Archive for September, 2015

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BY THOMAS FREY

It was rather anticlimactic when it finally happened, but the front door simply failed to open.

There was no “going out of business” sale, no press conferences, no people gathered around to claim what was theirs. Instead, this once-bustling institution that built the tallest building in Cleveland, full of glass and fancy furniture, had breathed its last breath.

Make no mistake, the rich colorful legacy of the banking industry will fill countless future studies as people analyze and scrutinize past business dealings over the decades ahead; but the days of being able to walk into an actual bank building and make deposits and withdrawals just came to an end.

Far noisier endings had come a few years earlier in 2037 when Chase, Citigroup, Goldman Sachs and Wells Fargo closed their doors. But this last bastion of teller windows and hand written deposit slips, and the handful of aging customers who still frequented it, had been hemorrhaging cash for some time, and with this silent ending the banking era had officially come to a close.

When it comes to money, it’s all about trust. Once consumer confidence and trust begins to erode, it becomes a mammoth task to regain it.

Like many businesses of the past, the money world focused on people with money, leaving countess millions either unbanked or under-banked. But in a highly connected world, where every consumer has networks, influence and value, eyeballs count.

For some, banking leaders were the notorious puppet masters who manipulated the stock market, created new legislation, and made self-serving decisions that favored the rich and powerful at the expense of everyone else. To others, they were merely hard-nosed business people making the most of their position to keep investor returns high.

As an industry that had been artificially propped up with innumerable laws and a banker-friendly political system funded by banker-friendly rich people, the final days were delayed far past the time when the first foot entered the coffin. But all industries will eventually end, and this is the story of this one.

Is this a realistic scenario? If so, what are the key factors we should be paying attention to today? The answers will probably surprise you.

Banking, the Early Years

Lest we forget, the banking industry is a relatively young industry, coming into its own less than two centuries ago. Junius and J.P. Morgan were the father and son duo credited with bringing banking and finance to America. In the early 1800s, Junius Morgan helped George Peabody solidify America’s ties with the capital markets in England. The English were the primary buyers of the state bonds being used to build up America.

In 1895, J.P. Morgan, took over the business and leveraged the relationships his father built to launch the U.S. into the industrial era at breakneck speed. Early Wall Street banks gave new meaning to elitism. No regular person was allowed to walk into the House of Morgan and open a bank account. Ironically, even as recently as 70 years ago, most banks simply refused to do business with the little guy.

The Beginning of the End

Early signs of trouble started to come to light even prior to the 2007-2008 recession, a recession many attributed to the shenanigans of key industry executives, none of which were ever charged for their role in manipulating the markets.

In 2000 with the dot com world crashing, the Federal Reserve lowered rates 11 times – from 6.5 percent in May 2000 to 1.75 percent in December 2001.

After the bombing of the World Trade Center in 2001, the Fed continued slashing interest rates to avoid a recession.

In June 2003, the Fed lowered interest rates to 1 percent, the lowest rate in 45 years, creating a flood of available credit.

Easy credit and the upward spiral of home prices made investments in higher yielding subprime mortgages the new gold rush.

By 2004, U.S. homeownership peaked at 70 percent.

Consumer demand drove the housing bubble to all-time highs in the summer of 2005, a bubble that ultimately collapsed in August of 2006.
2006 saw a 40 perent decline in U.S. home construction.

During February and March 2007, more than 25 subprime lenders filed for bankruptcy and as home prices plummeted, the whole financial system started to unravel.

Similar to many other banks, HSBC reached peak employment in 2007 with 315,520 full-time employees, dropping to 208,000 in 2015.

The 2007 recession caused a total collapse of confidence and trust in the global financial system. But even more significant than the loss of confidence and trust, the entire financial system including every rusty bolt, nut, and overcharging scheme for consumers lay fully exposed for the world to see.

With political leaders racing to compensate for bad systems, adding layer upon layer of regulatory oversight, entrepreneurs everywhere suddenly realized how vulnerable the entire financial industry was.

Enter Fintech

Even before the recession, a number of startups in the financial technology, or “fintech,” space began percolating.

Good entrepreneurs have a way of sniffing out where money and opportunity coexist, and the banking-finance world was not shy about flaunting their lavish lifestyles and opulent trappings, revealing many of the underhanded dealings that made them rich.

