just 4%, buoyed by rock-bottom interest rates and strong demand from overseas buyers. Shareholders are more bearish. The discount to book value at which U.K. and U.S. office real-estate investment trusts now trade imply 15% and 10% falls in the value of the properties they own, respectively, according to real-estate research firm Green Street.

For now, mortgage writers too are erring on the side of caution. Seen through the lens of their lending activity, banks’ efforts to big up the office to staff appear halfhearted.

Plexiglass dividers and floor decals might not be permanent, but the pandemic will bring lasting change to offices. Experts from the architecture and real-estate industries share how they are getting back to work and what offices will look like in the future. Photo: Cesare Salerno for The Wall Street Journal

Write to Carol Ryan at [email protected] and Rochelle Toplensky at [email protected]

Copyright ©2020 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

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For Many Home Buyers, a 5% Down Payment Isn’t Enough | Sidnaz Blog

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Would-be home buyers without big piles of cash are getting left on the sidelines.

In the turbocharged housing market, prices are surging and homes on the market are routinely selling for far more than the listing price. Those who can’t afford big down payments are often the ones losing out.

Half of existing-home buyers in April who used mortgages put at least 20% down, according to a National Association of Realtors survey. In 10 years of record-keeping, that percentage has hit or exceeded 50% three times, and all have been since last fall. A quarter of existing-home buyers in April paid cash, the highest level since 2017, NAR said.

Oscar Reyes Santana has been house hunting with his parents and siblings for more than a year in California’s San Fernando Valley. They are all first-time buyers and budgeted for a 5% down payment.

The family bid on at least five homes, each time offering at least $30,000 above the asking price, but they lost out every time, said Mr. Reyes Santana, who is 23.

“It’s been really tough to try to beat everyone else,” he said.

They have all but given up the search for now, and are focused on saving up for a bigger down payment.

Home prices are surging. The median existing-home price rose 19% from a year earlier to $341,600 in April, a record high, according to NAR. That is largely because there aren’t enough homes on the market to meet demand.

In such a housing market, sellers can often choose among multiple offers. Cash buyers have an advantage because they don’t need to secure mortgages, which can make the transaction go faster. Sellers sometimes worry that offers with smaller down payments are likelier to fall through during the loan-closing process, agents say.

The median existing-home price in the U.S. rose 19% from a year earlier to $341,600 in April, a record high.

Many borrowers who can afford only small upfront costs get loans insured by the Federal Housing Administration or the Department of Veterans Affairs. In an April NAR survey of real-estate agents, 27% said sellers were unlikely to accept an offer with an FHA or VA loan, and another 6% said sellers would refuse such an offer. These loans are less attractive to sellers because they have stricter closing conditions, real-estate agents say.

While mortgage originations of all types rose last year as home buying surged, FHA and VA loans lost market share to conventional loans. FHA loans, which often go to first-time buyers, accounted for 10% of home purchases in the first quarter of 2021, the second-lowest level since 2008, according to Attom Data Solutions.

“It’s very hard to get my FHA offers accepted,” said Olivia Chavez Serrano, a real-estate agent in Los Angeles.

Bigger down payments can cushion the housing market in a downturn. In the 2007-09 recession, home buyers who had made tiny down payments were quickly underwater as soon as home prices started to fall.

A lump sum of 20% or more can be hard to come up with as home prices skyrocket, especially without help from family members. “I’d say at least 50% of my first-time home buyers are getting gifts right now,” said Chris Borg, a mortgage broker at Vantage Mortgage Group Inc.

Low-down-payment loans and down-payment assistance programs are touted by affordable-housing advocates as crucial tools for increasing the homeownership rate, particularly for minority buyers. In 2019, a higher proportion of FHA and VA borrowers were Black or Hispanic compared with conventional-loan borrowers, according to the Urban Institute. Some congressional Democrats have proposed new down-payment assistance initiatives to help first-time buyers.

Surging home prices are also complicating appraisals, which means some buyers are being forced to shell out more cash than they had expected.

Appraisals are based partly on recent sale prices for comparable homes in the area. When housing prices rise quickly, appraisal values don’t always keep up. Mortgage lenders will typically lend only enough to cover the appraised value of a home, so when an appraisal comes in low, the buyer has to make up the difference or let the deal fall through.

Oscar Reyes Santana and his family bid on at least five homes, each time offering at least $30,000 above the asking price, but they lost out every time.

For example, a buyer who plans to put 20% down on a $500,000 purchase expects to pay $100,000. But if the home is appraised at $450,000, the cash payment goes up to $140,000—the sum of the $50,000 shortfall plus a $90,000 down payment.

Many buyers are still getting offers accepted without putting 20% down. First-time home buyers who used mortgages paid 9.1% down on average year-to-date through mid-May, though that is up from 8.4% for all of 2020, according to CoreLogic. Repeat buyers paid 16.6% down on average.

SHARE YOUR THOUGHTS

Have you bought a home during the pandemic? Join the conversation below.

Briana Stansbury, who works at a community college in Portland, Ore., recently made an offer on a two-bedroom house. She used a 5%-down loan program that Freddie Mac offers for first-time buyers, and she agreed to go through with the purchase even if the appraisal came in as much as $10,000 below her purchase price of $371,500.

That put Ms. Stansbury at risk of having to come up with extra cash in a hurry, but she had lost out on bids for other houses and thought it would give her a leg up.

Ms. Stansbury lost sleep while she waited for the appraisal. But it came back above the sale price, and she closed on the house in May.

