What To Do With Your Would-Be Down Payment If You’re Waiting Out A Hot Market
Feeling like you’re five years late entering the real estate market?
Wishing you had bought that modest three-bedroom house in the neighborhood when you had the chance, when now you can’t afford a cramped two-bedroom condo in the suburbs an hour away from work? You aren’t alone. Many would-be homebuyers are in this position, according to the Pasadena Star-News — especially in hot markets like California and Florida — and have resolved to wait it out until prices come down… or at least cool off.
But you still have what would be a fairly substantial healthy down payment sitting around — one set aside for that dream home. What are you supposed to do with it?
The lump sum should almost certainly be locked away in a short-term investment rather than having inflation eat away at it in a standard savings account, experts say. Even if you think you might use it in the next few years, home prices may still rise, and you’ll want your payment to grow as much as it can while you wait for the right home at the right price.
“Many people in this situation have encountered the perfect storm. Low interest rates mean their cash isn’t able to grow in safe places quickly. And high housing costs require more of a down payment. My first suggestion is to ignore the advice of your uncle and neighbor and avoid equities,” said Phillip Cook, a financial planner with Cook and Associates in Torrance, Calif.
Cook is one of many experts recommending less risky, fixed-income products such as preferred stocks and real estate investment trusts (both of which tend to pay dividends), along with agency bonds that mature in five years or less. These investments will increase your return more than what you could get from a bank, although there is still an element of risk — as you will find with any investment.
Craig Burger, a senior portfolio manager at Bingham Legg Advisors in Los Angeles, argues that in this housing market, patience should be rewarded.
“As mortgage rates move up, the market is going to soften. So I tell people to be patient. This is not a market you want to chase. Let the market come to you,” he said. “I don’t think this bubble is going to collapse. But I do think there is an awful lot of froth and speculation. If anything, I think things will sort of rust.”
Perhaps that will happen sooner than anticipated. In November, sales of previously owned homes fell 11.2 percent throughout the state as California real estate showed signs of significant cooling. Median home prices in Santa Barbara County, home to some of the state’s — and country’s — most expensive homes, declined for the first time in 47 months.
Of course, plenty of other areas are steadily climbing. In Los Angeles and San Bernardino counties, the median price of homes grew by more than 20 percent annually as of November. In other words, don’t hold your breath. Financial advisers also warn buyers to be realistic about what they can afford, and not to gamble with their down payment money, hoping it will get them into a nicer home.
Don’t roll the dice. Keep your investment as liquid as possible, which can be done by splitting it up into some short-term CDs, according to financial analyst Greg McBride of Bankrate.com. At the beginning of this month, a six-month CD was yielding 3.78 percent, while a one-year CD was yielding 4.12 percent. Yet despite decent yields many brokers are advocates of buying whenever possible. Real estate has outperformed just about anything in the last decade.
Patience is indeed a virtue, and something prospective buyers should get used to. But every case — and location — is slightly different. Locally, hotter and overvalued markets may cool off, even decline in median price if the state’s mortgage rates rise as expected. Meanwhile, even lesser-known segments of the Florida real estate market are booming. You are better off not rushing things, and taking the time to ask a number of questions that will help determine if a Florida home loan is right for you… right now.