Armed with a righteous contempt for old-school banking practices, a contempt that plays well in sound bites on social media, fintech companies began showing up in all aspect of the financial marketplace including exchanges, investment systems, networks, brokerages, research, and risk management.

Bitcoin, the mysterious godfather of cryptocurrencies was launched in 2009 with the promise of automating “authority” out of existence.

As we transition from national to global systems the concept of “authority” becomes a reoccurring theme. In this context, technology has changed the very definition of business, forcing regulators to reassess their own role and authority.

Is Uber a taxi company or simply a “lead generation” service for entrepreneurs?

Is AirBNB in the hospitality business or simply a “tenant finder” for the real estate industry?

Are coworking operations part of the real estate industry or in the collaboration business?

Is Lending Club a new kind of banking loan service or is it in the resource coordination business?

Emerging business models are rapidly showing how archaic and narrowly defined our regulatory systems have become.

Fintech Feeding Frenzy

In 2015, with more than $12 billion of VC funding stoking the fires, the number of fintech startups swelled to over 8,000, each attacking tiny pieces of formerly protected banking turf. Much like an underwater feeding frenzy with countless piranha-like startups eating every possible ounce of flesh from the banking industry’s bones, we are witnessing an epic transition in the banking finance world.

Many executives inside the large institutions are fully aware of the customer-stealing disruptions happening outside their walls, but internal legacy systems make it impossible for them to shift strategies.

What will the bank of the future look like?

Defining the Bank of the Future

The future of banking will be mobile, happening in devices we carry in our pockets, built into jewelry, and on our wrists, not in fancy office buildings. In less than five years, smartphones, watches, and other devices will replace credit/debit cards, wallets, lenders, stockbrokers and insurance agents.

They will even allow us to transfer money around the world instantly, into different currencies, for virtually no transaction fee. Western Union currently dominates the $583 billion a year “remittances” business and collects transaction fees of 9%. Facebook and others are getting into this market with lucrative business models charging only a fraction of that amount.

Trusted retailers and grocery stores will allow customers to store money in private accounts, circumventing the need for traditional bank accounts. Leveraging data from shopping habits and loyalty cards, approved shoppers will be able to instantly borrow money at the point of sale, select the best payment schedule, and not have to worry about compound interest or hidden fees.

Early adopters will be Millennials and the unbanked poor people of the world. With very little to lose, and unusual incentives to participate, a banking revolution comprised of low-cost tech solutions used by industry outsiders will begin to infect nearly everyone on the planet.

By 2020, peer-to-peer lenders are projected to be handling 30 percent of the established loan business in the U.S. Traditional banks are already devising ways to participate with peer-to-peer lenders to better manage their portfolio.

Final Thoughts

Since the 2007-2008 recession, banks have done little to regain consumer confidence and trust.

A recent Viacom Media poll of 10,000 Americans found that 4 of the 10 least-loved brands in the U.S. are banks, and a full 71% said they would rather go to the dentist than listen to what a banker has to says.

Banks that survive the coming decades will look far more like tech companies than traditional banks. With global systems beginning to co-opt national systems, fintech startups reaching unicorn status ($1B+ valuations) in record time, and global currencies gaining traction in the cryptocurrency space, banks are in for some turbulent years ahead.

Since money is at the heart of nearly everything, it’s hard not to have a dog in this fight.

That said, I’d love to hear your thoughts. Is the banking industry doomed as many are predicting, or will it reinvent itself and retain control as we enter this new era?

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By Ruth Davis Konigsberg

As someone who should have saved more for retirement when I was younger, I’ve often taken solace in the existence of “catch-up contributions” — the additional amount above the usual limit that the IRS lets people 50 and older sock away in a 401(k) or other employer retirement fund to shield the funds from pre-tax earnings. (For 2015, 50+ savers can stash $6,000 above the $18,000 limit.)

Catch-up contributions were enacted by Congress in 2002 to encourage more saving by older workers, many of whom had just seen their portfolios deflate following the dotcom bubble. The theory, notes a report by the Investment Company Institute, was that older people would be able to defer more because they would no longer have the expenses of children or buying a first home.