Danyell Allen of Cedar Park, Texas, felt ready to buy a house this year. She had saved up for a 5% down payment. Her children wanted to paint their walls and adopt a pet, which they can’t do in their rental house.

But after losing out on more than 10 offers, she called off the search. “The lowest I heard I was beat out on any home was $30,000 over asking price,” she said. “That’s not something I can do.”

Prices are surging in part because there aren’t enough homes on the market to meet demand.

Write to Nicole Friedman at [email protected] and Ben Eisen at [email protected]

Copyright ©2020 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

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How to Consider Tapping Your Home Equity as House Prices Rise | Sidnaz Blog

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More Americans are tapping their homes for cash, taking advantage of low interest rates and the rise in home values.

Total home equity cashed out in the first quarter of this year is estimated at $49.6 billion, up nearly 80% from a year earlier, according to data from

Freddie Mac.

It is the highest level on record since 2007, but still below the $84 billion quarterly cash-out volume in 2006.

Jenny Puls is one such homeowner. After looking for a larger house for more than a year, Mrs. Puls decided she was better off adding a second floor to her family’s 1,600 square-foot craftsman-style home than buying in this year’s overheated market.

“We just ran out of room; my office had to become the nursery,” says Mrs. Puls, a Realtor who has a 9-month-old daughter.

Her Houston-area home had appreciated to $645,000 from the $220,000 she paid a decade ago. She cashed out $336,000 and refinanced to a new 30-year fixed mortgage of $500,000 at 3% in order to add two bedrooms, an extra living room and a kitchen expansion. Though her monthly mortgage payments doubled, and she has had to pull $40,000 out-of-pocket to finish financing the renovations, she says this was the better option for her.

When Jenny Puls couldn’t find a home in this hot market, she cashed out $336,000 of equity to finance a second-floor addition on her home, shown in 2017.



Photo:

Jenny Puls

“I think the inability to find what you want has caused people to really rethink, ’Can I stay where I am? What would make me happy?’” says

Stacy London,

a certified mortgage consultant who helped Mrs. Puls with her loan. “And yes, they have chosen to refinance and pull out some equity so they can improve their home and be happy where they are.”

If you are also thinking about pulling equity out of your home, here is what you should consider.

Learn the basics

How much equity will you take out, and what happens if home prices slip in the near future?

In general, you can extract as much as 80% of the equity you have accrued in your home. For example, say you bought a home for $250,000, putting down 20% at the time. You have since paid off $50,000 of your original mortgage, and the home’s value has risen to $650,000. You could potentially refinance with a new, $520,000 mortgage and take $370,000 of that in cash; the remainder would go to pay off your existing loan.

The U.S. mortgage market involves some key players that play important roles in the process. Here’s what investors should understand and what risks they take when investing in the industry. WSJ’s Telis Demos explains. Photo: Getty Images/Martin Barraud

How much you should take out depends on your financial situation. If you have great job security and you are using the money for something that can pay dividends into the future, like renovating your home, then it is possible that maxing out your equity could make sense.

“While we’re seeing an increase in the use of cash-out refis, it’s still a low level of home-equity withdrawal compared to what we saw during the financial crisis,” says

Mike Fratantoni,

chief economist at the Mortgage Bankers Association. “U.S. consumers are more cautious now than they were before.”

Prior to the 2008 subprime-mortgage crisis, many homeowners overextended and pulled too much equity out of their homes when prices were booming. Once prices crashed, many owed much more than their house was worth.

Make sure that you can afford the new monthly mortgage-payment amount, which could increase significantly. If you stretch your monthly budget too far and there is an economic downturn, you could lose your house.

Pay attention to taxes and value-adds

If you use the money to improve your home, ensure that it adds substantial value. Certain frills like high-end materials or luxury upgrades might not go the distance in the same way that modernizing a kitchen and bathrooms would.

If you don’t use the money for home improvement, you will no longer be eligible for the mortgage interest deduction in your taxes. If you use the money to start a business, however, it is possible that you may be eligible for another tax break, so speak with your tax adviser about the tax implications of home equity loans for your specific situation.

Another way to use the money is to pay off high-interest debt. While it doesn’t include tax benefits, it could result in significant interest savings.

Know the difference between a cash-out refinance and a Heloc

In a cash-out refinance, you get a new mortgage on your home’s current value and cash out some of the equity that you have in the home, which has likely increased along with higher prices.

The interest rate for a cash-out refinance at the $548,250 Fannie Mae limit is hovering at about 3.25%-3.75% for a 30-year fixed loan. Any amount you take out above the limit might have a higher interest rate.

A home-equity line of credit, or Heloc, has a variable interest rate attached to it and works more like a credit card. Instead of getting the money all at once, you open up a line of credit against your house with a limit.

The interest rate for a Heloc is closer to 4%, with closing costs around 2% of the loan amount.

Doug Henning, a software developer in Jacksonville, Fla., took out a Heloc 15 years ago to help pay for his daughter’s wedding. His limit was set at $50,000, but he dipped into only a portion of it. After the Tax Cuts and Jobs Act of 2017 made Helocs no longer eligible for the mortgage interest deduction, he paid off the Heloc and a few credit cards with a cash-out refinance in 2019. Last year when interest rates dropped, he refinanced his mortgage again, down to 2.75% from 4.5%.

“To me this is like taking advantage of the system, as long as you’re knowledgeable enough to not get way in over your head,” says Mr. Henning.

SHARE YOUR THOUGHTS

How do you think about the equity you have in your home? Join the conversation below.

Write to Deborah Acosta at [email protected]

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