In practice, however, catch-ups don’t seem to have provided anything like a catch-all solution. According to Matthew Rutledge of the Center for Retirement Research, who analyzed data from 1999 to 2005, the people most likely to use catch-ups were the tiny fraction of workers — only 9% of the total group — who were already contributing close to the maximum.

One might hope that, over time, participants would try increase their contributions, eventually maxing out and thus becoming more likely to use catch-ups. But the nominal deferral limits have also continued to increase, so employees may have been struggling just to keep up.

Tax Policy Failure?

One problem, identified by researchers at the 2015 Retirement Research Consortium last month, centers around the tax advantages of catch-ups. Tax incentives rise in value with income — along with one’s marginal tax rate — so they wind up encouraging the wealthiest, who already have more to save, to use catch-ups. By contrast, lower-income households are less sensitive to tax incentives to begin with as they have lower tax rates and may have no tax liability after deductions and exemptions.

Another limitation to catch-ups: Since they are only available to people over 50, they apply to a demographic that already saves more on average. As Patrick Purcell of the Social Security Administration pointed out at the Retirement Research Consortium, “From the perspective of younger, lower-earning workers, the catch-up provision might appear to be both upside down and backward.”

Following this reasoning, it would more sense to try to incentivize people who are under 35 and earning less — as, for example, Roth IRAs do.

Finally, researchers have also discovered something called a crowd-out effect, in which an increase to one savings vehicle causes a decrease to another.

In other words, an individual’s saving strategies compete with each other — and so employees who use catch-ups may be simply shifting assets across savings plans, reallocating contributions from, say, a post-tax IRA into their pre-tax 401(k). It’s still unclear whether the enactment of catch-ups have led to a total increase in retirement savings overall.

The crowd-out effect illustrates how hard it is to change savings rates once they are fixed in one’s mind (and in one’s 401(k) selection form — a phenomenon I have experienced first-hand).

In order to take full advantage of catch-ups, we savers will have to make sure that they represent real, incremental savings — however painful — instead of mere mental accounting.

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By Casey Dowd – FOXBusiness

Baby boomers are entering retirement in record numbers and 44 percent of them have concerns about their level of debt, according to a 2014 report by the Employee Benefit Research Institute (EBRI). While concern and responsibility with debt are warranted, one expert argues eliminating all debt is actually a mistake that has led too many retirees to lose the opportunity for what could have been a secure financial future.

Most financial planners agree that carrying debt into retirement is a very dangerous move, one that can risk your financial future and drain your retirement savings. Contrary to this belief, Tom Anderson, author of, “The Value of Debt in Retirement,” says anyone can use debt strategically to add value to their financial goals — like many of the nation’s most successful companies and ultra-high-net-worth individuals do every day.

“Debt is such a huge piece of the economy and our lives but we don’t study or talk about it, so what happens is there are many people who tend to have way too much debt or they’re completely debt-averse and they don’t have any debt at all,” says Anderson. “I think very few people are in the optimal middle target zone and being strategic about it.”

Anderson, a wealth management advisor, discussed with me how the right kind of debt can help complement one’s assets. His book offers a bold point-of-view on debt as being a strategic asset in the management of individual and family wealth.

Boomer: What kinds of assets should one have in order to make debt work to his or her advantage?

Anderson: Eighty percent of America does not have $100,000 in liquid, investible assets – stocks, bonds, things you can buy and sell quickly and easily. Something has to be wrong with our education and our system if we’re one of the wealthiest countries in the world, but eighty percent of America doesn’t have liquidity.

When you get a paycheck the government takes out taxes, Medicare, Social Security, and then you save into your retirement plan and you’re left with cash. Cash is the most precious money for you in your life and in many cases people use it to pay down the wrong debt, putting it into things that aren’t liquid. Taking that money and building up a liquid investment account will give you survivability in bad times especially if you don’t position it in a high risk way.

But you need to have a conservative, diversified account. In my opinion, people should consider a world-neutral approach to asset allocation. History has proven unkind to those who overemphasize their home country. Debt only magnifies your asset allocation strategy. Everything else being equal, a lower-volatility portfolio with debt is better than a high-volatility portfolio with no debt.

Boomer: Why might rushing to pay off a mortgage before retirement be financially unsound?

Anderson: My story isn’t that I think debt is good. My story is that I think liquidity is very valuable. It’s flexible. Liquidity will protect you in tough times. A lack of liquidity is what drives you to bankruptcy. I would suggest to you that if you don’t have enough money to pay off all of your house, you might not want to pay off any of it.

Let’s say you’re in a $400,000 home and you have $100,000. You put down the $100,000 on that house and then two months later, you lose your job. You can’t refinance that house because you don’t have a job anymore. You don’t have the liquidity. You actually could find yourself in a situation where you end up going bankrupt. If you keep that $100,000, you still have interest payments on that house. But you also have cash to ride out almost any storm that could come your way. And you can use that cash to start building up your asset pile, all the while, reducing your risk.

Boomer: How can utilizing a proper debt strategy potentially help to nearly eliminate one’s taxes?

Anderson: Most people spend more time deciding what TV they’re going to buy than they do trying to figure out our tax code. It’s understandable because our tax code is highly complex. But there are many ultra-high net worth individuals taking advantage of the tax code every year. I simply want to level the playing field and share these same strategies with everyone else.

Think about all the times you’ve had someone prepare your taxes. They take the information you give them and prepare a return based on that information. Rarely do people give you proactive advice on how to reduce your taxes. In most cases, things like mortgage interest are right off the top deductions, not subject to the alternative minimum tax, up to a million dollars. It’s an incredibly powerful tax tool.

Mortgage interest is just one type of debt deduction. Increasing your charitable giving before you’re retired and early in retirement can also have its advantages. And securities based loans have advantages as well. When you take out money from your taxable investments, like stocks and bonds, as millions of Americans do in retirement, you have to pay capital gains tax. But if you choose instead to borrow from that portfolio, you do not have to pay taxes on what you borrow. I recommend that you do not borrow more than 25% of your portfolio, so that should the market drop dramatically you don’t end up in a maintenance call being forced to deposit additional collateral, cash or sell securities held as collateral to bring the account back in to good standing. I strongly recommend you make these decisions with the help of a financial professional. If you don’t already have a sizable taxable portfolio, you may to consider putting some money into those taxable accounts in addition to your tax-deferred accounts like an IRA or 401(k). Finding the right combination can help you reach the most efficient solution to lower your taxes.

Boomer: How can one determine his or her optimal debt ratio, or debt “sweet spot”?

Anderson: This is where I encourage people to think like companies. We’ve all heard the phrase it takes money to make money. It takes time for companies to profit, but they’re able to do that in large part because they increase the amount of debt that they have over time. As their assets grow, so does their debt. Companies are maximizing value with their optimal debt ratio. People have the ability to do the same thing!

I take the ideas used by companies and make them more conservative for individuals. I’ve found that an optimal debt ratio is typically between 15 and 35%. To calculate your debt ratio is simple – divide your total debt by your total assets.

Take John, a 35-year old doctor who has still has a mountain of student loan debt. But he also has a healthy investment portfolio. He can borrow from that portfolio and pay off the entirety of his student loans. He still has to pay back what he borrowed, but it’s less than what he was paying before. And he has no required minimum monthly payment. Less money out is more money in. I call it capturing the spread. If you can make more money on the money you borrow than that money costs you, you may be able to be like John and increase your return. He is simply taking the ideas successful companies use every day and making them more conservative for the individual. John is choosing to maintain some debt in order maximize the growth of his assets. As with any strategy, there are risks and you should talk to your financial advisor to help determine what will best suit your specific circumstances.

Boomer: Other financial advisors advise the exact opposite on a lot of these points —why would you say you are right and your critics are wrong on the value of debt in retirement?

Anderson: Some of the best ideas have arisen by challenging conventional wisdom. In my twenty years in the industry, I have found it astounding how little information is available about debt for individuals and especially how it relates to retirement.

The mainstream advice is generally geared to people that have a low net worth and/or lack the responsibility to handle debt. I understand that these strategies may not be for everyone, but I think people deserve the opportunity to learn about these ideas and then determine if utilizing a debt strategy might be right for them. I want to empower people to make their own decisions because if used in the right way, debt can be an incredibly powerful tool.

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Muriel Maignan Wilkins

Signs That You’re Being Too Stubborn
They’re hardheaded. They dig their heels in. You know the type — people who are way too stubborn for their own good. While it’s easy to point the finger at others who exhibit this behavior, it can be hard to recognize this trait in yourself. Here are the signs that you’re being too inflexible:

  • You keep at an idea or plan, or insist on making your point, even when you know you’re wrong.
  • You do something you want to do even if no one else wants to do it.
  • When others present an idea, you tend to point out all the reasons it won’t work.
  • You visibly feel anger, frustration, and impatience when others try to persuade you of something you don’t agree with.
  • You agree to or commit halfheartedly to others’ requests, when you know all along that you’re going to do something entirely different.
  • Stubbornness is the ugly side of perseverance. Those who exhibit this attribute cling to the notion that they’re passionate, decisive, full of conviction, and able to stand their ground — all of which are admirable leadership characteristics. Being stubborn isn’t always a bad thing. But if you’re standing your ground for the wrong reasons (e.g. you can’t stand to be wrong, you only want to do things your way), are you really doing the right thing?

Take Joe, a senior level executive whom I coached. Joe was known for his commanding presence, and for driving results within the organization. His decisiveness and ability to focus on key issues and solutions made him a valuable asset to his company. However, there were times when Joe was blinded by his own abilities and unable to see other courses of action that were in the best interest of the company and critical stakeholders. After Joe continued on with plans to reorganize a division in spite of his boss’s and the board’s caution against it, his boss aptly described the situation as such: “Joe is so laser focused on what he wants to do that he doesn’t realize he’s winning the battle, but losing the war.”

Like Joe, the overly stubborn individual is often the victim of Pyrrhic victory — while they get what they want, the damage they’ve done along the way negates any good that could have come out of it.

So what do you do to ensure that your holding your ground doesn’t get in your way? Here are four strategies:

Seek to understand: Simply put, try listening to the other person. Rather than automatically shutting down the conversation, seek to understand her idea and rationale. Many people don’t listen because they’re afraid if they do, it will appear like they agree with the other party. This is not a valid reason for not listening. Just because you understand someone doesn’t mean you agree with her. But you’ll have a better chance of stating your position if you can show that you at least have a good sense of the bigger context. And who knows, you might actually change your mind once you have the whole picture.

Be open to the possibilities: Overly stubborn people often believe that there is only one viable course of action. As a result, they remain solidly staunched in their positions. By approaching a situation with an openness to at least explore other alternatives, you show some flexibility — even if you ultimately end up right back where you started. When someone is trying to persuade you on something you vehemently oppose, ask yourself “What conditions would need to be in place for me to be convinced of this idea?” By checking your assumptions, you might find yourself able to entertain other possibilities that weren’t originally in your purview.

Admit when you’re wrong: Being convinced that you’re right is one thing. Digging your heels in when you know that you’re wrong is inexcusable. In the latter situation, own up to your error and hold yourself accountable for your decisions and actions. In the long term, that will gain you far more credibility than sticking to your original plan.

Decide what you can live with: Being overly stubborn can become a habit. And while staying true to your stake in the ground is admirable, not every situation warrants that type of steadfast conviction. Rather than always pushing for your idea, decision or plan, recognize when it’s okay to go with a decision that you can live with even if it’s not your top choice. It may be that you have more to gain in the long term if you show that you’re persuadable in the short term.

At the root of all stubbornness is the fear of letting go of your own ideas, convictions, decisions and at times, identity. But as renowned author James Baldwin eloquently stated, “Any real change implies the breakup of the world as one has always known it… Yet, it is only when a man is able, without bitterness or self-pity, to surrender a dream he has long cherished or a privilege he has long possessed that he is set free… for higher dreams, for greater privileges.” Sometimes, letting go of an overly staunch position can result in greater value than you originally expected.

Muriel Maignan Wilkins is a co-founder and managing partner of Paravis Partners, a boutique executive coaching and leadership development firm. She is co-author, with Amy Jen Su, of Own the Room: Discover Your Signature Voice to Master Your Leadership Presence.

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By Brian Honea
While many experts have expressed doubt as to whether the Fed will raise rates in September following Monday’s Dow Jones crash, a rate hike seems even less likely after an influential policy maker from the Federal Reserve Bank of New York weighed in on the issue.

At a press conference following a speech on the regional economic outlook in Buffalo on Wednesday morning, New York Fed president and CEO William C. Dudley expressed the idea that a rate hike at September’s Federal Open Market Committee meeting seemed “less compelling” than it was a few weeks ago following the turbulent stock market activity earlier in the week.

“From my perspective, what we’re going to do is going to be data dependent,” Dudley said. “But data is not just about the monthly economic releases that come out, which have actually been pretty positive.”

Dudley pointed out that the recent reports on consumer confidence, new home sales, and durable goods were all strong – but that only tells part of the story, he said.

“From my perspective, what we’re going to do is going to be data dependent.”

“You also have to look at all the other things that could potentially affect the economic outlook,” Dudley said. “At the end of the day, we’re concerned about the outlook – how is the economy going to perform in the future? So it’s not just how we’re performing today, it’s all the things that affect the outlook beyond the next few months.”

The term “data dependent” includes all those things as well as international economic developments and U.S. financial market developments, Dudley said.

According to a report from the New York Times, Dudley’s remarks on Wednesday were the first public indication that recent events are influencing the Fed’s plans for the September meeting. His comments on Wednesday make it seem less likely that the Fed will raise rates in September, since many investors are betting heavily against a rate hike and Dudley has previously stated he does not want the Fed to surprise markets, according to the report.

Despite Dudley’s doubts, for some, the positive economic data reports from the last couple of weeks are enough. In a Reuters survey of 22 of the nation’s top economists on Wednesday, 20 of them said the housing market is probably strong enough to withstand a rate increase by the Fed this year.

The FOMC’s next meeting will be September 16 and 17. It will be the Committee’s sixth of eight meetings this year. The two remaining meetings will be October 27-28 and December 15-16.

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New research conducted by Freddie Mac released Tuesday indicates that people living in single-family rental (SFR) properties (a house, townhouse, or condo) may be more likely to buy a home than those living in apartments.

Freddie Mac’s latest survey, conducted in June, found that overall, about 55 percent of renters in both single- and multifamily properties intend to continue renting in the next three years. When dividing up the two categories, however, the data indicated that 53 percent of renters in SFR properties intend to buy a house in the next three years compared to just 36 percent of multifamily renters who plan to buy in that period.

One factor in deciding when to buy a home is how satisfied the renter is with the rental experience, according to Freddie Mac’s June survey. Approximately 68 percent of those satisfied with their rental experience say they intend to continue renting, compared to 32 percent who say they plan to buy a home. A higher percentage of apartment renters (67 percent) than SFR property renters (60 percent) reported being satisfied with the rental experience.

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“As we gather data each quarter, we are finding the old perception that renting is something people do until they buy is not always true. The trend shows that satisfied renters are more likely to continue renting, even as we are seeing rising rents in the market,” said David Brickman, EVP of Freddie Mac Multifamily. “Dissatisfaction may drive renters to buy, and we are seeing a slight decrease in satisfaction among single-family renters. We will continue to monitor this for stronger indicators and trends, but for now, the single-family rental home market may be a good place to look to find potential home buyers.”

According to the U.S. Census Bureau, about 15 million households are of the SFR variety, while about 25 million rent apartments.
“The number of U.S. renter households is up again for the 10th straight year, according to the U.S. Census Bureau,” Brickman said. “More households of all sizes, income levels and age ranges now rent their homes. Renters are leading household formations, which are expected to keep climbing due to the improving economy, millennials continuing into adulthood and immigration.”

“Dissatisfaction may drive renters to buy, and we are seeing a slight decrease in satisfaction among single-family renters.”

In the June survey, 44 percent of respondents who have lived in their homes for at least two years say they experienced an increase in their rent in the last two years, compared with 38 percent in a March survey. About 70 percent of those who experienced in increase say they want to buy a home but cannot afford to, while 44 percent said they would like to buy a home and are currently searching. About 49 percent in September said they like where they live and plan to stay regardless of how much the rent increases, compared to 46 percent in March; 44 percent in September said they have put off plans to purchase a home, compared to 51 percent in March.
Freddie Mac commissioned Harris Poll to survey approximately 2,000 adults online each quarter for both the June and September surveys. Click here to see the March survey, or click here to see the June survey.